Settling down is expensive.
The average 30-year fixed mortgage rate hit a whopping 7.23% in August, an eye-watering number for anyone looking to buy a house. And many prospective homebuyers have decided that if they have to pay through the nose to grab a piece of the American dream, they might as well get exactly what they want by building their own home — permits for future construction hit a 12-month high in June.
But is the build really worth it? Here’s everything you need to consider when choosing between buying an existing house and building one from scratch.
Building a house isn’t cheap by any means.
Today’s Homeowner reported in April that, excluding the cost of land and development, which can be upwards of an additional $100,000 depending on the size and complexity of your build, building a 2,100 square foot spec home costs a national average of $332,397. To name a few state-specific projections, it also reported the average to be $287,670 in Mississippi, $309,334 in Texas, $363,314 in California, $371,875 in New York and $431,364 in Hawaii.
The actual cost of the following considerations can vary broadly by location and build details, so CNBC Select recommends consulting with a financial planner and a homebuilding expert in your area before proceeding with a project. That said, here are the basic questions you’ll need to answer for almost any new build that can help you decide if it’s the right choice for you.
1. Where are you going to build?
First things first, you have to own land to build on, says Christos Viores, a real estate attorney and managing partner at Ligris, a firm based in Massachusetts. He built a home from the ground up in 2021.
Land prices vary wildly in the United States. Land is obviously much cheaper in less sparsely populated areas, like North Dakota or Alaska, than in highly populated urban areas, like New York or California. The average price per acre of single-family, residential land in 2019 was $152,000 though this estimate ranged from $11,000 to nearly $1.45 million between counties at the 1st and 99th percentile, respectively, according to researchers from the Rutgers Business School, the Federal Housing Finance Agency and the American Enterprise Institute.
Keep in mind, though, that an acre is roughly the size of a football field. In fact, you can fit approximately 18 homes (at 2,400 square feet each) in one acre of land. You probably don’t need to purchase an entire acre of land and can comfortably build a home with a humble yard on much less land.
If you’re lucky, that land won’t have any problems and you can proceed with the build. But more likely than not, you’ll have to install some sort of drain system, which can cost you thousands of dollars, though it depends on where you live and what you need. Viores built his home at the bottom of a hill, and the extensive drain system cost around $65,000.
Similarly, your plot of land might also have pre-standing property, like a dilapidated house, and you may have to pay to tear such a structure down, whether to build in its place or to get the property up to code.
2. What are you going to build?
Next, you’ll need to hire an architect to turn your vision into a workable blueprint, down to the height of the ceilings and the width of the walls. And architects aren’t cheap. Viores says the architect’s fee was one of the most surprising costs associated with constructing his dream home.
Even though you can buy pre-designed home plans online for around $1,000, a custom job can cost you either tens of thousands of dollars or a set percentage, usually 5% or 15%, of the total cost of construction.
3. Are you allowed to build?
Before breaking ground, you’ll need to contact your municipal government and acquire several permits. To build a custom home, you’ll need a construction permit which will likely cost between $1,000 and $5,000. Additionally, you might need an electrical permit, a plumbing permit and an HVAC permit, each of which could range in the hundreds of dollars.
Permit costs and requirements vary widely between locales. If you live in cities with a historical commission, you’ll also need a permit to demolish standing property of a certain age.
4. Who is going to build it?
After you’ve got your plans laid out and approval from the government, you need a builder, also known as a contractor, to source the materials and actually construct the home. Viores says that builders typically charge commission in one of two ways: either a flat fee somewhere around $150,000 or a fee of 15% to 25% of the total cost of construction. So, if you’re building a million-dollar house, be prepared to tack on an extra $150,000 to $200,000 for your builder.
The builder or contractor will itemize the project and likely provide you with an
Read More: How Much Does Building A Custom Home Cost in 2023?