It’s a tough question, and as you might assume, it comes with a myriad of considerations.
What’s the location? What is the price point? How long are you looking to remain in the house?
I’m not convinced that there’s money in “flipping” houses in Toronto anymore, unless it’s your primary business, so today I’d like to ignore that realm of possibilities, and instead I’d like discuss the idea of building versus buying as it pertains to a young family who is looking to remain in the house for 20-25 years.
I feel sorry for people who own $3,000,000 houses, don’t you?
I mean, the market for $600-$800K freehold single-family homes is red-hot, and has been appreciating 8-10% per year for the last three years!
And yet the folks that own houses at the higher of the price spectrum are seeing everything around them going up, as their own house prices have flat-lined.
I know, I know – cry me a river. So Mr. & Mrs. Moneybags aren’t making more money on their money…
It’s like on the radio this morning – the host talking about how “tough” it is for Lebron James, to have to play 46 minutes of a 48 minute game in the N.B.A. Finals, with no support from his teammates, fly back-and-forth across the country, and the toil it takes on the body, while all the while, getting paid $30 Million per year.
You know what’s tougher than that? Anything.
The host actually realized how dramatic he was being, and said, “Yeah, sorry, I know – if you’re a blue-collar labourer, grinding with your hands all day, you’re sitting here wondering, ‘Why am I supposed to feel sorry for Lebron James?'”
But putting things in a relative perspective, what Lebron James is asked to do, compared to what any player on the opposing Golden State Warriors is asked to do, is an impossible task. He has to do 3-4 times more than anybody else on that court.
So while my parallel here might be losing steam, I find it interesting that certain segments of Toronto’s real estate market have appreciated 3-4 times more than other segments.
It’s a simple case of supply and demand, as it always seems to be.
There are more people looking for $400,000 downtown lofts and $650,000 houses than there are looking for $3,000,000 houses, so it seems to reason that the former will out-appreciate the latter.
But as the former is also fast-paced, and frenetic, the latter part of the market is so incredibly laid-back, and works almost backwards.
We see $599,900 list prices for 3-bed, 2-bath semi-detached houses resulting in $725,000 sales. But when it comes to a lot of the $2M, $3M, and $4M houses, the process is the exact opposite.
A lot of the baby-boomers are selling their homes, and “cashing out” their nest-egg, but they haven’t transacted in real estate in so long that they’re not used to the pace. Selling their house in 65 days is totally normal to them, and under-pricing sounds absurd.
The result is that many houses over $2M sit for a while, or are reduced in price, or both.
And what I see out there is an opportunity for buyers in this price point to cash-in as the previous generation cashes out.
In the $600-$800K price range, we don’t “build” houses; in fact, we barely renovate them. But in the $2,000,000 price range, often the land itself is worth more than the house.
The price discrepancy between one house, and the house next door, is massive in some of these upper-end areas.
You might have a $4,000,000 house, brand-spanking-new, sitting next to a $1.9M “tear-down.”
So buyers in this price point need to decide: “Do I buy new, or buy a lot, and build?”
I want to look at one particular lot in Rosedale that I was watching last year, and this one was a particularly wild ride!
“The house,” which I’ll refer to it because of the ever-present grey area and changing rules about sold prices and all that BS, was first listed for $2,700,000 in July of 2014:
From the outside, at least.
On the inside, it needs work. Lots of work.
In fact, this house would be best-utilized as nothing but a brick frame, with a gigantic hole in the ground behind it. That’s right – it’s more than a “gut.” It’s a new-build.
You know what – a picture paints a thousand words, so here you go:
This was a 44 x 140 foot lot, backing on to the ravine.
The 3-storey layout would be better than a 2-storey layout if it were move-in ready, but I felt that this was truly only land value, so there wasn’t a ton of added value there.
This was about neighbourhood, street, style, and lot size.
And I loved the look of this house from the get-go!
In July of 2014, I was looking around to see what a “finished” house would go for on this street, of similar lot size, and I figured around $3,600,000.
Make no mistake – buying that $2,700,000 “house,” which is really a nice way of saying, “lot,” means you’d be spending the next ten months building a new 4,000 square foot home.
And unless your primary occupation is “home builder,” then I can guarantee it will be the most stressful ten months of your life.
I shudder to think about living and breathing “the house,” day-in, day-out.
