The debate over whether it is more cost-effective to build a custom home or buy a newly constructed one is not an easy one. In this post, we dive into your options and compare theory with hard data in order to help prospective homeowners make an informed decision. We find that owners, acting as their own developer while building a custom home can create significant cost savings, but only if the potential risks are properly managed and mitigated.
Category A - Houses Built for Sale (by Developer):
Category B - Custom Built Houses (by general contractor):
In this scenario, the owner takes on the role of the developer and eliminates their cut of the profits. Note though, that the owner must also take on the risk of the land being undevelopable.
Category C - Custom Built Houses (by owner-builder):
Finally we have a scenario where the owner takes on both the role (and risks) of the developer and the general contractor.
Example Cost Savings:
An owner can save quite a bit of money by cutting the developer out of the equation and assembling the design team, financing and general contractor his/herself. What does that look like in terms of savings?
Here we take an example of a $500,000 (market value) house. As you can see , it's possible to save quite a bit of money by eliminating the developer ($125,000) or the General Contractor ($75,000).
How to Control Custom Home Building Risks:
Building your own house does not always pan out this way. Both land development and general contracting are skilled professions that require experience, local knowledge and relationships.
Most of the value that developers bring to the table is their pre-existing relationships. They have key working relationships with people in financing, design and local government that allow them to reduce the friction in the home building process and get things done efficiently and leverage these contacts to reduce their risk. For example, before buying a large parcel of land for a subdivision, they may have conversations with their civil engineer to assess feasibility and the town official in charge of signing off on the plot subdivision to ensure that it will go through smoothly.
Controlling Land Development Risk:
For building a single family home in a rural location, land development risk is fairly minimal. That risk increases if you plan to subdivide a parcel of land or get a zoning variance for some construction that is not permitted by right. For this reason, it's important that you or your real estate agent perform a diligent land feasibility study before placing an offer to buy land to build on.
One of the larger remaining risks for a custom home owner is the site development costs. It's important to fully understand the scope and the cost of the site work..
Controlling Construction Risk:
Whether you hire a general contractor or become an owner-builder and only hire subcontractors, it is extremely important to properly vet your builder during the bid phase.
Many general contractors will try to outsource their risks onto the owner, such as material costs, construction delays and change orders.