Renovation Versus New Build – Buying Below Residual Value

April 9, 2012

A big theme these days is the comparison between buying a new home, or fixing up/extending an existing one. Which is the better option?

Well, in many markets across USA prices remain stubbornly high for newbuild homes, so a wrecked old foreclosure may make better value for money. But renovation isn’t for everyone, and costs can escalate, especially if you’re looking at the luxury end of the market.

In Buffalo, however, the decision dynamics are a little bit different. Newbuilds, beyond luxury ‘one off’ homes, are a rare breed, even now. The reason? Existing houses are too cheap. Lets look at the numbers –

Cost to build a simple 4 bedroom house in typical rental area of Buffalo – $100,000

Cost to buy a house in bad condition in a similar area – $10,000 (renovation cost $20-$30,000)

Cost to buy a newly renovated house in similar area – $30-35,000.

So what does this mean, bearing in mind the recent economic stats confirming Buffalo as having the 2nd highest GDP per Capital growth in USA?

GDP Growth means people are earning more money, i.e. job quality is improving (and presumably skill levels) Maybe the current low cost of living has attracted more jobs, improving the economy, or existing companies are prospering in the low cost environment – either way, in time this must put upward pressure on prices as people are attracted to an improving area. In Buffalo that can be seen from the improvements in rental vacancy rates -According to US Census Bureau, rental vacancy rates in Buffalo fell from 12.5 to 8.3% from 1st to 4th quarter 2011 – compared to New York vacancies increasing 23% to 6.8%, Houston at 14.6%, Detroit at 16.2%, Chicago 10.4%.)

Right now, Buffalo is one of the few places in USA where you can buy a fully renovated house for less than half the cost of a newly build house. With increasing demand for homes in the area, and no new supply due to the higher cost of building new homes, then the slack will have tighten up by increasing rents and prices towards the ‘par’ of newbuild cost – the cost of the land, bricks and mortar, which could be seen as the residual value of any home in any area.


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