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New construction vs. an existing home: Which is a better buy?

By Ilyce R. Glink and Samuel J. Tamkin,

My wife and I have saved about $225,000 and want to buy a bigger home with the cash. We owe about $120,000 on our current home. Our monthly mortgage payments are about $1,000. When we bought our new house, we paid $160,000 for it, and it is now appraised at around $126,000. We want to rent our current ho use and possibly get around $1,200 per month.

First, is this a good idea? Second, my wife wants to find a home that’s around 10 to 20 years old. She feels those homes are bigger and have more land. I’d like to find a new home that is more energy efficient, without the worry about having to replace the roof or other mechanical systems. What would you recommend we do?

Whether to borrow money to buy your next home is a personal decision only you can make.

You’ve saved quite a bit of money, but putting it all into the purchase of a new home is probably not a wise idea. Interest rates are very low, which is a strong argument in favor of financing the purchase. You would have a lot of leeway as to how large a loan to take out. On the other hand, if you can put aside enough money to cover expenses and potential emergencies and to make retirement contributions, putting a lot of that cash into buying the new home could also make sense.

We’re not financial advisers, but a lot of advisers would tell you that putting all of your money into one asset — be it a stock, bond, mutual fund, or piece of real estate — is not good planning. It’s prudent to diversify. Perhaps some cash could go into the new home and some could be spread among different investments.

As for renting your home, you need to understand why you want to keep it. What investment return do you expect in the short term and in the long term? Will you like being a landlord?

In the short term, you might lose money on the home every month because of expenses. If the home does not increase in value and you keep it for several years, your decision to rent the home may prove to have been a poor one. Unless you’re able to be in a cash positive position, keeping your home as a rental may not be a smart investment move.

Now let’s address your question about whether to buy another new home or an existing one. We believe your primary consideration should be location. You might buy a large home, but you won’t like it much if you don’t like where it’s located.

The Great Recession has made existing homes even cheaper compared with newly built ones. This hasn’t always been the case. Existing home prices in many areas were about the same as new construction, although buyers were often willing to pay a premium for new appliances and to have everything new.

Now the difference in cost can be huge. Determine what new construction homes go for in your area, and then assess what comparably sized homes go for in similar neighborhoods with comparable schools. Then you will be able to assess the market and price differences for various types of homes.

You might find that your wife’s idea is better than yours. After all, new construction homes aren’t problem-free. In fact, you will sometimes have more problems with a new home than an older one. While it’s true that you shouldn’t have to worry about the roof of a newly built home, it might have been installed improperly. You, as the new buyer, will be the one to figure that out.

At the same time, we’ve found that appliances don’t last as long as they used to, and this includes many major elements of a new home. If hot water heaters, furnaces, air-conditioning equipment, kitchen appliances, disposals, humidifiers, dehumidifiers, pumps and other equipment last less than 10 years, then your idea to buy new might be the better course. If you buy a 10-year-old home, you may find yourself replacing a whole lot more than you had planned.

Siding, roofing materials, doors and windows may not last as long as you’d wish. If inexpensive construction materials were used in a home from 10 or 20 years ago, again, you will be the one having to replace them. If you buy a home that is older and has had all of those components swapped out, you may find that you won’t have to replace as much in the coming years.

Whether you buy a newly built home or an existing one, you should have an inspector walk you through it with you before you commit to buying it. If it’s new construction and your inspector finds that the quality is inferior, would you really want to buy that home? Similarly, if it’s a 20-year-old home and your inspector tells you that it has never had any work done and all of the appliances and fixtures are original to the home, would you be prepared to live there the next five years, replacing all of those items?

Both new construction and existing homes have their relative advantages and disadvantages. You and your wife need to evaluate all of these issues and make a decision that’s right for both of you.

Ilyce R. Glink’s latest book is “Buy, Close, Move In! Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce’s radio show toll-free (800-972-8255) any Sunday from
11 a.m. to 1 p.m. Contact Ilyce and Sam through her Web site, www.thinkglink.com.

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