Buy Distressed or Owner Build New?
While the real estate market is on the road to recovery, there is still some weakness out there. Bank owned homes are getting harder to come by but they are still available in some markets. One of our readers recently asked…”Does it make sense to take on the responsibility for general contracting your own new home when there are still good deals on distressed homes?” This is a good question that should be asked by anyone looking for their dream home. Let’s take a look at a few of the considerations when choosing which way to go.
Getting What You Want
When looking for your dream home, it’s important to check off as many of your boxes as possible. This doesn’t mean you will always get exactly what you want. But when you build a new home as an owner builder, your chances increase big time. While there are still some good deals on existing homes out there, it can be much tougher to find exactly what you want. But if you are flexible with your wants and needs, there’s no reason you shouldn’t look for a deal on an existing home prior to pulling the trigger on a new home project.
When building new or taking on a major renovation to an existing home, you will probably need a place to stay while work is being done. This can be one of your biggest expenses. If you’re lucky enough to find a distressed property that will allow you to live on site while work is being done, thousands of dollars can be saved on rent/mortgage, utilities, property taxes, moving, storage…etc.
One important item to consider when evaluating potential distressed properties for sale is the possibility of hidden problems. Building a new home is a complicated process that can be stressful but you typically know exactly what you’re dealing with from the beginning. With distressed real estate, there can be big items lurking behind the walls that can be stressful and expensive. Things like substandard wiring or plumbing, foundation problems…etc. can eat up a budget in a hurry. A thorough home inspection can help uncover some of the possible problems but many of the bank owned properties on the market are sold as is and don’t allow an inspection to be performed prior to purchase.
Analyzing The Numbers
There are a whole bunch of things to review and think about before purchasing real estate. However, if you are trying to decide whether to build a new home as an owner builder or purchase a particular distressed home, there is one number that stands out above all the rest. This number is the discount to fair market value. When you build your own home you can reasonably expect to save twenty percent if you use all of the resources available to you and put the time into doing it right. So twenty percent would be a good estimate for the discount to fair market value for the owner build option. You may want to check out our Owner Builder Savings video for more details on this number.
When looking at potential distressed properties, you will want to come up with a discount to fair market value to see how the deal stacks up to the owner builder option. Here’s simple calculation to help you find the number.
[(Fair Market Value of property after renovations are complete) - (Purchase Price + Renovation Costs)]/(Fair Market Value of property after renovations are complete) Multiply this number by 100 and you have your discount to fair market value for the distressed property.
So let’s say the distressed home you are looking at can be purchased for $200k, needs $50k in renovations, and will have an estimated fair market value of $300k when completed. Your real estate broker should be able to help you estimate the fair market value of the property after your renovations are complete. You and your builder consultant can work together to put together an estimate for the renovation costs. Using our equation above, the discount to fair market value for this example is 16.67%.
So should you buy the distressed home or build a new one? In this case, the decision will probably come down to other variables like location, lot availability, budget,…etc. If you do decide to go with the distressed property, be sure to check out our owner builder resources to help you save time and money managing your renovation project.