Building vs Buying a Home: What to Consider
On this episode, sponsored by Live Oak Bank, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss considerations for building vs. buying a home, the pros and cons of building, lending considerations when building a home, and common pitfalls when choosing to build a home.
About Today’s Guest
Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.
Summary
Nate Hedrick, the Real Estate RPh, digs into some important considerations to keep in mind when planning to build a home versus buying a home, how the process for building a home differs from purchasing a pre-existing home, the main approaches to building, and important questions to ask your builder or developer when building in a development or on raw land.
Nate shares his personal experience with his clients in the real estate market and the various motivations for building a home instead of buying. Those who choose to build a home over buying a pre-existing home may be motivated by both the nature of the current housing market and a desire for a variety of customizations to the home.
Nate outlines the many pros and cons when building a home. Benefits of building a home include the level of customization on design based on the builder, creating the home that you want but can’t find in the market, and that new home feeling. Cons when building include the time it takes to complete the home, usually around 9 months, as well as the financial process differing for building a home from the process for buying a pre-existing home.
The two main approaches to building a home are examined: working with a builder or developer to purchase and build on a lot or buying a plot of raw land. When working with a builder or a developer, clients can expect to have a concierge type experience, whereas buying raw land may require purchasers to perform more tests and do additional research to ensure that the land will be viable for the build. To avoid major issues, buyers should include their real estate agent and builder in the entire process of buying and building on raw land. Similarly, when working with a builder or developer, buyers should include their real estate agent in the process as your agent acts as an advocate throughout the buying and building process.
Mentioned on the Show
- Live Oak Bank: Loans and Financial Solutions for Pharmacies
- Buy or Refi a Home
- Real Estate RPh: Helping Pharmacists Navigate the World of Real Estate
- YFP 190: 7 Ways to Reduce Your Monthly Housing Costs
- 20 Questions to Ask if You’re Building a Home
- YFP 191: 10 Common Mortgage Mistakes to Avoid
- Schedule a Call with Nate: YFP Real Estate Concierge Services
Episode Transcript
Tim Ulbrich: Nate, great to have you back on the show. How you been doing?
Nate Hedrick: Tim, great. Always good to be here.
Tim Ulbrich: Excited to have you back. We had you on Episode 197, Ways to Reduce Your Monthly Costs, and we have some exciting news coming up. Details will be forthcoming. But we’re going to be launching a YFP real estate podcast. Our goal is weekly content for real estate investors, either current investors, pharmacists that just want to learn more, that have been thinking about it but haven’t pulled the trigger. We have heard loud and clear from the YFP community that they want more information on real estate as an investing path. We’ve brought more content in 2021, at the end of 2020. We’ve got more coming ahead. And more information certainly will come. Nate Hedrick is going to play a big role in that effort. So Nate, exciting times ahead, right?
Nate Hedrick: Yeah. I’m really excited. It’s going to be a pretty cool podcast, and we’re bringing back another YFP past guest. We’ll keep it a surprise for now. So excited about all that.
Tim Ulbrich: I love it. And I think you and I, we’ve talked about this extensively, but we know that many pharmacists have inquired about real estate investing. And we have seen firsthand the value that can come from showing examples, stories, the good, the bad, the ugly. And for pharmacists that are thinking about this or even have begun this journey that can see other examples all across the country and of course connect with those folks. And so we’re excited to bring this community together of pharmacist real estate investors. Stay tuned. We won’t announce the exact date of launch or any of that at this point, but wanted to put that on folks’ radar that we’re going to have some more great content coming for you related to real estate investing. So Nate, we’ve been talking a lot about home buying on this show. But something we have not talked as much about is building a home. And I’m excited to dig into this topic and talk through some important considerations to keep in mind if you’re planning on going that route and how the process may differ from buying a home. And this information that we’re going to draw for this episode of which we will link to in the show notes comes from a post on your blog, The Real Estate RPh blog, and that post is 20 questions to ask if you’re building a home. So we will link to that. And this episode is really meant for folks that have been interested in this topic, are thinking about building a home, on the fence about building versus buying. And so we’re going to dig into topics surrounding that. So from what you have seen, Nate, with your clients and in the real estate market, you know, how prevalent is this? Are folks often thinking about building a home instead of buying a pre-existing home?
