Purchasing a New Construction Home

New home construction

Are you looking to purchase a new construction home? Here are some tips, tricks, and things to keep in mind as you start to plan your move.

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Getting to know your builder

First off, make sure you know what city or cities you want to build your home in. This probably sounds like an obvious starting point, but there are so many different builders in each city, and each builder is different in what they offer, how they price, what kind of upgrades they have, etc. So, it’s really important to consider how your desired location will affect the entire process from start to finish.

Once you know where you want to be and, more importantly, who you want to build with, find out what features are included with the builder you’re working with and what they offer. Most builders will have a base level of features that come with a home. This is often carpet in the entire house, with the exception of wet areas like the kitchen, bathroom, and laundry room, which are usually tiled or have a different type of water-resistant flooring. In the kitchen, you’re likely to have a base level countertop that’s different from the models.

In the kitchen, you’re likely to have a base level countertop that’s different from the models, since upgrades to quartz or even granite may be costly. The cabinets will likely have some upgrade options as well in terms of type, color, and even quality. Usually the builder will offer a couple of standard options to choose from in addition to the upgraded options. As far as appliances go, there’s usually a baseline package that includes the stove, dishwasher, and microwave; you can often upgrade to a stainless or higher-end appliance package if you so choose.

In any room, the best way to know what’s included is to ask your builder. Generally, in many of the rooms you might have to pay extra to have electrical wiring for things like ceiling fans in the bedrooms or additional power outlets; this is one example of something that you may not consider right off the bat, and you definitely don’t want to be surprised by added costs down the road. Talking to your builder about what’s included at the start of the process can save you this bit of unexpected cost; they’ll be able to provide you with the details of what comes with the standard package, and what may be considered an upgrade at an additional cost.

As with pre-built homes, it’s always safer to work with a real estate agent when you’re purchasing a new build. Look for one that is familiar with new construction homes, and more specifically an agent who’s familiar with the builder you want to work with. They’ll not only know the ins and outs of the entire ordeal, but can help you navigate it as well and make sure that you’re getting a fair deal.

To upgrade or not to upgrade

When it comes to the cost of upgrades, there’s a few things to consider. First, take into account the amount of money you’d spend on a given upgrade versus the value you’d reap from that upgrade in the long run. Second, make sure it fits into your budget. If it’s something that you’re looking for and it will increase the resale value of the home, then it might be worthwhile to shop around. In this context, you’re usually paying more for the convenience of the builder installing those upgrades rather than contracting it out yourself, so keep that in mind when settling on an upgrade.

When you’re buying a new construction home, there are several different components that have to be paid for. The builder will likely require a certain amount of the earnest money and a down payment before the building process begins, after which the mortgage will cover the rest. The earnest money is like good faith money, and it will end up being deducted from either your closing costs or your down payment.

Each builder is different. What they require you to put down as earnest can range anywhere from $2,500 to $10,000. But for upgrades, often these costs are going to end up being out-of-pocket, and you can only finance so much of it. If you aren’t doing a higher down payment on the home, you can expect to pay for many of these upgrades out-of-pocket. The reason for thai is that it all comes down to what the house will be appraised for. If, for example, the home is $400,000 and you decide to put $50,000 into upgrading the flooring, appliances, and kitchen counters, the home will have to appraise for at least that amount if you’re trying to roll that into the loan. Realistically, an appraiser isn’t going to give you that much in added value for those upgrades, so you would need to pay the difference in cash.

It can be a bit confusing, so to put it simply: the cost of the home (including upgrades) can’t be more than the value of the home as given by an appraiser. If the cost is more than the value, a bank won’t give a loan to cover it all, and you’d have to pay the difference in cash. You Should always speak to you through your real estate agent or the lender first before committing to any major upgrades. It’s important to know what you’re budgeting for.

Tip: The cost of the home, including upgrades, must be equal to or less than the value of the home in order to avoid paying for upgrades out-of-pocket.

Financing your build

Speaking of budget, another area that’s unique with new home builds is how you finance them. Most builders will require that you pre-qualify with their lender. They’ll also give really good incentives to using their lender, like high closing cost concessions and long rate locks. They don’t bring it up, but you can definitely shop around for better rates. Ask lenders that you shop around to match the incentives. You might just find that they can match them and provide even better service. So again, make sure you bring your agent and have them help you understand the cost for those upgrades because it will impact your loan and your overall home cost.

Your agent can definitely identify which upgrades are worth it and what the least expensive options are to get the most value out of your new home. It’s definitely a good idea to tour new homes with your agent for this reason, as well as the fact that most new home builders require you to tour with your agent for the first time in order for those agents to represent you and help you in the process. If they aren’t there with you that first time, the builders won’t let them be part of that transaction afterwards. And especially if you’re a first time home buyer unfamiliar with the process, having your agent there as someone besides the builder to give good, unbiased advice can really be a gamechanger.

