Learn me buying a plot of land and having a house built on it...not in a subdivision

Here's the background.  My wife and I got married last year.  I was married previously and have 3 teenage kids, she was not married and has no kids.  She is retired and now works part time.  I work full time.  We both planned well for ourselves in years past so we have strong retirement accounts (yes, even after my divorce, LOL).  We are now positioning ourselves with the goal of me retiring in 5-7 years and get a "retirement job".  The elephant in the room there is medical insurance, but that's a different topic.  Part of that retirement plan is to be snow birds.  We live in Atlanta, but when I retire, I'd like to move back to my home of Philadelphia. I hate winter so we will spend 6 months a year in Florida.  We already bought an investment condo in Davenport, FL and it's doing great.  That could potentially be our FL winter home.  

The home we are in now was new construction, finished in June of 2021.  It's in a subdivision.  4 bed/3 bath, 2500sq ft, two stories, on a slab.  We bought it with the belief/assumption that my kids would stay with me a lot.  My boys never stay overnight and my daughter stays with us roughly every other week.  With that in mind, this house is more than we need. We're kicking around the idea of downsizing.  

Our house is worth 25% more than we paid.  We put down 20%, so we've got nice equity.  We know if we sell this house before the 2 year mark, we'd pay capital gains tax, so that's part of the consideration.  We're intrigued by the idea of buying a plot of land and building on it.  Goal is 3 bed/2 bath, 1400-1500 sq ft, ranch, 2 car garage, maybe a basement (but not required).  High end finishes, but not a show home.  I will NOT be doing any of the build myself.  To clarify, this house we build would be here in GA.  Live in it until we're ready snowbird, then cash it out.

Has anyone done this?  What was your experience with the contractor(s)?  How did the budget go?  Yeah, I know...I will exceed it.  How much per sq/ft did you pay?  Are you happy you did it or was it just more headache than it's worth?  We're just kicking the idea around...if nothing makes strong financial sense, we're content to stay here.

Just to clarify... you would build this in Philly?  How close to town are you thinking.  I'm just pointing out that you might have to get pretty far outside of town to find land that isn't under someone's thumb.

It's been 20 years since I built, but I gotta think with new materials costs right now, plus the labor market being expensive, building new might be pretty costly in comparison to buying something gently used.

At least if it's in Philly you have access to some contractors who use Amish labor.  Depending on the team, that means you'll get rock solid bones that will last forever, but some of the finishing touches might be a bit, uh, dubious.  They tend to move quickly when it comes to the fancy stuff that they themselves wouldn't necessarily use in their own homes.

And, if in Philly, you'll want a basement

My wife and I started down this road a few years ago (2014 - 2015).  After looking at the cost of lots, the costs for septic systems, earth work, environmental / rainwater runoff systems, etc. on top of the cost of constructing the actual house, we concluded that for our area (southeast PA) it was going to be cheaper, faster and easier to buy an existing house - which we did.  YMMV

Curtis73 (Forum Supporter) said:

Just to clarify... you would build this in Philly?  How close to town are you thinking.  I'm just pointing out that you might have to get pretty far outside of town to find land that isn't under someone's thumb.

It's been 20 years since I built, but I gotta think with new materials costs right now, plus the labor market being expensive, building new might be pretty costly in comparison to buying something gently used.

At least if it's in Philly you have access to some contractors who use Amish labor.  Depending on the team, that means you'll get rock solid bones that will last forever, but some of the finishing touches might be a bit, uh, dubious.  They tend to move quickly when it comes to the fancy stuff that they themselves wouldn't necessarily use in their own homes.

And, if in Philly, you'll want a basement

I'm sorry, that wasn't clear at all.  I modified the original post.  The house we're considering building would be here in Atlanta, close to our current home.  The idea being that for the next 5-7 years we don't need this much house and if we downsize, we can put that equity to use elsewhere.  When we're ready to move, sell the house we built, hopefully for a good chunk more than we paid to have it built.  Selling our existing house and downsizing to another existing home here in GA is also on the table...though we would wait a few months, so we avoid capital gains tax.