Nate Hedrick: Yeah. It really depends on the market, but I’m seeing more people going this direction simply because the inventory has been so low recently. With the way the market’s been — actually, I just heard about a client recently that looked for a house for about 2.5 months and there was just nothing. Anything that was coming along was going $20,000, $30,000, $40,000 over asking. And it just became untenable. So they said, ‘Look, we’re just going to sit back, we’re going to renew our lease for another year, we’re going to go ahead and build.’ So I think sometimes it’s something that’s being forced upon people, but other times, you just have someone that goes in and says, ‘Look, we know what we want in a house. We can’t find that in our market today. We’re going to go out and build it, right? We’re going to find the specific spot that we want it to be, and we’re going to get the exact house that we want. This is how we’re going to do it.’
Tim Ulbrich: Yeah, and I just had a similar conversation a couple weeks ago with a pharmacist down in the Raleigh, North Carolina, area. Same thing, you know, very hot market let alone just what we’re seeing national trends in that area specifically and prices where homes were going relative to asking said, ‘You know what, we’re just going to build the thing,’ which I’m guessing is easier said than done as we’ll talk about but is certainly a consideration. What other motivations might folks have? I mean, is it typically just demand? Is it I can’t find anything, these custom aspects that I want? Like what are you seeing from folks in terms of motivation to build?
Nate Hedrick: Yeah, a lot of times, it just comes down to if you know what you want or if there are specific things that you want in a home and it’s difficult to find in that particular market, then you can go out and build it, right? So if you are — and actually, it’s funny. My wife and I were running into this recently. We’ve been kind of casually looking at other houses, just to see what else it out there, and keep coming back to the fact that like if we were to really move, I don’t know that I’d want to go get this big, gigantic house, right? I’m more interested in the land and putting our kind of style house on it. And there are other people that fall into that same category. So I think there are a lot of different motivations. But if you want that true customizability and that feeling of like the brand new car, right, that’s where that home building usually tends to come in.
Tim Ulbrich: Now Nate, you and I both know — especially you as an agent — that when you say we’re “casually” looking, that’s a done deal, right? I mean —
Nate Hedrick: No, I look at enough real estate to be able to look at it casually I think. Hopefully.
Tim Ulbrich: That’s true. So high level as we start this conversation, and we’ll dig in in more detail about what are some specific considerations when you’re considering building, whether it’s working with an agent or financing, common mistakes that folks make, but high level, pros and cons of building. You know, for folks that are thinking, yeah, maybe it’s us, maybe it’s not us, like what are some things that folks may want to think of when it comes to making this decision.
Nate Hedrick: Yeah, the biggest pro is the full customizability. And this can vary based on the actual builder, right? Some builders are going to give you absolute customization from floor plan to design to fixtures. And even if you don’t get that level, right, there are going to be 10 floor plans to choose from. And within that, you can pick your countertops and your cabinets. Again, it gives you that full range of customizations. If you know exactly what you want or are close, 80% of that you know and you can get the rest of the way, that building allows you to get that full customizability. The real con, though, right — or the couple of cons I guess would be timing. So obviously it takes time to build that house, especially if you’re customizing it from the ground up. You’re looking at the very minimum nine months from that date of contract, usually longer, to really get that home built. So waiting game is there. You’ve also got a different type of lending that goes on. And we can talk about this more. But construction loans are very different than your traditional conventional mortgage. And so there’s other stipulations that go with that, some other fees, and it can make it a little bit more tricky, basically.
