Today’s competitive real estate market and limited home inventory is causing more and more homebuyers to consider a new construction home or building a custom home.
We partnered with real estate agent Casey Rutherford and invite you to grab a coffee and tune into our first interview series where Ken Warlick, VP of Construction and Brent Jay, VP of Custom Homes answer your most pressing questions about:
- Costs: What is the difference in cost between a custom home, new construction home & resale home?
- The 3 L’s–Land, Labor and Lumber Costs
- Financing: What is a Construction to Perm Loan?
- How much do Homeowner’s typically go over budget in a custom home build?
- What areas I should invest in for my new home?
Below is a print version of the interview if you prefer to read vs. watch!
Costs & Financing
Q: What is the cost to build a home vs. buying an existing home?
This is a great question. Homeowners in greater Atlanta are typically shopping 3 types of homes: Traditional Resale, New Construction or a Custom home.
Let’s start with the Custom Home vs. a New Construction Home costs.
When you build a custom home, you are putting in the sweat equity and are an integral part of the construction of the home—from design to securing the financing, it’s your time and efforts alongside the builder.
When a builder purchases a property to build a home on, we front all the costs involved- the financing, construction costs, design work, etc. When the new construction home is put on the market, the builder has to ensure the project is profitable and those costs transfer into the price of the home. Banks typically charge builders higher interest rates to finance the project vs. the end user.
However, when building a custom home:
- Interest rate a homeowner receives on a Construction to Perm loan vs. the interest rate a builder receives for financing a spec is 2-3% lower.
- Builder assumes the risk on spec home so there is a higher margin and higher carrying costs ( loan origination fees, closing costs) of additional 2-3%. (Builders have to close twice, once on the lot and then again to the homebuyer, so that incurs more commissions and fees.)
- With a CP loan, only close once
In total, the homebuyer saves roughly 10-12% building custom. There is also instant equity in a custom home. The appraised value of your home is increased due to the spec home value that is 10-12% higher than what you paid.
Traditional Resale Home
When you compare a custom home to a traditional resale home purchase, the resale cost per sq. ft. will be lower than a new build.
Resale homes typically require maintenance and home improvements. Remember, these home were built and decorated with someone else’s design and tastes.
The homeowner must be willing to spend the time and the money to make those improvements. Areas like the kitchen, outdoor space and master bath may be expensive and invasive to renovate.
Another cost center to consider with traditional resale is home maintenance–these costs are historically higher. A new construction home or custom home have very little maintenance. These homes come with 1, 2, 10 year warranties, and are built with more efficient technologies that lower monthly energy bills.
Is real estate more expensive because of the lack of homes right now?
Yes. I’m sure Casey can attest to the competitiveness of the market she’s experiencing for her clients. It goes back to the whole concept of supply and demand. When demand is high, and supply is low, prices increase. Plus, interest rates are at a historic low, and that enables more people to be in a position to purchase a home because it’s more affordable to buy than rent.
The 3 L’s of Construction – Land, Labor & Lumber
Like many industries, COVID has impacted our industry.
At the beginning of the pandemic, there was fear that the housing market was going to experience a sudden decline.
- For Lumber: there are only 400 sawmills in the US. Because of COVID, only 170 are currently operating. Those 170 have half the labor force also because of COVID, so production is cut in half. Sawmills also decreased production due to fear of lower demand.
- We’ve seen an 200% increase YOY. As we we’re experiencing now, the market is on fire. And it will take a while for the housing supply to catch up to the demand.
- Land costs – because of high number of people looking to build new construction homes, custom homes or resale homes, land is more scarce, so value increases.
- Labor—again, there is increased demand, so the pool of skilled tradespeople lessons and the cost goes up for quality tradespeople.
- We do not expect prices to come down in the near future.
How is a construction loan different than a traditional mortgage?
A traditional mortgage is only granted for existing structures. A Construction to Permanent (CP) loan combines financing and mortgage financing into one loan, simplifying the process.
The CP loan conveniently acts like a line of credit—you draw what you need throughout the various phases of the homebuilding process, and only pay interest on that amount. The draws go to the homebuilder to pay for the construction of your custom home. The lender will require a series of inspections along the way to approve those draws and ensure the home is being built to plan.
Once the home is completed, the CP loan rolls into a traditional mortgage.
***While you can pre-qualify at any time, the application process occurs once you have the final executed contract, house and site plans, budget and specifications from Harrison Homes.
What’s the average amount you see people spend over their budget for a custom home?
Typically homeowners spend 3-6% over plan.
Why does that happen?
Budget increases typically are the result of change-orders, which are deviations from the planned scope of work. When building a custom home, there are two basic cost centers.
“Bricks and sticks” as builders like to call it— what it cost for construction, framing, insulation, wiring, etc. Then there are the finishes–the “fun” elements, like lighting, hardware, tile, etc. These are determined by the homeowner’s personal style preferences and their budget.
Increases typically happen because homeowners add things into the build that weren’t planned. Maybe they fell in love with a tile from Italy, or decided to upgrade their lighting package and increase their spend.
At Harrison Homes, we’re very careful with managing our client’s budgets. When you decide to build with us, we go through a very detailed and thorough planning process. Your entire home will be estimated, priced and presented to you so that it is a reflection of what you want in your home. We will never enter an agreement with a homeowner without full transparency about what it will cost to build their dream home.
What areas of my home should I invest in now vs. later?
Without question, the areas to allocate more budget to are the Kitchen, Master Suite, Outdoor Living Space & Curb Appeal.
- Kitchen – it’s the heart of the home and the most expensive room in the home. It is designed to fit your lifestyle needs, for function as well as aesthetics. It’s also very expensive to change later.
- Owner’s Suite– it’s your retreat and sanctuary and the second most expensive room. Consider the overall design of the bedroom- beams, ceiling design, trim and lighting. Most of the dollars are spent in the ensuite—which includes a large tile budget, plumbing, vanities, tub hardware and fixtures. And, don’t forget about the closet!
- Outdoor Living – Living in the south, outdoor living space provides a lot of value. It’s often times the second gathering place for family and friends. Homeowners need to think about entertainment and how you want to be able to use it. Outdoor fireplaces, pools, patios, fire pits, turf, swinging beds, grills, uplighting on the trees and house– all contribute to creating outdoor living space.
- Curb Appeal – These are the finishing touches on your masterpiece. It’s best to devote a little more budget up front and plan into the build because to do it later costs more. The homeowner will also be paying for ongoing maintenance for the yard, so being strategic in the design upfront can help save with that.
More questions? Stay tuned for our next Q&A series!