Yep, I know the Philly market well...lived there for 42+ years.  When I go back, looking north and west.  northern Bucks, north/west Montco, south Berks or Lehigh

Wife and I are building right now just north of San Antonio. We bought 5 acres in 2017 and slowly cleared what we wanted to make the home site. Definitely spend time up front on the set of plans.  Expect at least 4-5 months of time to get plans dialed in, I wish we had spend more time now in hindsight. Of course material prices are crazy right now so we had to do a cost + on the lumber in contract but otherwise it has been alright price wise. We are getting more for the money than if we bought an existing house in the same area we are building. Build will be around 180$/sqft including the well and septic. We did some stuff ourselves like meter loop and pulling wiring from power pole to the house. All the excavation was done with a rented skid steer and tractor. It's been fun and we can't wait to move in sometime in January!

SKJSS (formerly Klayfish) said:

Curtis73 (Forum Supporter) said:

Just to clarify... you would build this in Philly?

I'm sorry, that wasn't clear at all.  I modified the original post.  The house we're considering building would be here in Atlanta, close to our current home.  The idea being that for the next 5-7 years we don't need this much house and if we downsize, we can put that equity to use elsewhere.  When we're ready to move, sell the house we built, hopefully for a good chunk more than we paid to have it built.  Selling our existing house and downsizing to another existing home here in GA is also on the table...though we would wait a few months, so we avoid capital gains tax.

Speaking personally, I think that's a terrible idea for a variety of reasons:

1. Construction is hideously expensive right now. I mean hideously.  You'll be paying an absolute premium for the new house.  To the point that you will probably be paying more for a smaller house than for the one you're living in right now.
    
2. That won't last for the 5-7 year range.  Construction and housing costs will never return to pre-pandemic levels, but the current super-high is not sustainable and will inevitably drop.  Most of the huge federal spending programs driving this construction market inflation will expire in the next few years, and things will taper off.
   
   So right when you want to sell, values will be returning toward normal on a house you paid an absolute premium to build.
    
3. 1400-1500 sq ft is a hard sell.  The majority of buyers want more space.  Your main market will be A) young couples with little money who won't be able to afford your premium-cost house, and B) older couples who will probably be looking for a 55+ community anyway.

These are just my thoughts, and I could be wrong.  But I really don't see building a new small house right now as a way to improve your equity situation.

A couple of thoughts...  Hotlanta is huge.  Which area?  Cherokee County maybe?  Do you plan to be a owner/builder?, or hire a contractor?

One problem with building a "downsized" home, is that you might limit the number of potential buyers when you get ready to move it.   Most realtors will say it has to be 3/2.   And in today's market that usually gets up around 2500 s.f.     So... you might not downsize much.  Resale is better if you are on a paved road, and you build a paved driveway.   

Rural building is fun.  Remember your target buyer.  They are looking for the rural quality of life.  Usually they are thinking, "Hey, I can have room for stuff, maybe a barn, or big shop, garden, animals and such."   Do your site design with those future things in mind, even if you don't do them yourself at this time.

#1 this day and age.... research internet access at the site.  Very important.

Crazy market now... but real estate is still moving in the South... and Atlanta is the South.  Much has to do with cash coming out of colder climes.    But, you target sale is a few years away, so rates may drop by then.   Building supply costs have dropped recently, and in some cases subs are easier to schedule.  For planning purposes maybe use $180/s.f.  but... I am seeing some $200 based on quality of construction and fitment such as interior details, appliances, light fixtures.  Just saying.

After building a house 6 or 7 years ago ourselves...I don't think I'd want to do a custom build on land like you're talking about here to just live in for 5-7 years, personally.   I realize you're not asking for this opinion but I felt compelled to point out...

I don't think your new build is going to appreciate at a significantly different rate than your current home and you'll have all the closing costs and fun of moving an extra time during your life. 

[Actually, let me walk that value/appreciation thing back just a little.  I DO think that a more valuable home might suffer a bit more while the interest rates are higher than 2020-2021.  With money being more expensive to borrow...buyers are going to be putting more pressure on the lower end of the market to be able to fit a mortgage payment into their budget]

If I were in your shoes, I'd consider doing like you did in FL...buy your retirement home in Philly sometime in the next few years and let it start paying for itself.

To answer the questions you DID ask about.