Tim Ulbrich: And when you talked about customization, Nate, never have gone through this process. You know, I’m sure some folks look at that and they’re like, that’s incredible. I’ll get to choose every detail. I look at that and say, my gosh, I don’t even know what shirt I’m going to wear on any given day let alone what the knobs are going to look like. So is there a wide range of like if you want to keep it simple, builder may say, ‘Here’s Option A, Option B, Option C.’ And then the details are already contained within that? All the way to every little detail is negotiable along the way.
Nate Hedrick: Yeah, it depends on the builder. A lot of times what I’ll see — for the most part — is they’ll offer 3-5 options for a given set of whatever, right? So they’ll say, ‘Your countertops are coming from this supplier. And you’ve got from marble to granite, and these are the preferred options.’ And you’ve got an allowance for that is how they often do it. So they’ll say, ‘Cabinetry allowance is $14,000, and we’re getting it from x, y, and z cabinet maker.’ So then you can go to that particular site or they’ll a lot of times have handouts that you can look through, and it narrows down your options, right? That’s the most common setup. The other cool thing I’ll see a lot is where high end, especially high-end purchases and high end builders will offer a designer as part of that process where you can sit down with them for x number of hours as part of that fee or the cost of building that house, you get x number of billable hours with that designer to pick and choose all those things. And a lot times, those designers will bring with them ideas and collections where they’ll say, ‘Well, if you’re going to choose these cabinets, these are the drawer pulls I recommend.’ Again, you can totally get into the weeds, but that can make that analysis paralysis much, much easier to manage.
Tim Ulbrich: And it always stays on budget, right? I mean, it’s always on budget.
Nate Hedrick: You know, it’s funny, again, these allowances, they offer those but you can pretty quickly break them if you want to.
Tim Ulbrich: I’m sure. I’m sure. Well, it just reminds me like, no judgment here, it’s just human behavior. If I were looking at a home and there were some options involved, like you kind of make one decision that I would suspect has a domino effect on other things that you want to do. So since you talked about the lending piece being different, let’s start there. You mentioned construction loans, which are of course a different animal than conventional home financing, which even within that we’ve also got multiple options we’ve talked about on the show before. Most recently, we had Tony Umholtz from IberiaBank, Episode 191. We talked about 10 common mortgage mistakes but in there talked about some of the financing options. So Nate, talk to us here about lending considerations. You know, what exactly are we dealing with when it comes to construction loans? What’s different? How does this change or not change things like pre-approval and down payments and timing? Walk us through that.
Nate Hedrick: Yeah, it’s fairly complicated, actually. I’ve been meaning to like put together a post and digest this because there’s not a lot of great resources out there that actually walk through this. But the idea is that you’ve got two phases to think about when you’re thinking about a construction loan. And again, a lender is probably going to beat this up and say, ‘Well that’s not what you call it,’ but this is how I explain it, right? So you’ve got — we should have Tony back with me, right?
Tim Ulbrich: Yeah.
Nate Hedrick: But you’ve got this kind of pre-build phase where you’ve got to pay for either the land and the lot, right, the location, and then you’ve got to start paying that contractor, that builder, for some of the materials. So before there’s ever a house there, there’s still costs being incurred. So there’s this construction phase of that loan. And then after, when it’s done, you actually have a mortgage. You have a house that’s paying a 30-year fixed rate mortgage or whatever. And so there’s a number of ways that lenders will break that down. Sometimes they’ll do separate loans. You apply for one, you get the construction loan, you go through that, then you will create basically a mortgage that will pay off that construction loan and then go from there. Sometimes you can do a combined process where the loan will be all in one. They call it a single close often where you’ll close once on that construction loan and it will convert to a 30-year fixed mortgage at the end. It varies by lender, there’s advantages and disadvantages to both. It’s a whole separate podcast episode just to talk about that. But the idea is that you want to make sure you have a conversation. It’s not like going out and getting pre-approved for a $500,000 house. There are considerations in terms of well, is the lot or the land included? Right? Is that included in the finance or do I have to pay for that lot in cash? Again, a number of considerations that come up as you start down that road.
