Options to buy or build

My wife and I have taken a giant leap toward home ownership. Namely, we decided to buy a home. The remainder of the journey still seems rather mysterious and intimidating.

No sooner had we decided to opt for the “buy” solution to the “rent or buy” question, than we were made aware of our next pressing dilemma: “buy or build”?

Luckily, fortune seems to be in our favour. Grand Cayman is abounding with available properties, many of them brand-new or renovated since Hurricane Ivan in 2004, and many with motivated sellers. The only thing sweeter would be if we had more money, but that’s another story.

Two long-time Cayman property gurus said that while the prevailing economy has reduced construction costs somewhat, the prices of improved properties are down even more. With all the real estate inventory available right now, there is a good chance that the right home is already built and is just waiting on the right offer. On the flip side, building a home enables you to customise it just the way you like, allowing you to incorporate the newest features to save energy and money in the long term.

Broker talks buying

JC Calhoun, the senior broker for Coldwell Banker Cayman Islands Realty, has been selling real estate locally for more than 30 years. “My advice usually for somebody is if they can find an improved property that really suits them, they’re better off buying rather than building because people underestimate the time involved in doing a building project,” he said.

Calhoun said the cost of building right now is down a bit, as is the price of raw land. “But improved property is down farther than those other two,” he said.

The slowdown in the construction sector also works in favour of someone who finds an improved property that is almost perfect, but might require some renovation work before it is just right. Not only are construction prices relatively low, but the dearth of large developments has freed up contractors to do smaller projects, such as personal renovations.

“There are many more contractors available right now than there has been in the recent past,” he said. “In the old days when things were really blowing and going, some wouldn’t do that kind of stuff.”

Additionally, when people start thinking about building from scratch, they usually do not factor in the personal time required to monitor construction from beginning to end. “Even if you have a good builder, you have to stay on top of the situation because there are a lot of intricacies to it,” he said.

With the economic downturn, most people are putting in more time than ever into their own professions, perhaps for less money than before, he said. “To take a hunk of that time out to oversee construction of your own personal residence is something that many people just can’t do right now. My thought is, the first thing to do is look at improved properties to see if something works for you. Prices are down. It saves time. It saves money,” Calhoun said.

Another consideration is how soon the new home is required. Generally, construction of a new home will take about six months, barring major delays. Meanwhile, moving into an improved property should take about one to two months after the sale, depending on bank paperwork and pre-move renovations.

The debate between buying or building should be viewed in the overall context of a purchaser-friendly environment, where the deck is stacked in buyers’ favour.

“If you can’t find an improved property, and just nothing out there really suits you and you’re really particular, then the timing is good to build. I’d look to see what is out there first before I decided to build right now,” he said.

Architect on building

Wil Steward is managing director of Chalmers Gibbs Architects, the oldest and largest architectural practice in the Cayman Islands. The firm was established in 1959 and has been in Grand Cayman since 1966. Steward has been in Cayman since 1992. “Certainly the major advantage of building yourself, besides saving on stamp duty and a few other incentives that government offers, is really the ability to build in some energy-saving features,” he said.

Steward said his group is working on a couple of all-solar projects that would entail a wholly different set of variables than if they were being asked to retrofit older homes. “The older homes are often not as well-insulated. They may not have had their roofs conceived with solar in mind . That’s just an example of one thing that could be attractive to someone considering building,” he said.

Another advantage of building over buying is, of course, that people can make a new home exactly the way they want it, Steward said. People looking to obtain an investment property might be better off building a home from a new design, and with new techniques, rather than trying to renovate an older home.

However, people who think that building is going to save them tons of money, compared to buying, could wind up with a roomful of disappointment.

“Realistically, in the construction industry, even though it’s somewhat depressed, costs will only come down so far. There’s sort of a basic profit in construction to start with,” he said. “We are facing slightly lower construction costs at the moment, but they’re only marginally lower than they are in better times because all that is happening is builders are reducing their profit, and in some cases even eliminating it.”

While builders are trying to keep prices low in order to compete for jobs, they are also dealing with rising costs of inputs, such as fuel and metals, he said.