We did this a few years back and consider ourselves very lucky to have found a really good contractor to work with that shared our values.  It still took longer and cost more than expected.  Some of the subcontractors (one in particular) were jerks but that could not be avoided...you simply HAVE to use whoever will actually DO the work.  My wife handled the project management (and budget) and I can't comment on $/sqft.  But it's hectic and I would NOT plan to do this again in my lifetime.  It was worth it because we were building our "forever home" even though we know that might not be the actual case...it CAN be our forever home.  I wouldn't want to do a custom for a short term home.  If I were doing that I'd might have a spec home built...but I'd probably just stick with what I had or downsize to something existing.  Having a new home built is near the top of the list of major-life-stress-events for a lot of people.

Purple Frog (Forum Supporter) said:

For planning purposes maybe use $180/s.f.  but... I am seeing some $200 based on quality of construction and fitment such as interior details, appliances, light fixtures.  Just saying.

I can't speak specifically to Atlanta, but that is very low to my eyes.

Up here in the Midatlantic area commercial construction is running $500-$600 / sf.  Residential construction is historically about half the cost of commercial work.  I'd budget $250-$300 / sf for a new house.  And that's going to depend on site improvement costs, let alone acquisition.

I've been trying to get both of my bathrooms gut renovated for at least a year, plus some custom casework for the master bedroom.  While I recognize bathrooms are expensive and this is not the same as building a new house, I've gotten several estimates in the $800-$850 / sf range.

Duke said:

SKJSS (formerly Klayfish) said:

Curtis73 (Forum Supporter) said:

Just to clarify... you would build this in Philly?

I'm sorry, that wasn't clear at all.  I modified the original post.  The house we're considering building would be here in Atlanta, close to our current home.  The idea being that for the next 5-7 years we don't need this much house and if we downsize, we can put that equity to use elsewhere.  When we're ready to move, sell the house we built, hopefully for a good chunk more than we paid to have it built.  Selling our existing house and downsizing to another existing home here in GA is also on the table...though we would wait a few months, so we avoid capital gains tax.

Speaking personally, I think that's a terrible idea for a variety of reasons:

1. Construction is hideously expensive right now. I mean hideously.  You'll be paying an absolute premium for the new house.  To the point that you will probably be paying more for a smaller house than for the one you're living in right now.
    
2. That won't last for the 5-7 year range.  Construction and housing costs will never return to pre-pandemic levels, but the current super-high is not sustainable and will inevitably drop.  Most of the huge federal spending programs driving this construction market inflation will expire in the next few years, and things will taper off.
   
   So right when you want to sell, values will be returning toward normal on  house you paid an absolute premium to build.
    
3. 1400-1500 sq ft is a hard sell.  The majority of buyers want more space.  Your main market will be A) young couples with little money who won't be able to afford your premium-cost house, and B) older couples who will probably be looking for a 55+ community anyway.

These are just my thoughts, and I could be wrong.  But I really don't see building a new small house right now as a way to improve your equity situation.

 

Obviously I'm not real estate/money management expert, but this was my initial thought as well. 

Especially the 1400-1500 sq ft part. We are DINKs and we need more space than our current 1815 sq ft home, since we both work from home permanently. 

Thanks for all the input.  There are several options on the table for us.

• Do absolutely nothing and just stay here - that is very possible and would be the "easy button".  If nothing else makes good sense, then we're staying here.  Period.
• Sell this house and buy a smaller existing house.  The inflated prices work both ways, we'll get a lot for this house but pay for it on the buyers end...hence very careful shopping.  There are a decent amount of recent "flips" on the market and as it's slowly starting to cool the investors are looking to get out of them quickly.  
• OpenDoor is in a similar situation to Carvana right now.  They're imploding.  Watch the carnage and try to swoop up a property at firesale prices.
• Buy a house in need of reno and have that done while we live here.  We have damn good agents and they know contractors, we trust them.
• Build a home here.  Yes, if prices are well north of $200/sq ft it probably would make no sense.  But it's worth at least kicking tires.

To answer a few questions.  We currently live in Paulding County, GA.  We would build/buy here.  My two younger ones are still in school, and Paulding County is a hot market.  We'd build in a populated area, maybe along a main road.  Paved driveway, etc...  A pretty "normal" 3/2 with 1500ish sq ft.  When we're ready to flee to PA/FL, we'd see where the market is.  If it makes sense, we'd keep it as a rental investment.  We thought a small house would be a tough sell too, but from what our agents tell us a small-ish nice house in a nice area is the safest bet...even better than a 2500+ sq ft house.  

