LOUISE FAIRSAVE: Build or buy?
For a young couple seeking their own home, the question is whether to buy or build. Let us consider, for example, a couple who are living in a rented apartment and have a three year-old daughter. They have been planning and saving in order to acquire their own home.
They have accumulated just over $30 000 at the credit union. The husband had just been advised by the loans officer that they have qualified for the level of mortgage they had in mind.
They were in a position where they could consider spending $600 000 provided that they made a five per cent contribution. They would need to pay over $30 000 and the credit union would loan them $570 000 to complete the purchase.
They had observed advertisements in the newspaper for the construction of homes of different designs on varying lot sizes. Given the credit union financing, they could choose from a number of affordable designs.
The contractual arrangements for the construction of the homes were quite tight. Deadlines were clearly defined and penalties were spelt out for not meeting deadlines. The materials to be used and the finishes for the house were specified in detail. If the would-be purchaser desired different finishes, that variation would have to be valued and the contract price varied accordingly.
The builder estimated an eight-month period to construct the house. They had chosen a design that they believed they would be enjoyable for their dwelling and it was in a residential district with other houses of similar value.
They also investigated buying an existing house. They browsed the newspaper and identified three interesting homes that they would visit.
The second property that they visited was the most interesting. It was a family home that was twelve years old in a middle-class neighbourhood. They liked the layout of the rooms and the lead-in from the patio to the drawing room. This house had acceptable finishes and there were established gardens. The main repair needed was repainting. The asking price was $580 000.
They had a firm of architects/engineers survey the property and give them an independent opinion and valuation. The firm confirmed that the property was free of termites, that the roof of the building was sound, that the drainage systems were adequate and that there were no structural problems with the building. The asking price was fair, yet there was no harm in trying to negotiate the cost downwards.
This option allowed the family to move in much sooner than if they had undertaken to build their home. The apparent renovation needed also guided them in negotiating a final price of $560 000, well within the offer of financing by the credit union.
When painted, the added value to the house would be apparent. They believed that the potential long-term capital appreciation on this house was just as good or better as a new house.
Their decision was to purchase the existing home. They decided to avoid the risks of building – the risks of construction deadlines not being met, the risks of additional costs, and the risks that when the building was complete, the house did not live up to their earlier imagination.
They also avoided the risk of living in a partially completed house with grounds yet to be landscaped. Having found an existing house that they really liked at a reasonable cost, their choice was easy.
However, for the picky home-dwellers who may wish their living quarters to be very special, the answer may be just the opposite. In such cases, cost and savings may not be the major issue. Rather, the important goal may be to get exactly you imagine their home should look like within reason.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.