10 Important Tips for Buying New Construction
I wrote another listicle! I did it because I thought it would help keep the length of the blog down. Well... that part didn't work. But it's jam packed with good info and insider intel!
Buying a new construction home can be a ton of fun. But as a Portland area Realtor, I can tell you from first hand knowledge that there can be just as many pitfalls in the process as purchasing an existing home.
If you're considering buying a new home, or are curious about it, this list is for you! And, as always, contact me if you have any questions or need help finding a home or selling one. Or both. Or more than one. I'm all for multitasking.
1. DON'T SIGN A CONTRACT ON YOUR FIRST VISIT.
Them's some scary words.
I'm all for buying new homes, but I'm also a big proponent of due diligence. No matter how much you fall in love, and even if it seems like other people are clamoring to get that special lot you want, back away from the pen.
There is a lot to think about here and this is a really big purchase. The sales office wants to convince you to write up the contract immediately if they can talk you into it. But if you do, then you're giving up:
Representation. The sales agent at the development is not there to help you get a better deal. If it does so happen that they have one lot left and it's a hot market, get your Realtor on the phone, stat.
Time to study the contract, understand all the provisions, and negotiate them. Your Realtor should look through the contract and negotiate provisions that put you into a better position and/or protect your interests.
Due diligence. Take the time you need to research the school district, crime stats, and other neighborhood details to make sure this is a good area for you. These and much more can impact resale value.
Time to research the price and negotiate from a position of knowledge. To help you negotiate the price (or determine if it's a reasonable deal if it's non-negotiable), your Realtor needs time to run a comparable property report and research the development. This helps determine the health of the market in the neighborhood and what the true value of the home might be. It will allow you to negotiate from a stronger position.
Time to research the developer. Your Realtor may already be familiar with the developer and can give you some insight. But also make sure to look the developer up online and see if they get a ton of glowing or bad reviews. What problems have other people had with them?
Time to look at other new developments. Just because you fell in love with a home in that development doesn't mean there isn't a better option out there!
Time to shop mortgages and read through the paperwork. Oftentimes the developer will have a preferred lender that may or may not confer additional benefits if you use them. Even if they provide a big incentive, take the time to call a local lender and see if there is a better option out there. Take the time to read through any mortgage documents they provide. A lot can hide in mortgage paperwork!
Time to closely consider the lot, floorplan, and elevation to make sure you're picking the best possible options. You may decide to choose the same floorplan as the model home, but often a builder will have multiple "elevations" of the same floorplan, which can have subtle or MAJOR differences. Be very careful here. Also triple check that the lot is what you expect. Ask questions about what's happening on all sides of it. If they've broken ground, take a close look at the foundation and go inside if the house has been framed. Measure everything and compare it to the plans. Don't let yourself be surprised by things not matching up after you've already signed a contract!
2. THE FRIENDLY AGENT IN THE SALES OFFICE IS NOT YOUR FRIEND.
I'm not ragging on Realtors that work new construction. Some of the nicest people I've met do this exclusively. But you need to know that the agent in the sales office has only one job: sell the new homes at the highest price possible, as fast as possible. And they are usually very good at it.
The "sales office" concept at new developments is setup to circumvent your right to be represented. This doesn't mean that the agents who staff these offices are bad at their job. On the contrary, they are excellent at their job... which is representing the builder/owner to the best of their ability. Your best interests are very low on their list of priorities. (More about this further in the article.)
3. SET A DEFINITE BUDGET BEFORE GOING TO LOOK AT ANY NEW HOME COMMUNITIES TO AVOID "STARRY EYE SYNDROME".
I can speak from personal experience here. Way back when, I was a first time home buyer. I bought a small ranch home in an okay neighborhood in the suburbs. After a couple of years, I started noticing some new developments going in around the area.
I stopped by the sales office, walked through the model homes, and started imagining how wonderful it would be to trade my modest place in for a 3000+ square foot 2-story house with a huge bonus room, walk-in closet, open concept kitchen... and I would get to pick my own finishes!
Of course, I greatly preferred the larger floor plans. And I didn't want the base model either. I wanted upgrades! ALL the upgrades!!!
Fortunately, the timing wasn't really right and I ended up staying in my place. Which was a good thing because years later the Great Recession hit. I'd been in my home long enough that my equity held out so that I was never underwater. I was lucky.