Tim Ulbrich: And so speaking of finding a lot to buy and where folks look and buying land, you know, that to me seems like something that could be both exciting and overwhelming. And I’m used to my typical searches for a home on Redfin and Zillow and things like that. Is it same type of process, you know, in terms of finding a lot to buy, where folks look, what makes a good lot, a bad lot? What are things that folks need to consider here?
Nate Hedrick: Yeah, so there’s two main approaches to this. So one is that you’re going to — that is kind of the more traditional option, which is that a builder or developer has purchased several acres and they develop that into a neighborhood, right?
Tim Ulbrich: OK.
Nate Hedrick: We see this all the time, right? Coming soon, houses starting in the $300,000s, join Orange Village or whatever it is.
Tim Ulbrich: Yes.
Nate Hedrick: You see these. And a lot of times what happens with that is you’re not going out and finding and hunting down a lot. It’s the full concierge package all put together. You go out to the builder, they say, ‘We have 40 lots that we’re preparing to be built upon. You can pick your spot on the street. Here’s our preferred builder or builders.’ A lot of times they’ll have anywhere from one to three builders that they work with on those development lots. And you basically find your lot that way. The other option is to go out and buy raw land. And you can find these on the MLS, you can find them on Craigslist, you can drive around and see some with a sign in the yard. And you can buy raw land and then go out and find your own builder who will come out and custom build on that particular lot. And so the two approaches are very different. One is a much more kind of put together process, going out and actually going to that developer on that particular build lot whereas the other can be much more flexible and a lot of times, you get your truly customizable builds when you’re talking about going out and buying a plot of land and then bringing in a builder to come do that plot.
Tim Ulbrich: And in the first example, Nate, you’ve given, which I drive by those all the time, right? So you see homes for sale. That seems obviously, you know, concierge is probably a good way to think about things kind of customized and put for you together, it’s packaged together, it’s .25 acres or whatever be the lot size. You know it’s ready for water, sewer, all that stuff taken care of. You have comps of that obviously based on the neighborhood. The other one to me is both intriguing/overwhelming. I was just driving by a property yesterday here in Columbus. It was 131 acres for sale. And I’m like, that’s interesting. I don’t know, it’s by the interstate. I was like, there could be something cool you could do with it. And then I stopped right there, right? Because you start to think about like, what is a comp for 131 acres of land like this? And what about being ready for sewage and water and things like that? So any thoughts for folks that are going more that route of I’m just looking for random land that’s out there and putting a home where it may not be as put together for them, if you will. What are those things? I’ve listed a couple, thinking of comps for land, water, sewer, things like that.
Nate HedricK: Yeah, absolutely. So you have a due diligence period on raw land like that where you can start to assess those things, everything from getting like a geotechnical survey, something as simple as a soils test to determine if the soil is appropriate for bearing the structure that you’re talking about. This is a particular problem in certain areas like I think about my in-laws that live in Pittsburgh. So there’s a lot of hills, there’s a lot of old mine shafts, quite honestly — that sounds ridiculous, but that’s a real problem that you contend with as a developer out in Pittsburgh. And so you have to do these site and soil samples to make sure that you’re going to have supportive structures to be able to handle the house that you want to build there. You mentioned hookups, that’s a huge one, right? So if you are out in the country, you might not have access to city water. You might have to put in a septic system and dig a well and again, that well might need to be 100 feet deep, 200 feet deep. Like who knows? Right? If it’s truly, truly raw land, these are all things that you would need to figure out. And so a lot of times what you’ll do is you’ll find a piece of land that you’re interested in and either the seller of that property has done all that work for you and they can say, ‘Here is the site and soils test. Or here’s the survey that we’ve done. There’s already a well. There’s — whatever, you name it.’ Right? They may have done that up front or you can order that yourself. And there are companies that specialize in this. And a lot of times, your agent will actually help you coordinate with those companies. You can often go to your builder because your builder will have the specs needed to make those decisions. And so I often recommend that if you’re going to be doing this, it’s not a buy land, find a builder later. It’s do it all at once because you want that person involved.