“On the one hand, there can be better bargains out there in the real estate market, but you really have to look closely at what you’re buying because what’s built today is probably a lot better insulated, and may be better built structurally,” Steward said. “You can also choose what ground elevation you’re going to build at. Older buildings may be built at seven feet or less. A lot of the newer homes are built at eight feet or more.

“That’s certainly an advantage of building. You can choose your own ground elevation based on the amount of risk you’re willing to assume.”

Practical considerations

Both Calhoun and Steward urged caution before pulling the trigger on a real estate transaction, independent of the buying or building scenario.

Calhoun said the first move for any prospective buyer should be to the bank to talk with an adviser.

“You’d be amazed at how many people look at improved properties when really they do not qualify for a mortgage for that property,” he said.

When you have the maximum dollar figure established, contact a real estate broker and share the dollar figure, what locations are ideal and what locations are definitely not acceptable. In Cayman, all CIREBA agents have access to the same database of property listings, so it is best to pick one agent and stick with him/her, rather than contacting a different agent for each property.

Armed with the information, the agent will do a search and provide a list of possible properties. From then on, it is a vetting process, capped by in-person visits to a handful of final candidate homes.

“If there really is nothing out there that works for you, then tell the Realtor, ‘None work for me. Let’s look at land.’ Then they’ll shift gears, run a whole new search and you’ll look at land in that same way,” he said. “That’s the academic way to go about doing it.”

Steward said it is necessary to look at home-buying or -building just like any other major investment. “First you need to figure out what you’re trying to achieve. A lot of people don’t have a single goal, but they definitely don’t want to lose money and would like hopefully to make some money on their investment,” he said.

He said, “Real estate is becoming a lot more interesting investment because other forms of investment are, to say the least, a bit unstable. It makes real estate a better bet.”

Before starting a new construction project, people should gather realistic cost advice on the specific project from experts, such as architects, surveyors and engineers, rather than relying on rule-of-thumb estimates, Steward said.

“People talk in terms of square footage costs, and often times it’s just conventional wisdom that’s been repeated so many times it becomes sort of true,” he said. “I think every building project has specific requirements.”

Closing costs

In addition to the sale price of a property, there are other costs associated with real estate transactions that buyers and sellers must consider.

Typically, a buyer is responsible for bank fees, stamp duty and land registry fees. Meanwhile, the seller is responsible for the commission charged by the real estate broker. Most of the fees vary according to the value of the property at hand. If an attorney is retained, the party hiring the attorney would be responsible for that fee.

Buyer’s costs

Bank fees – Usually, 3 per cent of the amount borrowed: 1 per cent to attorney, 1 per cent to bank, 1 per cent to government as stamp duty. If the mortgage is more than $300,000, the stamp duty is 1.5 per cent. (Interest rates for real estate lending are based on prime U.S. rates, plus 1-3 percentage points. Typically, mortgages require a 5-35 per cent down payment, and are paid back over a term of 10-40 years, depending on the borrower.)

Stamp duty – Varies up to 7.5 percent of the purchase price (not including ‘chattels’ – things not attached to the property, such as furniture).

7.5 per cent – Seven Mile Beach area, regardless of buyer’s Caymanian status

6 per cent – all other areas, including Cayman Brac and Little Cayman, if the buyer is not Caymanian or is a company

4 per cent – all other areas, including Cayman Brac and Little Cayman, if the buyer is Caymanian

2 per cent – all other areas, including Cayman Brac and Little Cayman, if the buyer is a Caymanian first-time buyer, for bare land purchases between $50,000-$75,000 or for residential purchases between $200,000-$300,000, for owner occupation

0 per cent – all other areas, including Cayman Brac and Little Cayman, if the buyer is a Caymanian first-time buyer, for bare land purchases up to $50,000 or for residential purchases up to $200,000, for owner occupation

Land registry fees – $50 for official search, $50 for transfer to buyer’s name, $100 for purchase agreement registration

Seller’s costs

Real estate broker’s commission – CIREBA rates vary from 4-10 per cent, and are paid according to the price in the Listing Agreement

10 per cent – Price less than $95,000

7 per cent – Price between $95,000-$495,000

6 per cent – Price between $495,000-$995,000

5 per cent – Price between $995,000-$9.995 million

4 per cent – Price of $9.995 million or greater

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