Buying new versus resale
by Hugh Hardy
I often get people asking me about the merits of having a new home built versus the advantages of buying a resale home. There are a number of points to consider and cost is, of course, one of the most important considerations. But before I discuss cost, I would like to go over some of the other considerations.
The most obvious thing about a new home is that everything is new. You are unlikely to have to worry about maintenance for quite some time - if the home is properly built, that is. With a resale home, you may have to replace worn carpets, have the furnace cleaned replace windows that don't keep the cold out etc. With a new home, you choose your own colours and styles - with a resale home you are stuck with the original owner's choices - and these may not suit you.
Many potential new home buyers worry about the home settling. In my experience, you are much more likely to have problems with an older home than with a reasonably constructed new home. But these problems are usually extremely minor and are covered under the Ontario New Home Warranty Program (ONHWP).
This brings to mind another point. Many people I talk to are afraid of purchasing a new home because they are afraid of cost overruns during construction and they are also concerned about whether they can get the builder to come back to fix future problems. Well, let me say that there is a way to avoid these hassles. If you buy a lot and hire a contractor to build a home, then these two problems are possible. Why? You are actually acting as the builder if you do it this way. The contractor is invoicing you for the work he does. When you build a home this way it is easier for the contractor to add costs to his original estimate. It is also not technically necessary for the contractor to supply an ONHWP warranty. The best way to go is to have the contractor buy the lot and to make an offer to the contractor for the finished home on your choice of lot. This now means that the contractor must be licenced by the ONHWP people and he must supply a warranty with the home. It also means that your offer becomes a binding contract when signed by the contractor and the price and terms specified are no longer negotiable. This eliminates the problem of cost overruns. I always work this way when dealing with builders. It really eliminates problems. I get pretty technical in the body of the offer regarding the different grades of construction materials to be used and the quality of construction. This further protects the purchaser. It also protects the builder because he then knows exactly how to accurately cost out the project.
Now let's talk about the cost of new versus resale. Let me start with some background. When an appraiser tries to establish the value of a property, there are two possible ways that he can calculate this figure. One is through comparing it to other similar homes that have sold and then adjusting for differences. The other is to calculate the value of the land and then add the cost of construction to it. These two methods of calculating value actually give us the cost of building something versus the cost of buying the same home as a resale. Since we work with these two calculations as our basic ways of determining value we are always aware of the relative costs of building versus buying a resale home. So what do we find? In the late 1980s, when the market was booming, it was definitely cheaper to build. In fact, you could build a home and sell it immediately for a substantial profit. As the market fell, it became more expensive to build. As this trend continued, the builders then found that they weren't selling too many homes - so they began to reduce their profit margins in order to sell homes. Today, it is pretty much neck and neck as far as the cost of a resale versus building is concerned. Sometimes the builder's homes are cheaper and sometimes the resales are cheaper. However, there are some exceptions. High end, larger homes, often sell for much less than reproduction cost - just because of the limited market for these homes. In the very low end, it is possible to get a home built for less than the cost of a comparable resale. But generally the value is about the same.
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