Home builders once again are building homes. New-home construction has surged in recent months to levels not seen in more than four years, according to the Commerce Department, and sales are the highest in more than two years.
For home buyers, the appeal of a newly built home is obvious—everything is fresh and new…little maintenance is required…and buyers can have input on things such as paint colors, flooring and fixture choices, assuming that they buy before construction is completed. And most new homes come with warranties. New homes tend to cost a bit more than existing ones per square foot, but much of that premium is soon recouped in reduced maintenance and heating and cooling bills for an energy-efficient new home.
However, buying a new home has various challenges and potential problems. What would-be buyers need to know…
The days of desperation sales are over in most areas. Wonderful deals were available on new homes in many areas for much of the past five years as builders tried to unload unsold homes in a slow housing market. But the backlog is now gone in most areas, and today few builders will even start construction on a home until they’ve lined up a buyer.
What to do: If your goal is to find a bargain, call builders operating in the area that you are interested in and ask if they have any homes for sale that are completed or nearly completed. This isn’t common, but even in this era of cautious home builders, it’s possible that a deal fell through after construction was under way. If so, negotiate hard on price—you might be able to obtain a discount of perhaps 5% to 10% below the usual sale price, depending on the local market and the builder’s financial situation.
It’s almost impossible to time the sale of your current home perfectly. Builders usually expect buyers to sign contracts before construction begins, and they offer few guarantees about when it will be completed. Prior to the housing-market meltdown, the conventional wisdom was that buyers should wait until their homes were virtually completed before listing their current homes for sale. That’s risky in today’s less predictable real estate market—if your existing home doesn’t sell quickly, you could be stuck paying two mortgages.
What to do: Sell your current home before signing the contract to build the new home. Put most of your possessions in storage, and rent until the new home is ready.
Most new homes are being built in outlying areas. Home buyers increasingly prefer homes located near downtowns, public transportation, shopping centers and other municipal infrastructure—but in most cases today, home builders are building farther from the action, where land is cheap. That could detract from the home’s selling price later.
What to do: Lean toward new homes close to downtowns, major employers and/or public transit when possible. Or search for new homes in areas where there are plans for shopping centers, office buildings, municipal infrastructure and public transit options.
New-home upgrades usually are overpriced. Some home builders offer a wide range of appliance, cabinetry and flooring choices, among other options. But select anything above the base option, and you’re probably paying above market price—upgrades are a major source of profit for many, though not all, home builders.
What to do: Negotiate for lower prices on the upgrades that you want. Builders usually are willing to negotiate on upgrade prices because their profit margins on them are so steep. In some cases, you actually may do better financially by taking a builder’s base-level option and then upgrading on your own.
Certain components that typically come with existing homes often aren’t included with new homes. Your new home might not come with landscaping, a deck and/or patio, fencing and/or window coverings.
What to do: Confirm that these are not included, and factor in the cost of adding them when making your home-buying decisions.
Expect noise. Buying a home in a new subdivision might mean putting up with construction noise for months or years as additional houses are erected.
What to do: If noise is a major issue for you, lean toward new homes that are not in new subdivisions or toward subdivisions where most of the lots are already developed.
Expect to take a loss if you try to resell your new home quickly. If you try to sell while part of the subdivision still is under construction, you will have to compete with the builder for buyers—and unlike the builder, you can’t offer financing, customization or a brand-new home. Your landscaping also might not yet be mature, which could cost your home curb appeal compared with existing properties.
What to do: Don’t buy a home in a large new development unless you’re likely to live in it for at least four to five years.
CONTRACTS AND FINANCING
Your contract might be lacking key contingencies. Contracts that home builders ask buyers to sign often do not include clauses that make the purchase contingent on the property passing a home inspector’s inspection…or on the buyer’s ability to obtain outside financing.
What to do: Insist that these clauses be inserted before you sign. (The financing contingency is not necessary if you are paying cash.) Definitely hire a home inspector—new homes can have problems, too.
Contracts usually contain arbitration clauses. That means you can’t sue the builder even if there are major problems with the home that the builder won’t fix. Your only recourse will be an arbitration process—which might be stacked in the builder’s favor.
What to do: Ask to have the arbitration clause removed from your contract before signing. Most builders won’t agree to this, but it’s worth a try. Before signing a contract with a builder, check the builder’s reputation for doing quality work and dealing fairly with buyers. Ask your real estate agent and real estate attorney for their opinions of the builder. Ask for off-the-record opinions from staffers in the town’s building department, too (either in the town where you’re buying or other towns where the builder has operated). Even knock on a few doors in developments that the builder has recently built to solicit home owners’ opinions.
New home warranties vary greatly in quality. Some provide limited or no coverage for certain home components or include exclusions for major issues such as mold. Others impose unreasonable maintenance requirements on home owners so that claims can be denied when home owners fail to comply. Lengthy 10-year warranties might cover only very specific elements of the home for a full decade, with many other components covered for as little as a year or two.
What to do: Ask your real estate agent and/or your attorney to examine the warranty to determine if it seems adequate before signing anything.