Buying New Home Construction From Builders
Tips to Protect Yourself when Buying from Home Builders
The prospect of a brand-new home can be tempting. You won’t inherit somebody else's worn carpeting and personal taste in kitchen appliances or have to look at some kid's initials scrawled into once-wet cement. You’ll also get home that’s in line with the latest trends in design, construction, and maybe even energy efficiency.
Most importantly, though? The home will likely be move-in ready—meaning no tedious repairs or updates before you can set up shop and call the place your own.
Are you considering buying the brand new home of your dreams? These tips can help you protect yourself, as well as make the process a more pleasant experience.
Consider Hiring a Real Estate Agent
You don’t have to use a real estate agent to buy new construction, but you certainly can. When you go to visit a model home or meet with a home builder, you’ll likely encounter a sales agent—someone hired by the builder to sell properties in a certain community.
While these professionals can help you in your quest to build or buy a brand new home, it’s important to keep in mind that the builder is paying their salary and that they probably get a commission off of each property they sell. As a result, they might not be looking out for your best interests.
By hiring an agent, you can ensure there’s a knowledgable pro in your corner when you meet with the builder (or their sales agent). They can also help protect your interests and ensure you’re getting the best deal.
Builders may be willing to cut you a better deal by going in without a real estate agent. Because the seller (in this case, the builder) pays the commission for buyer’s agents in the U.S., coming in with an agent can actually cost your builder quite a bit. You could save as much as 6% off your home price by forgoing the use of an agent.
Don't Automatically Use the Builder's Lender
Builders often prefer their own mortgage lender for a variety of reasons. For one, 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 many cases, builders offer special deals and discounts if you use their preferred lender. They might even offer money off your home’s sale price. If this is the case with your builder, make sure to shop around with other lenders just to be safe. The savings your builder’s lender nets you actually might not be the best deal once other offers are on the table.
You should also research the lender’s reputation, ratings, and customer service quality. Buying a home is a huge move, and you need to be sure you’re in good hands before moving forward.
- 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. If you have an agent, they may have recommended lenders that can help as well.
- Get multiple quotes. It’s generally advised that you get at least three to five quotes. In fact, Freddie Mac shows 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. Rates aren’t everything. 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 Before Buying a Brand New Home
Sometimes, state law actually requires the involvement of a real estate lawyer. If you do meet with an attorney here are some areas of your contract you’ll want to inquire about:
- 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. If your contract contains a warning about health issues, it's probably because this is a valid concern and other buyers have gone to court over it.
- Timing: When will construction begin and when is it expected to wrap up? In what situations may there be a delay? What happens when a delay occurs? You may want to include 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.
Verify Options and Upgrade Prices
Bear in mind that for many builders, the profit margin is highest on upgrades. If you’re thinking of upgrading any of the materials or features in a home you’re building or buying, then you’ll want to get the details in writing.
You should understand:
- 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 will influence your final sales price.
- Liability: Get the details on the builder’s cancellation policy. How long do you have to cancel an upgrade? Will you be held liable for items the builder cannot return to a vendor?
- 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 do not submit your request within a certain period of time.
Make sure to talk with your mortgage lender and find out if they will finance all the options/upgrades you select. If your lender will not finance 100% of your choices, you will be required to pay for those out of pocket.
You should also consider which upgrades you could purchase and install yourself after your sale closes. However, realize that some upgrades such as CAT-V ethernet, DSS satellite, or security wiring inside the walls are easier to do before construction.
Check Out the Builder's Reputation
If a buyer has a bad experience with a builder, the word typically spreads quickly.
First, check online reviews and look at public records to see if there are any previous or pending lawsuits against the builder. Then, talk to the neighbors. Did they experience any problems? 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 all their homes to be owner-occupied. Others eagerly sell as much inventory to investors as profit margins will allow. If the market suddenly dips, investors are typically the first to bail, meaning your community could clear out and fall into disrepair (sending your home values down with it). Generally, 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 communities. Make sure you ask about 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
Always, always, 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 your home is safe, hazard-free, and a good investment of your money.
It’s easy to think that new construction is without flaws, but that’s far from the truth. Most inspectors find a laundry list of issues, even with brand new properties.
If the inspection reveals any issues or problems, then go back to your builder and ask them to make repairs before you close on the home. If they refuse, they may be willing to lower the sales price instead.
The Bottom Line
Buying a new home comes with risks, but there are steps you can take to protect yourself in the process. Do your research, be prepared, and consider enlisting an agent, attorney, and inspector who can safeguard your interests along the way.
Quicken Loans. "Should You Buy a Home Without a Real Estate Agent?" Accessed Jan. 14, 2020.
Freddie Mac. "Keep Calm and Shop On." Accessed Jan 14, 2020.
NOLO. "What to Look for and Avoid When Signing a Home-building Contract." Accessed Jan. 14, 2020.
Builder. "Profits of Choice." Accessed Jan. 14, 2020.
National Association of Home Builders Economics and Housing Policy Group. "Builder's Use of Incentives Falls Back to 2002 Levels." Accessed Jan. 14, 2020.
Redfin. "New Construction Home Inspections: Are They Necessary?" Accessed Jan. 14, 2020.