Tim Ulbrich: Yes.
Nate Hedrick: You want the architects involved, you want the surveyors involved, the builders involved, all at the same time to make sure you’re not going to run into a problem.
Tim Ulbrich: Now I suspect the question I’m going to ask here is, ‘it depends,’ but I’m going to ask it anyways. One of the other thoughts I have as I look at raw land periodically just out of interest that folks may be wondering if they’re doing the same build a home is resale value. So especially when you get into perhaps unique pieces of land, unique customized properties, I could see an argument on both sides of that, either hey, it’s a unique piece, it stands out, there’s not a lot of other things like it. Or maybe not as many people are in the market for something like that. So is it a ‘it depends’ situation, just every property, every area where when you get into a customized home, customized piece of land, in terms of resale?
Nate Hedrick: Yeah. I’m stealing from Tim Baker, right? It definitely depends. But there is some speculation to draw in too. There’s actually a number of investors out there that will buy raw land for the sheer purpose of saying, “OK, I know that this market is booming and it’s starting to expand. I think it’s coming this direction in the next 10 years, so I’ll go buy this property that I expect to be worth 10 times this, but I have to wait 8 years to get there.” So it can be very speculative in terms of that value. But the other thing that’s nice is that if you are in like a municipality or a city and there’s land there, you can often compare that land value on a cost per acre to other land in the area. So if you — especially like something where we live in Ohio, everything’s flat and easy to kind of figure out. If you’ve got a 1-acre parcel in x city, it’s potentially pretty similar to another 1-acre parcel in that same city. And here’s why. And so you can compare those somewhat easily in certain areas. But in others, it’s almost impossible.
Tim Ulbrich: That makes sense. And you know, you had talked about some key people of the team. And I think you do a great job when you’re talking about home buying or home building in this case and considerations, how important the team is. So we talked about the lending piece and we’ve mentioned the agent piece and the builder piece. But we haven’t talked about that in detail. So let’s start with the agent piece. How does a real estate agent support someone building a home? And how does this differ from those that might be looking to buy a pre-existing home in terms of who they might be looking for?
Nate Hedrick: This, again, kind of depends on if we’re talking about building in that development or building in the middle of nowhere or on raw land. But in both cases, you absolutely want to have an agent on your team. I think it’s obvious a lot of times if I’m going out and buying raw land and getting a builder that it might be helpful to have an agent in that case. But it doesn’t seem as obvious when you’re talking about, again, that concierge model we talked about where you’re going to a site plan, they’ve got a model home, their office is open, they’ve got all these friendly real estate agents there. It often feels like I shouldn’t even need anybody to help represent me. But the reality is you absolutely should. And it costs you almost nothing to do that. The agent being involved is your representative, right? The person that’s selling that property, they are trying to sell that property for as much as they possibly can. So even if you’re going to a development, 50 homes available, everything’s done for you, you absolutely want to have that agent as the core member of your team to help with things like negotiating the contract. I’ll give you a great example. I have a client that I’m working with right now. And our early conversations with the builder, they cited this great, gorgeous rooftop deck, OK? And they said, the rooftop deck, you can add it on for I think it was — I don’t know — maybe $15,000. Let’s just say it was that. And it was this awesome like you could see downtown and you can see the lake from downtown. This place is gorgeous. And they quoted it at $15,000 early on. Well that property started blowing up in popularity. And it got really hot really fast. And so we were in but kind of negotiating the contract still. And so we get to kind of the closing bit of figuring out this contract, and they said, “Oh yeah, and that rooftop deck. It will be $22,000.” We said, “Hold on.” And you know, at the time, the buyers were like, “Well, that’s just what we have to do.” I said, “No, I’ve got some notes here.” So I went back and we looked at it, and we had clear indications from the buyer — or from the builder that it was a $15,000 add-on.
