Building a new house - value after building?

AndyMNFunAugust 9, 2011

If you buy a $75,000 piece of land and build a $250,000 house, is the value of your house now $325,000? I thought I read that house value goes up after you build a house. Like the house would be worth $475,000. Can anyone clarify the value of a home after costs of purchasing land and building?

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AndyMNFun

I suppose if you build something and it's worth more than the cost of building everyone would do that, but I still would appreciate clarification.

Also, I'm talking about if you hire a 3rd party company to build your house, not doing it yourself. Thanks.

    Bookmark   August 9, 2011 at 4:45AM
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spf5209

Andy, did you miss the news about the housing bubble? There was a time when "irrational exuberance" driven by cheap money led to the condition you describe, but not anymore. Market value of the house is what an appraiser/buyer thinks the seller could receive in return for the house; cost to build does not matter. In the current market, it is far more likely the house is worth less than cost to build, since there are a lot of houses for sale, many at distressed/foreclosure prices.

    Bookmark   August 9, 2011 at 6:19AM
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musings

Cost to build has nothing to do with appraised market value. In some markets, cost to build is higher than appraised, so it may be the opposite. Talk to realtors if you don't have plans yet and are just considering. If you have plans, get an appraisal. Do not assume it will be worth what it costs or more. Not in this market/economy.

    Bookmark   August 9, 2011 at 8:35AM
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dash3108

Talk to a Realtor, and / or a banker, and / or an appraiser. Hate to sound sarcastic, but as spf asked, have you missed the news? It is more expensive to build than to buy now. In the market I work in (I'm a Realtor), if you spent $325,000 on a house right now, with the breakdown you said (75 land, 250 house), it would probably be worth about $290,000. Maybe.

    Bookmark   August 9, 2011 at 9:25AM
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athensmomof3

Like folks said above, value of a house has to do with the value of comparable surrounding properties who have sold recently. Since houses are on the market longer, taking longer to sell (usually with multiple price reductions), and there are lots of short sales, foreclosures, etc. out there, your cost to build will almost certainly be more (and sometimes a lot more) than the appraised value.

    Bookmark   August 9, 2011 at 3:34PM
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jenswrens

"It is more expensive to build than to buy now"

Please. I keep hearing this over and over on GW, and while it may be true for most of the country, and especially (only?) for subdivision/tract homes, it DOES NOT apply to everyone everywhere.

It is absolutely NOT true in my area.

I know, because I have been looking non-stop for a house to buy for almost 2 years now, and I cannot find an acceptable one that is cheaper than what I can build on my land.

This is what I can BUY for $750K in my area:

This is what I can BUILD in my area for $750K, if I already own the land:

To BUY an acceptable house of the same quality as those above, on the same amount of land, in my same town (location location location), it will cost me at least $1.5 - 2 mil, if not more. Building, for me, is way cheaper.

Sorry for the soapbox, but this mantra repeated over and over on GW just irks me to death. It's all relative, people - bubble or no bubble.

    Bookmark   August 9, 2011 at 6:20PM
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musings

"If I already own the land"

The OP is talking about buying land and building a house. Owning land or having a lot of equity in land can make a difference. I'm in the same boat as you (property here expensive, so building on MY lot is cheaper than buying, but buying and building on a lot in my neighborhood would not be cheaper). My advice to OP remains the same.

    Bookmark   August 9, 2011 at 7:36PM
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spf5209

Jen, sorry we irked you, however, no one said "everyone, everywhere". You are obviously in a rare great spot and if I could build a house like the ones you pictured for less than half the cost to buy, I wouldn't waste my time looking for something to buy.

Andy, hope you live near Jen! Best of luck!

    Bookmark   August 9, 2011 at 7:57PM
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lolauren

I agree with Jens reaction. Some of the above posters implied "everyone, everywhere" with their responses. However, the housing market where I live has appreciated every year for at least the seven years I've been here...

To the OP, there is no answer to find on here unless we know your specific market. Take the advice above and get in touch with a good realtor or someone who knows your local market. You need to figure out how big of a house you want and how much it would cost to build vs. what comparable homes are selling for. Look on your MLS (multiple listing service) to see how much homes are listed for (but follow up by finding how long they are on the market and what the selling price is.) Most likely, you will not have instant equity after building a home.... but it depends. It is possible in my area with some cookie cutter builders, but not that possible if you move towards a more custom home with upgrades. The reason not every does it (when there could be instant equity) is because it takes quite a bit of money to invest in the project/get it going and is a lot of time/work/stress! :)

    Bookmark   August 9, 2011 at 10:15PM
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aduncan81

As most have stated, the completed value and cost do not necessarily correspond. But it is very possible that the completed value will exceed your cost. We built a custom home last year, signed contract in April and closed late October and the appraised price was 5% over total cost! The land was purchased during the year too so the instant equity was due mainly to timing in that the higher end home market in our area appreciated during the build time.