But it was a near thing. I could have easily gone ahead and bought a home I could not really afford that I really didn't need.
The moral of this story: almost everyone that walks into the model homes of a new development want the bigger floorplans with the most upgrades. That invariably pushes it above a reasonable budget, but can seem completely worth it in the moment. Set a reasonable budget and stick with it, no matter what.
In case you're curious, I sold that little ranch home years ago. Now I live in a somewhat larger ranch home closer to Portland which is a much better location for getting to clients scattered around the area. My needs and tastes changed through the years which tends to happen.
4. FIND A REALTOR BEFORE LOOKING AT ANY NEW HOMES AND BRING THEM WITH YOU.
This is related to Number 1 and 2. Since the friendly agent in the sales office is not your friend, and there's a lot of due diligence to perform, you need to find a great Realtor and bring her with you. No one wants to sign on the dotted line, go through the construction process, and end up realizing later that they overpaid by 50K+ compared to their immediate neighbors (true story).
Who pays your Realtor? In almost every case, it will be the developer/owner, just like in any other residential real estate transaction.
On a side note: most developers are very happy to work with buyer's agents. The buyer's agent will work to get you a good deal, protect your interests, and help with the transaction. This all means a smooth process and a house that gets sold with a much lower chance of buyer remorse along the way.
5. DO NOT THINK OF A NEW CONSTRUCTION HOME AS A GOOD INVESTMENT (AT LEAST IN THE SHORT TERM).
Disclaimer: Much of what I'm going to say here applies to larger new home developments more than smaller ones or infill developments.
This should almost be a blog post on it's own (maybe it will be...). A lot of people think of their primary home as an investment. I don't always agree with this way of looking at the roof over your head.
You can read a bit about why in this blog: Tips for Home Buyers in Portland. But when it comes to new construction homes, the ROI (return on investment) potential in the near to mid-term is much lower than established homes. I know this may seem odd. Newer homes should be worth more, right? Remember that earlier I mentioned how the sales agents for new construction have one job: sell the homes at the highest price possible, as fast as possible? The second part of that, "as fast as possible", is the key. The faster they sell the homes, in the earlier stages of construction, the higher the price they can command for the home. You will pay a very hefty premium for the privilege of selecting your flooring, countertops, and cabinetry.
As the construction process moves along, the development will likely start to drop the price on the remaining homes in an effort to sell them before they are completed. Once they are all complete, the price will likely drop again, until it's low enough to attract a buyer that is willing to give up the possibility of buying a new home where they get to have design choices.
Usually developers and their agents are very good at this game. Most homes will sell during the construction process and they will make good money on them. But there are often a few left over when everything is done (depending on the size of the development, popularity, and location) that will be a good value.
The other factor for a lower return on investment in the first few years of owning a new home is the competition you will likely face with other new home developments that have started nearby. In many cases, you were able to buy a new home because it's an area where there is room for additional development. As long as a healthy market keeps chugging along, builders gonna build.
Don't believe me about lower ROI? I did an analysis, very recently, to determine ROI of re-sales of newer homes in the Bethany area (one of the hottest new construction areas in Portland). I looked at homes that were completed and purchased in June of 2013 (when this hot Portland market was On Like Donkey Kong) or later and then re-sold within 1-4 years.
Average year over year home value increase: 3.5%
Not exactly making bank on that investment.
This doesn't mean that you should never buy a new home during the construction process. But you definitely should be aware that you are paying a premium and that the value is unlikely to outpace inflation in the short term. Depending on how crazy you go with upgrades, you could very well end up selling at a loss if you have to put it on the market in the first few years. Even (maybe especially?) in hot new construction areas.
6. WHEN NEGOTIATING THE CONTRACT, PUSH FOR PROFESSIONAL HOME INSPECTIONS!
I strongly believe that builders should allow buyers to protect their (very large) purchase through professional home inspections completed during the construction process. Why do you think some of them don't allow this?
The sales agent in the office will probably talk to you about building inspections and final walk-throughs as though this is all you need to be confident that the construction process is going well. Building inspections are required by the city/county and are ordered by the builder during the construction process. These are different from home inspectors. Unfortunately, city/county/state guidelines are generally bare minimums and these building inspectors only look at certain things. They are there to do a job and check items off a list, not to protect your interests.