Tim Ulbrich: Yeah.
Nate Hedrick: And so I was able to help negotiate that back down and save them that $7,000. So having an advocate on your team, somebody that knows this stuff inside and out is absolutely essential.
Tim Ulbrich: Yeah. And not only an advocate, but an advocate that takes good notes and is ready to act on your behalf as well.
Nate Hedrick: Helps to have a detail-oriented pharmacist as your agent I suppose. But really, again, that agent is going to also grow the rest of your team from there, right? So if you need inspectors, if you need a lender, if you need a title company, again, most of the time the seller’s going to have the preferred title company that they’re working with or the preferred lender that they’re working with. But you still want someone on your team that can grow that, the rest of that process if you need it.
Tim Ulbrich: And for those listening to this episode, if you’re looking to buy or build a home in 2021, as you likely have heard us talk about on this show before, we’re excited about our partnership with Nate, The Real Estate RPh, for the Real Estate Concierge service that he can help get you connected with an agent that is local to your area but also be alongside for the process, talk to you at the beginning, walk you through along the way, be a second set of eyes, help you think about the beginning to the end, and work with that agent locally as well. So you can learn more at YourFinancialPharmacist.com. You can click on “Buy or Refi a Home,” and then “Find an Agent,” and that will get you Nate. And you guys can schedule a quick discovery call to see if that’s a good fit for what you are looking for. So we talked about the agent, Nate. The builder is one that comes to mind as well. You know, we’ve all heard horror stories of I was working with this builder, they went bankrupt, something happened. I feel like any neighborhood I’ve been in, there’s always been a story of like, oh this stopped here in the neighborhood because this happened. So talk to us about — of course it depends on some level, but considerations when working with and finding a builder.
Nate Hedrick: Yeah, this is exactly why I put together that blog post that you mentioned about the 20 questions to ask if you’re building a home because there are a number of things that I see my clients not even realize they should be asking up front. It starts very, very simply, right? You want to kind of get an idea of how long they’ve been in business, look at the number of homes they’ve built, look at the number of homes they’ve built in your area as well. So you know, if they’re brand new to Cleveland, Ohio, they’ve never built here before and they’re used to working in a different state, they may not be ready for some of the things that come up with building in this particular location. So getting questions about have you built in this municipality before? Have you dealt with the city, the planning committee, the zoning committee, this architect, you name it? All that stuff, you want to make sure there’s some sort of background going into that. So a lot of the questions that I often mention to my clients revolve around proving that that person is experienced enough to handle what we’re dealing with and then also licensed and insured in all those things as well so that if something does go wrong, you’ve got kind of this backup to make sure that you’re not going to lose your money or anything like that. And from there, it really grows to questions about the specifics in terms of are you looking for more energy saving features? Are you looking for more customization? Right? Because certain builders are going to be more customizable than others. Or perhaps maybe they only do certain types of appliances, and you really want the top-of-the-line. So those are all questions that you want to ask as you get into the weeds. But always start with those broader questions about experience and making sure that they’re appropriate for the job.
Tim Ulbrich: Great stuff, Nate. And again, to the community, the conversation we’re having today comes from an article that Nate wrote on the Real Estate RPh blog, “20 Questions to Ask if You’re Building a Home.” We’ll link to that in the show notes. And again, if you’re in the market for buying or building a home in 2021, make sure to head on over to YourFinancialPharmacist.com, click on “Buy or Refi a Home,” and we’ve got additional resources available to you right on that site in addition to an option to find an agent, which Nate can help you throughout that process. So Nate, as always, appreciate your time and your willingness to share your expertise with the YFP community.
Nate Hedrick: Absolutely. Thanks for having me, Tim.
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