    Bookmark   August 10, 2011 at 8:27AM
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sierraeast

Geographic location is something that's often ignored on these forums whether it's home values/current market, insulation techniques, suppliers costs, permitting process, etc. The whole building process varies by region. What works in one area might not be the case in others.

    Bookmark   August 10, 2011 at 10:27AM
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live_wire_oak

If you spend 500K to build a home, it could end up appraising anywhere from 350K to 525K. It varies by geographic area as well as the location within that area. The higher end and less cookie cutter home you plan, the more you risk it not appraising for cost. Appraisals use "comps" and if you are building something that your neighbors aren't, then you are taking a chance that you'll have to bring money to the table when you close on the loan.

But, to me, what's the point of building if you are doing something just like the neighbors. That may be great from an investment standpoint if you're doing a spec house, but it's totally stupid from a home standpoint. If you aren't planning to make this house a long term home, then why build at all? Just buy something existing for a couple of years and then move on to something else.

    Bookmark   August 10, 2011 at 11:53AM
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AndyMNFun

Jeeze I'm not a moron I know the housing market collapsed duh are you stupid? I just never read anything about the cost of building vs buying a built home. As I've read, the cost of building a house has decreased dramatically, so I still wasn't sure of the difference in cost.

    Bookmark   August 11, 2011 at 1:11AM
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kudzu9

The value of a piece of land and a new house is worth whatever someone is willing to pay for it...in this market or in any market. Regardless of what you spend, it doesn't mean that what others are willing to pay has anything to do with your costs.

    Bookmark   August 11, 2011 at 2:47AM
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mgabriel

Our house appraised for about 20% more than what it cost us to build. If we had not been owner builders, I don't think we would of seen this type of margin. The appraiser did note that houses in our area was down 30%.

Here is a link that might be useful: Our Foursqure

    Bookmark   August 11, 2011 at 12:53PM
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dekeoboe

Andy, Where have you read that the cost of building a house has decreased dramatically? I don't believe that is the case in my area.

    Bookmark   August 11, 2011 at 2:28PM
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david_cary

Well - the cost of building has decreased a little. Certainly the builders are working for less. We built in 2009 and I doubt anything has decreased since then while the housing market has continued to decline. And some of the building costs have climbed.

Either way - a mixed bag but certainly we are still below the peak in building cost. But certainly nothing dramatic. Price of oil drives somethings and does the local labor market. Lumber is up from the bottom but below the peak.

    Bookmark   August 12, 2011 at 6:25AM
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brickeyee

"If you buy a $75,000 piece of land and build a $250,000 house, is the value of your house now $325,000?"

Where did you get this idea?

What it costs to build is only slightly related to its value.

The market determines the value.
It may be more than the cost, or it may be less.

    Bookmark   August 12, 2011 at 10:09AM
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chisue

Builders usually know when they can make a profit by building. No small builders are putting up spec houses in my area, and few big name builders are starting new developments anywhere in the greater Chicagoland area. (Senior housing is selling, but slowly.)

We were only the second people in this neighborhood to do a teardown and build new. That was 2000. Then several builders bought old ranches for the land value. We built what we needed, but they put up as much house as zoning would allow for greater profit. (In my neighborhood the land values are often about a third of the total value of a house.) The last builder both overpaid for the lot and got caught in the RE bust. He probably lost money when his house finally sold, but he had to get out from under the financing.

Are builders in your area starting spec homes? Are they selling them?

    Bookmark   August 12, 2011 at 3:55PM
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mojomom

In our small town in Arkansas, builders are building spec houses that are selling well. However, the houses are more modest than in the past, though still nice, and price points are lower.

In our second home ski-resort town in Colorado, its a bit different. True, that this is a unique market being a resort and has a mix of second-home owners and full time residents. The high-end spec. homes were in the 4-7.5M range in the boom. High end spec. duplexes in the 2-5 million range and high end condos in the 1.5-2.5 million range were being built in the boom. This inventory is slowly getting absorbed, but with some faily significant price reductions, especially for the condos). Now the few spec residences are at a more modest scale and lower price points. Only a very few of the higher end(now about 1.4-2.4M) spec. homes/duplexes are in the building and/or permitting phases in prime locations. No condos are buing built, but one developer is building a new apartment complex (instead of condos as originally planned) for long-term rentals and a fabuoulous senior center is winding its way through the permitting process. So at least there is some building activitiy.

One builder however appears to be having some success with $220,000 to about $350,000 single family homes in a nearby "bedroom" community about 20 miles out. He bought the entire subdivision from the bank after it had been foreclosed and is now building more affordable housing.