And trust me – I’ve thought about building my own house one day, but given that I live a carefree, downtown-condo lifestyle, how do I possibly make that transition?
The phone rings on a Monday, and it’s your interior designer, saying that the tiles you wanted are on back order, so you have to put the kitchen installer on hold. But the kitchen installer has another job to do, and he can’t reschedule, since the floors are going in right after.
Your architect and your builder don’t like each other, your neighbours have called the city four time about the mess and the noise, and your husband/wife is more stressed than you are.
Is it worth it?
To live and breathe “the house” for almost a year? When you move in, will you be sour? Will the experience have been so awful and draining, that you look at the house as an ever-present symbol of the year you suffered through?
As with many things in life, perhaps it comes down to the price.
Maybe you can’t put a price on happiness, but you can certainly decide, “I would do ‘x’ if it cost ‘y’,” in many cases in life.
So at what price would you build, and at what price would you buy?
That $2,700,000 lot in Rosedale would be maximized by a 4,000 square foot house, at about $250 per square foot. So an even $1,000,000 to build, thus putting you at $3,700,000, plus $100K in Land Transfer Tax on the original purchase.
So that means you’d have spent $3,800,000 for a house that’s worth approximately $3.6-$3.8M.
Is it worth it?
Many people want to build a house as a way to make money on paper, but others simply want to have their own designs, their own features, and their own finishes.
I remember about four years ago when I was working with two different clients in The Kingsway area. Both were looking for a “building lot,” as both wanted to design their own homes from scratch.
As we moved through that spring market, the prices started to make no sense! We’d see a $1M lot listed for sale, where we knew it would cost $800K to build, and the house might be worth $1.9M in the end, but $1.8M was a safe bet.
Then then the damn lot would get nine offers and sell for $1.3M!
The prices made no sense.
What incentive was there at this point to spend 8-12 months building a house, if you were going to be in for $2M, on a house worth $1.8-$1.9M?
One client ended up buying a new-build, and the other bit the bullet and picked up a lot for $1.2M and built.
So is it worth a premium to pick your own designs?
Or in order to bite that bullet, would you want to make something on paper?
As for the Rosedale house listed last July at $2,700,000, it didn’t sell.
In fact, it sat on the market from July 11th, 2014, at $2,700,000, until it was terminated and re-listed on September 3rd……….for $2,395,000.
Wow. What a price drop!
You certainly don’t see that every day.
So as we looked at this in September of 2014, did building a new house on this lot make sense?
$2.4M for the buy, $1M for the build, with $88K in Land Transfer Tax, and you’re out with a new house for under $3,500,000, knowing that the result is worth $3.6-$3.8M.
Now does it make sense to build?
Or would you rather pay $3.6-$3.8M for the same thing, and not have to do any of the work?
Therein lies the question, in response to the “build or buy” title of this post.
At what point is the deal so good, that your decision is made for you?
Believe it or not, this Rosedale house didn’t sell at $2,395,000 in September of 2014.
In fact, it was re-listed, again, in late-October for $2,195,000. That’s over a half-million-dollars lower than the initial list price.
So again – $2.2M to buy, $1M to build, and $80K in LTT, and you’re out under $3.3 Million.
Now does it make sense?
Well I’ll tell ya – somebody got one HELL of a deal. Take a look:
Somebody got this property for a whopping $725,000 less than the original list price.
Don’t get me wrong – I thought the initial $2.7M list price was nuts, but I never though I’d see it sell below $2.1-$2.2M.
The person who builds on this lot is going to make a $500,000+ profit, albeit on paper, but it’s still equity, and it’s still net worth.
That house took four months to sell, and was listed three times.
I’m sure the owners (it was an estate, of course…) knew they were over-pricing to begin with, but I think it’s fair to say that the market didn’t respond well to this listing in the end.
I’ve seen a lot of higher-end properties reduced in price, and listed multiple times. Some have sat on the market for what seems like an eternity, at least relative to what we’ve come to expect in Toronto.
Perhaps it’s because the baby boomers looking to downsize don’t usually buy before selling, and thus they don’t “need” to sell, like most home-sellers under $1M, who have already bought.
But is it fair to say, if you have the money, and the wherewithal, there might be the odd “deal” in Toronto right now if you’re looking to build your own house?
It’s hard to look at the case study above and provide an argument to the contrary…