Before You Buy New Construction
The vision of a new home with the ability to upgrade finishes, alter floor plans and be the first to occupy a property lures buyers into builders and developers model homes every day. According to industry sources over 70% of home buyers want a new home. Be prepared to ask the right questions and see red flags before signing on the line!
Do's
- Have your own agent. Believing they might get a better deal or out of ignorance many buyers use the developer’s sales agent to represent them. New construction buyers should research what a dual agent can and can't do under their state real estate license laws. Most states require written acceptance of dual-agency by both parties. All homebuyers should be represented by an agent who has a fiduciary (loyalty to them) relationship with them only. Buyers shouldn't forget that most developers require that your agent must accompany you the first time you visit a sales center.
- Ask how much this home is as YOU see it. Models can be filled with every upgrade the developer offers as an example for buyers. Buyers should ask freely how much the model costs as I see it. Typically this cost will vary dramatically from advertised starting prices for a development.
- Pick the right developer. Working with a developer is like a short-term marriage. Ask for references from the developer’s sales agents. Do your own investigation of the developers previous projects, length in business and complaints filed with business bureaus.
- Consider resale characteristics. The allure of being the first to occupy a home sometimes clouds a secondary location or poor craftsmanship. You are better off purchasing a resale home in a better location than buying new construction.
- Question % of project sold. Inquire how much of the % sold are reservations (dating the project) versus contracts (engaged to the project). Some reservations don't go to contract because of a change of heart, financial concerns or occupancy timelines.
- Investigate property taxes independently. Property taxes can be a financial surprise you weren't expecting with the purchase of a home. Because tax assessors haven't valued a home or project, developers can underestimate how much the property taxes will be. Complete your own due diligence and call the local taxing authority to find out the worst-case scenario.
- Perform a home inspection. Never skip or waive the right to an inspection. New construction is not immune from defects and lackluster workmanship. Your Realtor will be sure to inform you of an inspection at least seven days prior to closing.
- Inquire about investor purchased units. In the post-real-estate-bubble-world many developer contracts restrict purchase of units by investors to sell at completion. Look for clauses in contracts that require purchasers of units to owner-occupy the first 12 months after closing. Ask what the percentage of owner occupancy is for the project.
- Get a certificate of occupancy. Local municipalities issue a certificate of occupancy after a unit has passed all building code inspections. Most mortgage lenders require a certificate of occupancy before they will close on a loan. If you are paying cash, verify prior to closing that the developer will deliver you a certificate.
- Understand why developers request upgrades paid for in advance. Experience has taught developers that some buyers will not purchase the unit where the floor-coverings, countertops and kitchen cabinets have been installed by the developer. Other buyers will want to select their own finishes and a unit that has a terminated buyer’s choices is a marketing problem for developers. Plan on paying upfront for all upgrades and changes you make to a unit, and if you decide to walk from the project once you have paid for upgrades, expect a fight from the developer if you want a refund on installed changes and upgrades.
- Require your deposits to go into an escrow account. Require all deposits and payments you make go into an escrow account, not the developer’s business account. Research state brokerage laws to discover what regulations developers must follow with buyer’s funds. If disputes arise it is easier to receive refunds from a neutral third-party or escrow agent than from a developer.
- Request copies of blueprints, floor plans and surveys. In the future when you want to make changes or sell, having the Blueprints, floor plans and surveys of your home will save you expense and time. Make sure the developer provides you with an updated survey, showing you your precise parcel. Verify that your new home also has its own parcel identification number issued by taxing authorities.
- Research warranties on structure, finishes and appliances. Developers typically offer 5 or 10 year warranties on structural elements of a home and rely on manufacturer’s warranties for appliances, furnaces, windows and overhead garage doors. Beware of one-year warranties on structural elements.
Don'ts
- Forget to ask for holdbacks on unfinished work. Weather or lack of building supplies can interrupt completion of a home. If some items aren't necessary for occupancy the developer will want to close on your home. Make sure any substantial items or features that are not completed in your new home have designated funds set aside for their completion. Request these funds be held back and deposited in an escrow account at closing.
- Omit final written punch lists. You should have a final walk-through at least 3 days before closing on your new home. Create a punch list of all uncompleted or unfinished items. Punch lists can also call attention to items that need to be repainted or need additional attention. Both the developer and the buyers should sign the final punch list in agreement. Developers should complete punch lists within 30 days of closing.
- Tune out during construction process. Proactive buyers can catch design mistakes or irregular materials by visiting the job site on a regular basis. For insurance purposes some developers limit access to construction sites. Stipulate in purchase contracts the timing of all visits during construction of your new home.
- Be fooled by low assessments. Developers can use artificially low monthly homeowner fees in new construction marketing materials. Plan on at least a 25% increase in assessments the first year after the developer delivers the association to the homeowners.
- Overlook costs between standard and upgraded features. There can be a huge difference in quality and life spans between builder-grade and upgrades. It could be worth the additional expense to install better carpet, cabinets and faucets. Always check builder prices for upgrades at your local home center.
- Ignore developer incentives as a signal of slow sales. Free condominium assessments, stainless appliances and plasma TVs are thrown in to induce buyers to Buy Now! What many buyers think FREE are actually signals that a development is slow to sell. Incentives are a band-aid for a languishing development.
- Be surprised when developer holds firm on pricing. Developers of popular projects don't typically negotiate on unit prices. However, sometimes a developer will throw in upgraded appliances or hardwood floors in place of standard carpet. When a developer doesn't move on prices it is because they have an investment formula for the project, which is typically costs plus 25% profit.