Tip: Always bring your agent along when touring new homes

Now remember, you don’t have to have a separate agent with you, and there are agents on staff with a new home construction team; however, if you don’t have an agent acting as buyer’s representation there with you for the first visit, you can’t have any buyer’s agent assisting you with the questions or concerns you may have throughout that transaction. There are going to be people on staff to help you along with that transaction if you decide to go with solely the new build construction, but you don’t have to pay any additional fees if you do want a separate buyer’s agent who doesn’t work for the builder. So it’s a good idea to have a buyer’s agent who does not work the builder to come along with you.

Model homes versus your home

One part of the new build progress involves touring model homes, which are representations of what you’ll be buying (but won’t be the action home). Once you’ve decided on a builder, you’ll take a visit to their main office where there will usually also be a few model homes within the vicinity. These model homes are a literal representation of the floor plans you’ll be choosing from; the builder will probably have you tour a model home that has the same layout that you’re envisioning for oyur home.

Now, this feels much different from touring an existing home because the builder can actually show you what your house would look like with all the different upgrades that are available. Like we talked about before, some upgrades are included at no extra cost and some are not; again, each builder offers different packages which is yet another reason why having a buyer’s agent there with you is a major advantage.

With model homes, there are a couple of different timings, or phases, that may be available for purchase. The first is what is known as a ‘quick move-in,’ which would be ready within the next month or even the next week. These types of homes are typically ones that a previous buyer had started, maybe by picking out the flooring, cabinetry, etc., but for some reason decided to back out of escrow. There usually aren’t too many move-in ready homes available, but if there are by the time your loan is approved, you could move in rather quickly. The second type is called a ‘spec home,’ which are homes that are being built as they are being sold. This is the most common scenario with new construction homes. The wait time for a spec home, from decision to move-in, is usually around six months. So that gives you a little bit of time to pick out things like cabinetry, flooring, and any upgrades that you wish to do.

These are what the builders call ‘phases.’ Every few months, the builders release phases of certain homes based off the models you’ve looked at. In order to get updated information on each of these phased releases, you have to be qualified with their lender, after which you’ll be put on a priority list. This is just their way of knowing that you’re a pre-approved buyer.

Each builder is, you guessed it, different! Some wait lists can be as early as two weeks while others can be up to six months depending on the floor plan and model that you’re planning to purchase. On every phase release, the builder will go down their list and call the buyers to let them know which lots and home types are available. First-come-first-serve is the name of the game here; whichever buyer comes in first to put their earnest money down will get that specific lot (and some builders will go so far as to allow cash clients to have priority on the list). Once you’ve put down a deposit for a lot, most builders will allow you to go in and see the build progress. You can even take pictures, as long as you’re not interfering with the construction or being unsafe in any way.

Another thing you can do is bring an inspector during these kinds of visits. For example, if you wanted to have an inspector come out before the construction workers install drywall so that you can see all the framing, you could. The builders have to do their own inspections as well, since they have to be certified with the city, but you are also welcome to bring your own inspector.

While you wait…

Wait lists vary with the market and with the builder. Some are as little as three months out, while some are closer to a year. A silver lining to a longer waiting period, though, is that the longer you wait the more customizations you can do. Builders usually have quite a few options for things like cabinetry, colors, or flooring choices in addition to the standard options. And again, the models are there to demonstrate the different upgrades so that you can see what your home could look like with upgraded flooring, cabinetry, etc. You can definitely play around with those upgrades based on your vision.

The drawback, however, is that a longer waiting period also means a longer loan period while your home is actually being built. Interest rates can change. The real estate market can change. A lot can happen during this time, so always keep that in mind too and tlak to your lender about you can protect yourself from any potential changes.

Odds and ends

  • As great as new builds can be, they may also come with additional hidden costs. Some areas, like California, require solar panels that can run you an extra $5,000 to $20,000 on top of a home’s sticker price. Since this case require you to be approved for a loan with a higher dollar amount the price of the home, make sure you talk about this with your lender because oftentimes the price you see for a home is actually lower than the total price you’ll actually have to pay.
  • You’ll typically also be required to do a fair bit of landscaping within the first year at your new home, so make sure you budget for this as well.
  • Depending on where your new home is, there may be limitations on being able to rent out or buy new construction homes as a second home or as an investment property. Make sure you’re aware of what’s allowed in your area, as well as what’s allowed with your particular builder.
  • Tax rates vary by location; check to see that the tax rate falls into your budget. Sometimes with new homes the tax rates can be on the higher side, especially in places like California.

Staying the course

Buying a new construction home is a lot of work, but it will all pay off in the end. Be patient, do your research, and make sure you know what you’re getting into. Ask a lot of questions! Don’t be afraid to take a chance negotiating on the upgrades; certain builders will make price concessions and some won’t, so it’s always good to check.

All in all, just because a home is new construction doesn’t mean it’s perfect. When you find the build you want, bring an agent with you, have a third party inspector check it out, and review all of the available information before signing off on your new home.