Housing in Los Angeles: Build or Buy?

June 4, 2008 4:26 PM

Would it be more cost effective to build a house or buy a house in Los Angeles?

The price of Los Angeles real estate has been dropping. I'm most interested in a 3 bedroom 2 bath house (or something close) around 1,500 square feet or so. I've been wondering: Would buying a piece of land in Los Angeles and building on it be more cost effective than buying a pre-built house?

We're of course talking in hypotheticals, but let's say you found a piece of land in a somewhat desirable location (a place like Silver Lake, west San Gabriel Valley, Glendale, Burbank, Pasadena, Sherman Oaks, or Hollywood (as in NOT South Central, Long Beach, or some place way far out of town)). Maybe a house was already on that spot and it burnt down. The point is that there is a piece of land, and no house (but maybe remnants).

This hypothetical house: we're not talking anything super fancy, but something that's designed for low energy usage (good insulation, double paned glass, etc.). I'm not referring to a totally solar house or full grey water system. Just a one story, 1500 square foot house that's good with energy. You got me?

Any ideas of the cost I'd be looking at? Any parts of Los Angeles where building a house would be cheaper than another? Would buying an already existing home be a better economic choice?

Keep in mind, I'm not looking at cheapest--I'm looking at most cost effective. The cheapest house would be made out of straw and Saran wrap; a cost effective house would be well built and be designed to minimize energy usage for heating and cooling.

posted by rybreadmed to home & garden (9 comments total)

Generally you cannot get a mortgage for a piece of land that has no house on it, so financing a build-your-own will be much more difficult. Finding a tear-down is slightly more practical. Expect to pay 200K-400K to tear down and build a new house of that size. In my experience, houses in tear-down condition do generally not have a $300K discount relative to the neighbourhood, so it's not cost effective in the short term. In the long term it may be worth it if you expect prices in the area to appreciate, however that's not very likely in current market conditions.
posted by GuyZero at 4:44 PM on June 4, 2008

Cheaper to buy I'm afraid. The vast majority of the cost of a house in LA is land. if you browse the real estate listings for land only, or for lots with teardowns, you will notice the discount is usually only about 10% or so (from memory off the top of my head). Check out California Moves (the interface is nicer than realtor.com) and you can probably see what I mean.

Or for another example, browse the LA county assessors site, type in an address in LA and you can see the breakdown of land value and house value.

In short you don't get enough of a discount when buying land only or teardown lots, to cover the cost of building new. I suppose if you were to build yourself you might be able to do it cheaper.
posted by Joh at 4:45 PM on June 4, 2008

I would guess buy and then make improvements, then wait 50 years for them to pay off.

I live in 91101. There is a decrepit tear-down a few blocks away. It is right next to a million-dollar apartment complex. The lot + house is going for ~$600k. Since the house is virtually worthless, this means that the land itself, probably less than 1/4 acre, is going for $600k.
posted by charlesv at 4:55 PM on June 4, 2008

Buy a house at auction and fix it up. That's what we did when we moved back here 12 years ago. We paid probably half of what the house was worth at that time and its increased in value by probably four times that now. It was a mess. Hadn't been lived in for a few years and hadn't been touched much before that either. We ended up pretty much gutting the rooms and redoing everything. Did as much of the work ourselves as we could, so saved a bunch there too.
posted by jvilter at 5:28 PM on June 4, 2008

Actually, you can get a mortgage for a piece of land if you've got credible plans to build on it. It's more complicated, but it can be done.

But it's probably not cheaper, unless you find a lot that's ridiculously cheap. Figure $10-20K to clear the lot of an existing structure. Figure optimistically ~1 year to build the house, during which time you need to live somewhere else (at $1500/mo rent, that's another $18K gone). Construction expenses vary wildly—at the low end, with you doing a lot of the work and getting really creative with materials, you see costs clocking in around $60/sqft. But $150-200/sqft is common for non-luxury houses, and the figure in the LA area should probably be higher. So to build the house, exclusive of the land, would cost $225K with a dash of optimism. This doesn't take into account time lost from work dealing with the complexity of overseeing a house construction, hair lost from worry, the potential for massive problems to appear midway through the project, etc. There are some interesting prefabs being offered these days, which cut your construction time to about 3 months. So they make the numbers more accessible, but their $/sqft really isn't any better.

So unless you can find a vacant lot that's ~$250K less than a built lot, you're almost certainly in the hole. It's too bad—building one's own home is a really attractive idea.
posted by adamrice at 5:29 PM on June 4, 2008

Consider that the value of whatever house that stands on any lot is derived in large part from the perceived value of other, comparable houses in the neighborhood. You could build the coolest mansion imaginable within your budget on this lot and when you go to sell it, the first thing everyone will do is pull out "comps" of similar houses nearby, in terms of square footage, number of bedrooms, etc.

The fact that you will have a custom or upgraded house is pull up the value, but your starting point will always be your neighbors. The greatest house in a shitty neighborhood is automatically handicapped. Similarly, the smallest, oldest house in a great neighborhood automatically gets a leg up.
posted by Cool Papa Bell at 6:32 PM on June 4, 2008

Generally you cannot get a mortgage for a piece of land that has no house on it, so financing a build-your-own will be much more difficult.

Where did you get this idea from? Construction loans, and even loans for owner/builders, are really common. How else are people financing their house construction?

That said, there are a lot of hoops to jump through if you go that route, and the bank will take great care that your proposed house will be worth as much or more than you are borrowing. The practical impact of that scrutiny is that doing anything "different" or "interesting" gets a lot harder -- you want a funky cool house, and the bank wants a house that it can easily sell if you turn out to be a deadbeat.

The real limitation here is that there generally isn't a lot of empty land in desirable locations in dense areas, and the land that is available costs a lot. Construction costs are easy to ballpark by the square foot, given your area and how fancy you are looking at building (eg $200/ft is common here); add that to the land cost, plus a big margin for cost overruns, and you can compare that to new construction. Cheap land might exist in a brownfield or somewhere like that, but the bank is a lot less likely to loan you money to build there.
posted by Forktine at 7:36 PM on June 4, 2008

Nowadays, with builders going idle or under, they might be much more willing to work with you on price.

I can't help but think that after the last couple years of flip-mania, that there should be a lot of 'improved' properties coming on the market. (Though, I don't have any data to back that up.)

Do keep in mind that the market is still in rapid flux (or, more to the point, freefall,) so good advice now might not apply in a year or two.
posted by blenderfish at 10:46 PM on June 4, 2008

Yes, there are a lot of "improved" (in quotes) homes coming to market in LA. Cute little 1920s and 1930s homes with the same cheap, hideous Home Depot cupboards, faux tile and shower stalls. On Redfin's website you can track the recent sale prices of the flips and spot just when the speculators refinanced and ruined whatever charm the places had. So budget an extra $25,000 to fix the fixes.
posted by Scram at 4:46 PM on June 5, 2008