Hiring a professional, private home inspector to perform inspections for you during the construction process is absolutely the BEST way to protect yourself from a lemon. (Does that term apply to houses like it does cars? If not, we need to come up with a new phrase. Maybe we can call poorly constructed new houses "coconuts" or "avocados".)
Here's an anecdote for you: someone I know had a home built in a large development. He happened to be a former home inspector. He went to the site every week to make sure things were going well. He stopped by after the slab was poured (they poured it earlier than he expected or he would have inspected it before the pour) and noticed that the slab was facing the wrong direction. They were going to start framing the house without even realizing that the garage would have ended up in the side yard, about 20 feet in front of a large slope...
If he hadn't caught it, correcting this mistake would have been a major mess. Instead, it was a minor mess. There's no way to re-pour a slab, but they were at least able to pour additional concrete in a way that made it work. It wasn't perfect, but it was acceptable.
Potential inspections that could be completed on a home under construction can include:
Pre-slab pour - the inspector will check the membrane, steel reinforcement rods, electrical and plumbing installation, compaction of ground under slab, etc.
1st floor frame - check that it's plumb and level, door and window sizes, measurements are correct, interior wall layout, and much more that involves lots of jargon.
Full frame (all floors) - more of the above along with roof penetrations, external/garage doors, verify utilities are all sound (not penetrated by nails, etc.), quality of utility roughs, etc.
Insulation inspection - verify the type/thickness of insulation, check seal of doors/windows, check vapor barrier on exterior walls, and more.
Final inspection - check all internal finishes are up to standard, full house inspection similar to any existing property.
Unfortunately, many developers only allow for a final inspection in their sales agreements. And they may even have restrictions on that. I personally think this is deplorable, but it's their home and they can limit this if they think the market will put up with it. But... make sure that your Realtor tries to negotiate for this before you sign the contract!
7. DON'T ASSUME THAT THE PRICE THEY PUT IN FRONT OF YOU IS NON-NEGOTIABLE.
This harkens back to number 5. How far along is the development? If you have a Realtor, they should run the numbers to find out how many homes there have sold (or are pending) versus the number that are under construction. Your Realtor should find out how much they sold for and attempt to find out what pending homes are going for.
Do they seem to be struggling to sell the properties? Are they going like hotcakes? Is the market super hot in the area or is it cooler? Why? Are they mostly or all complete or barely breaking ground? Are there other developments that look to be going in soon? How much are other nearly-new homes being re-sold for? And so on...
There may be no negotiation room. There may be A LOT of negotiation room. This is what your Realtor lives for!!!
8. FULLY RESEARCH THE COMMUNITY, NOT JUST THE NEIGHBORHOOD.
This is to make sure it's a good buy and will have good resale value. Even if you don't have kids, you need to know whether or not the schools are any good and whether or not crime is an issue. School ratings are controversial, but those ratings can make a big difference to buyers!
9. FIND OTHER LENDERS (PREFERABLY LOCAL ONES) AND COMPARE THE RATES AND TERMS.
I feel like I should lose geek points for this not being a financial calculator. So I'll post the amortization formula, just for fun.
Some developers have preferred lenders that will offer money towards closing costs, lower rates, or other benefits for choosing them.
Maths are fun.
The developer may also require you to be pre-approved through their lender. (You will still have the choice to go with another lender, but the contract piece of this is tricky. Talk to your Realtor about how switching lenders has changed in Oregon.)
In either case, make sure to shop around for the mortgage. Compare both the rates and the terms (apples to apples). I highly recommend looking at local lenders. They usually have better customer service, can offer a smoother transaction, and can often beat the rates of the big banks.
But, of course, if the package that the developer's preferred lender offers is the best, go for it!
10. IF YOU FOLLOW ALL OF THE ABOVE, ALLOW YOURSELF TO FALL IN LOVE WITH YOUR NEW HOME AND ENJOY THE PROCESS!
Buying a new construction home can be a lot of fun.
If you choose one earlier in the construction process, you get to pick your finishes and watch your money create this amazing house that you'll get to make a million memories in.
If you choose one later in the process, you may be able to get a much better deal than your neighbors. Try not to lord it over them, though. New developments tend to have really small yards so keeping things friendly is important. But you can definitely gloat in private :)
