Buying New Home Construction From Builders
The idea of buying a brand-new home can be tempting. You won’t inherit someone else's worn-out carpeting or have to look at some kid's initials scrawled into once-wet cement. You’ll get a home that’s in line with the latest trends in design and construction, and it should be move-in ready. But there are some downsides and pitfalls involved with buying new home construction directly from the builder.
Forewarned is forearmed, so take some steps to protect yourself and to make the process a more pleasant experience with a happy ending.
Consider Hiring an Agent
You don’t have to use a real estate agent to buy new construction, but you can. And you’ll likely encounter a sales agent when you visit a model home or meet with a home builder, someone who's been hired by the builder to sell properties in that community. You don't want to be outmatched if you're not personally experienced in real estate and you're proceeding without an agent of your own.
Keep in mind that the builder is paying their agent's salary and that the agent probably earns a commission from each property they sell. They might not be looking out for your best interests as a result.
You can ensure there’s a knowledgeable pro in your corner when you hire an agent. They can help protect your interests and ensure you’re getting the best deal.
Taking this step shouldn't cost you anything because the seller—in this case, the builder—usually pays the buyer's agent's commission.
Use the Right Lender
Builders often recommend their own preferred mortgage lenders for a variety of reasons. It reduces their costs and helps keep the business—and the profits from that business—in-house. It also makes it easier to keep both parties informed of the transaction’s progress.
In fact, builders sometimes offer special deals and discounts if you use their preferred lender. They might even offer money off your home’s sale price. But don't jump in with both feet quite yet. Research the lender’s reputation, ratings, and customer service quality first.
You might want to shop around with other lenders as well, just to be safe. The savings that using your builder’s lender nets you might not actually be the best deal when you consider other offers that are on the table.
- Consider alternate sources to find a lender. Your own bank or credit union might offer you very attractive rates and terms based on your banking history with that institution. Your agent might recommend lenders that can help as well...if you hire one.
- Get multiple quotes. It’s generally advisable to get quotes from at least three to five lenders. In fact, Freddie Mac indicates that getting five quotes can save you an average of $3,000.
- Research and interview your lender. Find a banker or mortgage broker you can trust and with whom you feel comfortable doing business. Dig into their background and reviews, too.
- Look beyond interest rates. They're not everything and they don't tell the whole story. You should also consider the fees each lender is quoting you, as well as the terms, prepayment penalties, and other facets of their loan estimates.
Obtain Legal Advice
You might want to talk to a real estate lawyer before you sign a purchase contract. Standard purchase agreements don't necessarily contain language to protect the buyer. You'll want to inquire about certain areas of your contract:
- Contingencies and your cancellation rights: Are you allowed a home inspection? Under what conditions can you cancel the contract? Make sure you understand your liability and commitments.
- Health risks: Find out if the materials used by the builder contain chemicals that are hazardous to your health. It's probably because this is a valid concern and other buyers have gone to court over it if your contract contains a warning about health issues.
- Timing: When will construction begin and when is it expected to wrap up? In what situations might there be a delay? What happens when and if a delay does occur? Ask about including a per diem payment in the event your construction goes beyond its deadline.
- Warranties: Most builders will provide some sort of warranty for their work. Make sure you understand what your builder’s warranty covers and for how long the policy lasts.
Some state laws actually require the involvement of a real estate lawyer.
Verify Options and Upgrade Prices
The profit margin is highest on upgrades for many builders. You’ll want to get the details in writing if you’re thinking of upgrading any of the materials or features in a home you’re building or buying:
- Cost: Make sure you understand exactly what each upgrade costs per unit, as well as what your total upgrade costs will be and how they'll influence your final sales price.
- Liability: Get the details on the builder’s cancellation policy. How much time do you have to cancel an upgrade? Will you be held liable for items the builder can't return to a vendor if you change your mind?
- Timing: What’s the timeline for deciding on your upgrades and materials? Some contracts give the builder the right to choose your upgrades if you don't submit your request within a certain period of time.
Talk with your mortgage lender to find out if they'll finance all the options/upgrades you've selected. You'll be required to pay for the extras out of pocket if your lender won't finance 100% of your choices. You should also consider which upgrades you could purchase and install yourself after your sale closes.
Just keep in mind that some upgrades, such as CAT-V ethernet, DSS satellite, or security wiring inside the walls, are easier to do before construction.
Check the Builder's Reputation
Word typically spreads quickly when a buyer has a bad experience with a builder. Check online reviews and look at public records to find out if there are any previous or pending lawsuits against the builder, then talk to the neighbors, too. Did they experience any problems if they bought from the same builder?
You should also scrutinize the construction quality of surrounding homes. Is the builder consistently building identical or larger homes in the area or is construction lagging with homes shrinking in size?
Finally, find out if the builder sells to investors. Some builders require that all their homes must be owner-occupied, but others eagerly sell as much inventory to investors as profit margins will allow.
Investors are typically the first to bail if the market suddenly dips. Your community could clear out and fall into disrepair if this happens, sending home values down even more. You want neighbors who have a stake in the community, not transient tenants.
Ask About Incentives
Most builders offer a wide array of incentives as a way to sell properties or finish out their communities. Ask what incentives you might be able to leverage in your home purchase. These could save you valuable cash or get you free upgrades on your property.
Some of the most common incentives include:
- Free or discounted upgrades
- Closing cost contributions
- Price discounts
- Green or energy-efficient features
- Assistance with your existing home sale
- Free points or interest rate buy-downs
Hire a Home Inspector
It’s easy to believe that new construction will be without flaws, but that’s far from the truth. Always get a home inspection when you buy—whether the home is brand new or centuries old. A home inspection offers a third-party assessment of your home’s systems and structure, and it can help ensure that your home is safe, hazard-free, and a good investment.
An inspection will run you from $300 up to about $1,000 as of 2020, depending on the size of the home and the extent of the inspection, from basic to every bell and whistle.
Go back to your builder if the inspection reveals any issues or problems and ask them to make repairs before you close on the home. They might be willing to lower the sales price instead if they refuse.
VA Home Loan Centers. "Top 7 Reasons – Why You Should Get a Real Estate Agent." Accessed Feb. 26, 2020.
Freddie Mac. "Keep Calm and Shop On." Accessed Feb. 25, 2020.
Federal Trade Commission. "Shopping for a Mortgage." Accessed Feb. 25, 2020.
National Association of Home Builders Economics and Housing Policy Group. "Builder's Use of Incentives Falls Back to 2002 Levels." Accessed Feb. 26, 2020.
Consumer Reports. "How to Choose a Home Inspector." Accessed Feb. 25, 2020.