We could also buy something in PA and rent it until we're ready to move.  But then we'd have mortgages on 3 properties, which makes me a bit squirmy.  Our FL condo is doing great and easily paying for itself, but still....

What makes you want to move currently? Is it just the size of the house? I would run the numbers, if its an extra empty room then that is not going to cost you that much in utilities. 

Also, if you bought in 2020 you probably have a much better rate on your mortgage compared to what you would get now. If no mortgage ignore. 

I'll echo what everyone else said. Wife and I bought a small lakefront property in 2018. We sat on it for a year doing nothing. COVID hit, by the time we get things into gear, materials, labor,  architects, absolutely everything was in high demand and insanely expensive. Ultimately we came to the same conclusion as everyone else...way cheaper and faster just to buy an existing home. Thankfully we sold at the high of the real estate craziness and did okay.

Can you tie into water and sewer? No? Then you'll be looking at well and septic, and the continual maintenance therein.

In reply to Appleseed :

I mean, we've been in this house since 2004 and the only maintenance either the well or septic has needed was a new pressure tank because at 15 years the old plastic one finally died. Mom and dad's septic is now 30 years old without a need for anything. I think people are scared of things they don't know or understand and these two topics get overblown more than most IMO.

As to the OP, I wouldn't want to build or buy anyhing right now. Between rising interest rates, super inflated costs and the inability to find contractors to do the work it's a terrible time. My vote, as much as I loathe subdivisions, would be to stay put for the 5-7 and call it a day.

Stay or buy used. Now is a terrible time to build, and if you did it's going to take 1-2 years to get it done. Then it's 3 to 5 years and then you sell.

A small house with higher end furnishings is going to be hard to get your money out of. 

Slippery said:

What makes you want to move currently? Is it just the size of the house? I would run the numbers, if its an extra empty room then that is not going to cost you that much in utilities. 

Also, if you bought in 2020 you probably have a much better rate on your mortgage compared to what you would get now. If no mortgage ignore. 

It's semantics, but I would truly classify our interest as "curious" instead of "want" to move.  Despite our hatred of HOAs, we like this house and would be perfectly content here if that's how it shakes out.  The curiosity is a few things.  First, since my kids don't stay here as anticipated it's just a lot more than we need.  Since we don't need (or necessarily want) this much house we're working through the different options to see if our money is better invested elsewhere.  Without involving the actual numbers, pretend the house I'm in now was $400k when we bought it.  We put down 20%, so mortgage was on $320k.  House is now worth $500k.  Therefore, we have approx $180k equity in it.  Would we be smarter to sell, go buy a nice small house we like for $300-$325k?  We could put all $180k into that so the mortgage is small and we're paying more principal per payment instead of interest (as mortgages usually do).  Or we could put down the customary 20% and invest the remainder in something else.  Again, those aren't our real numbers and yes there are some small variables, but you get the concept.

Interest rates are high now for sure.  If we did something soon, we'd definitely plan to refinance when they drop.

In reply to SKJSS (formerly Klayfish) :

Buying an existing smaller house may well make economic sense, if you find something you like.  I will note that conventional wisdom typically says that the break-even for closing costs, relocation, etc is about 5 years in the new location.

Building a new one is extremely unlikely to make economic sense at this point.

I may have this wrong or it may have changed, but once upon a time, if you didn't use the equity on the old house to buy the next one, you had to pay capital gains taxes on it.  That makes the "invest the remainder in something else" part seem pretty unlikely to work out.  There was a once per lifetime exemption to this which people usually held until much later in life when selling the home to go to some other living arrangement.

Like so many places, the Atlanta housing market is cooling. There are far fewer homes for sale, which may be keeping prices elevated for the time being, but the number of homes selling for over list price is down 8% while the number of homes with price drops is up 5%.

If you want to sell your house, it's got to be priced right, and you shouldn't expect buyers to be beating down your door the way they might've a year ago.

Couple that with the higher interest rate you'd pay on the new place, and any equity gain would likely be lower than expected. With a timeline of just a handful of years, I'd avoid the stress and just stay put.