In the middle of the boom, the city approved several subdivisions in prime (very prime) mountain areas very near the base of the ski-mountain. One of those subdivisions of 62 lots announced that it was 100% "pre-sold" in the fall of 2007, with waiting lists. Prices ranged from about 450,000 for a .15 acre lot to around 1,200,000 for a creekside lot just under an acre. After all the infrastructure was in place, in May of 2010, 51 lots remained unsold and prices were slashed in half. At that time, a local builder was quoted in the paper as saying that this meant that a 3000 sq ft. home on one of the smaller lots could probably be built for just over 1M. Since that time, 4 lots sold to one local long-time investor, for an additional approx 10% off the already prices. This summer another 30% discount off the reduced prices (making it 65% of original asking) was announced. Five lots quickly went under contract, but four (all creekside duplex lots, I think) have already dropped out. A hedge fund bought another smaller, well located subdivision on the golf course from the bank about 6 months ago and cut the prices in half. No sales yet. I think this tells us (1) land prices haven't bottomed out and (2) until they do (and more remaining inventory is absorbed) there probably won't be any significant spec activity.

    Bookmark   August 12, 2011 at 5:45PM
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jessiegray

I think this depends on where you live, the market, economy etc. But personally we bought a $30,000 2 acre property, then appraised our house plans which appraised for $230,000. The house cost us $150,000 to build. So bottom line we spent $180,000 but our home is appraised at $230,000. Then right after we built our house, one mile down the road a brand new school was built....so guess what? our value went up by a good bit. However if we hadn't made sure to get great deals on material and labor then the house could have cost around 200,000 and we wouldn't have all the equity we do now.

    Bookmark   January 27, 2012 at 10:36PM
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renovator8

When someone asks a question that is greatly influenced by the location of their project and they do not reveal that location they should expect a rambling, general discussion full of personal war stories that is probably not very helpful but they shouldn't blame the responders. The most important part of a discussion is how the issue is defined.

    Bookmark   January 28, 2012 at 10:02AM
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chispa

$30K for 2 acres - I can't even comprehend that - a lot that size in my town in L.A. would sell for $2-3 million. Location is the one thing that should be mentioned when asking questions in a RE forum!

    Bookmark   January 28, 2012 at 12:54PM
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brickeyee

In my area folks buy small houses on 1/8 of an acre for $500,000 to tear down and build a McMansion on.

    Bookmark   January 28, 2012 at 2:10PM
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nikkidan

When we were in the process of getting our construction loan, we had our plan and the estimate from the builder. We owned the land, 5 acres (worth about $7000). An appraiser had to come and appraise the property at what he thought it could sell for, in the current market, built at the specifications in our estimate. The plan did appraise at about $30,000 more than the estimate.

Note: we are talking about the $250,000 range, if that puts it into perspective a bit.

Now, we have done a few upgrades to what was originally in our estimate. So when it is re-appraised before we close on our mortgage, it should appraise at a little more. Nothing big for upgrades...tile bathroom/shower, and duraceramic floors in main living area, 9' ceilings on main level, extended the back porch a bit. Of course all of this costed us a bit more too. But it might raise the appraisal a little. If it doesnt, well, no biggie. We've put enough $ down on it already, so it won't affect our mortgage.

So, just saying that cost to build has nothing to do with the current real estate market. Which is the reason for the appraisal before you start building, and after you are done...for mortgage purposes. If it appraises low, you'll have to put more down for your construction loan/mortgage for the Loan To Value ratio to "jive".

HTH.

    Bookmark   January 28, 2012 at 2:46PM
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jamiecrok

Wow interesting responses! So yes it does depend on area but remember that an value as assessed by an appraisal is an opinion. I have worked in the RE industry for years, have a degree in RE and still can't comprehend how different appraisers come up with such different values.

When we bought our land, the appraisal was done well and came up with a value that was over our purchase price(what can I say I am a great negotiator!) Then just a few months later, without market change, the appraiser for the construction loan came up with a value for the land that was totally different! His comps were crazy and really shouldn't have been used but it worked for what we needed and why did I care when we are keeping the house forever...

    Bookmark   January 31, 2012 at 12:28AM
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littlebug5

$30K for 2 acres? I can't comprehend that either! I am currently offering my acreage for sale at $2,000 per acre, and haven't sold it yet!

Real estate is very, very regional. :)

    Bookmark   January 31, 2012 at 12:30PM
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whallyden

The nation-wide median price of new construction is 26% more expensive than exisiting (widest spread on record). Over the last 20-yrs that spread has been closer to 13%. However, as noted above, real estate is local.

    Bookmark   January 31, 2012 at 12:45PM
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