Although the official definitions of “buyer’s market” and “seller’s market” in real estate rely on the availability of inventory, I have often observed that the best way for me to answer the question of whether it is cheaper to buy an existing home in Hawaii or to buy a vacant lot and build is to ask whether it is a buyer’s or seller’s market at the time.
Let’s look at where we are in 2021 on costs of residential listings versus the option of buying a lot and build a similar home in the same community in the South and North Kohala markets I serve.
The Buy versus Build Equation Changes in a Buyers or Sellers Market
Over the course of real estate market cycles, I have observed that the Buy versus Build equation seems to change. In short:
- When it is a buyers market for single family homes, residential prices languish at below replacement cost.
- In a balanced market, built homes sell for roughly the cost of building a similar home, an (more or less as I am ignoring the other factors in “utility value” such as whether or not the home is “perfect” for the buyer’s needs and wishes, and the length of time required to design, permit and build a perfect house.)
- In a seller’s market, the scarcity of single family homes pushes up their prices to the point where it is attractive for buyers to look at the alternative of buying vacant land to build.
The dynamic also depends on the neighborhood. In some Big Island neighborhoods, there are no homes for sale, and buyers turn to lots. In other neighborhoods, there simply are no remaining vacant lots for sale, and “buy versus build” is not an option. Currently Maliu Ridge near Hawi would be an example.
In some of the lower North Kohala communities, and in Waikoloa Village in South Kohala, the velocity of sales of vacant lots has increased dramatically, but there is still enough land inventory to have not driven up raw land prices. Kohala Ranch would be an example of this scenario. There are neighborhoods nearer Kona, like Keauhou Estates, where the rare vacant lot will be sold in a bidding war.
Puakea Bay Ranch Example – Buying Land to Build
At Puakea Bay Ranch — the gated oceanfront home community near Hawi in North Kohala — there are two homes in escrow and four vacant lots. My 10-acre lot listing is priced at $400,000, so letʻs use that as land cost. The residential listings are at $2,450,000 and $2,500,000 for roughly 5,000 sq ft of living space plus large lanai and pool. If I apply simple math…subtract out the cost of land and divide by the size, I come up with roughly $420/sq ft for the home…an older home, albeit with updated finishes, but not necessarily perfectly suited to the tastes and needs of todayʻs buyer.
The cost of building larger homes actually works to a smaller price/sq ft than similar finishes in a smaller home, because the cost of some of the most expensive parts, like that high-end kitchen you crave, will be spread over a larger denominator when you divide. Currently contractors are giving me $350-400/sq ft for a home meeting the design requirements of this type of community.
Iʻd be happy to discuss vacant land options, design requirements, land, and construction loans and give contractor and architect recommendations. But donʻt be surprised to find contractors and architects are booked several years out. I understand there are 39 active building projects at Kohala Ranch alone!