Costs for building a new house vs buying a house

FOR many prospective homeowners the idea of having a home built exactly the way they want it is an exciting notion. However, while it does have its benefits, the truth is that there are several considerations that should be taken into account before ground is broken.
This is according to Adrian Goslett, CEO of RE/MAX of Southern Africa, who advises that building a home could come at a higher cost than people expect.
Goslett notes that the very first aspect that should be thoroughly researched is the competence of the building contractor that the potential homeowner intends to use.
“Selecting and working with a professional and competent contractor is critical to ensuring that the building project is successful and completed on time. This applies whenever the homeowner is building a home from scratch or embarking on a renovation project, the right builder is key,” advises Goslett.
“It is vital to scrutinise the contractor’s track record because when it comes to building a property, the construction risk is possibly the largest risk. If the quality of the workmanship is subpar, rectifying the problems at a later stage could prove to be extremely costly, not to mention the fact that the home could be unsafe to live in.”
According to Goslett, owners who have decided to build their own home from scratch should ensure that they use a builder who is certified with the National Home Builders Registration Council (NHBRC).
“The NHBRC aims to mitigate the risk of bad workmanship as much as possible, which is why homeowners should choose to work with a contractor that is affiliated to the organisation. This will help to ensure the standard of the workmanship is up to scratch and will provide the homeowner with some protection against defects occurring from substandard building,” says Goslett. “If a financial institution has financed the build of the property, they will also insist that the builder is a registered member of the NHBRC before releasing the necessary money.”

He notes that another element that could have severe financial implications is the risk of the property not being completed within the expected timeframe.
“While the property is in the process of being built, the owner will require accommodation until the property is habitable. This means that the owner will either have to stay with friends or relatives, incur the additional cost of renting a property or continue paying the bond of their current property, all the while paying for the land and building costs of their new property. If the owner is not prepared, a delay in the project could cause a massive financial setback with the owner held liable for the additional expenses over a longer time period than originally anticipated,” Goslett explains.
Goslett points out that due to the higher potential risks to the lender, a higher interest rate is charged on building projects until the work is complete.
“In the instance where a bank is financing a building project, the owner is required to provide several documents such as the building plans that include a schedule of finishes to determine the property’s market-related value once it has been built. These documents will be used to determine the size of the loan granted within the parameters of the bank’s credit policy,” says Goslett.
He notes that while a deposit is generally required whether the owner decides to purchase an existing property or if they decide to build, the deposit amount the banks will require in order to finance the build of a home is also often higher due to the risk involved.
“Apart from the risk involved in building a home, there is also the probability that the cost of the build will be higher than what it would cost the buyer to purchase an existing property with similar features. Even though the gap between the cost of building and buying an existing home has narrowed in recent months, the fact remains that there is still a gap. Several factors influence the cost of the project and these factors need to be considered before deciding whether it is deemed as a feasible option,” says Goslett, who notes that despite the risks and complexities of building a home, many owners place a higher value on creative freedom and design than the financial cost.
There is no right or wrong answer as to whether is it better to build or buy. However, each option should be carefully worked out from a financial point of view and well considered according to individual requirements.
“The answer is largely subjective as both options have their pros and cons and buyers need to decide what works best for their situation. Either way, property should be viewed as a long term investment, so whether buying an existing home or building their own dream home, it is always important for homeowners to do the necessary research and make a decision that best suits their needs, both now and in the future,” Goslett concludes.