Buying New Construction: What You Need To Know

Certified Mortgage Advisor
NMLS 1701021
Published 
October 20, 2020

Ins and Outs of Buying New Construction

Today, we're talking about the ins and outs of purchasing a new construction home. So you're gonna learn three things in this video. Number one, we're going to talk through the process. So what's the order of everything that's going to happen. Number two, we're going to talk about the numbers. So what kind of down payment, earnest money rate are you going to expect in new construction? And then finally, we're going to talk about incentives of purchasing with new construction over an existing home. So let's go ahead and dive into this.

What's the difference between new and existing?

We first need to talk about the difference between new and existing. Specifically what we're talking about here about a home with a builder who already has a home built. It's prefabrication. Normally what you do you talk to them and you customize the home and then they build it and then you buy it. This is not for custom-built homes.

Possibly similar price

What do you need to first consider is to look around and explore if building a home might be a very similar price to purchasing, especially in this market when home values are continuing to grow and grow.

According to Scott Smith, building might actually be very similar. He actually talks about how building was actually the same cost as purchasing a home for the exact same specs that they were looking for in their area.

So consider as an option building might not be as far out as you expect, especially if you're not going with a custom build routes.

Talk to agent about resale value & developing markets

Now, will you also want to do, are you want to talk to an agent about how a build might have a resale value. This is all going to depend on your market. It's impossible to say, as a blanket statement, all builds are better than existing homes or all existing homes are better than builds in terms of the resale value.

It's just not a fair comparison to do that. So talk with a real estate agent. See if the market is expanding and growing to make sure that if you purchase a new home and you're going to be in there for a couple of years that you'll see that value come back.

#CalmMoment

So before we dive into the next one, what I want to do is jump into a quick CalmMoment. The reason why is because if you're looking at a new build, you're probably feeling the pressure of the really low inventory happening or. We are in a crazy seller's market nationally. And this is where sellers have the control home prices are continuing to increase and there aren't a lot of houses available.

So if you're putting an offer as a, you're probably seeing multiple offer situations, you might be getting beat out by other buyers. And if so, I don't want you to look at construction or new construction just as this last-ditch effort to try to get the ball rolling. It's okay. To slow down, to put the brakes on things, if what's happening right.

Isn't working for you. So if you're in that situation, explore new construction as an option, but don't feel like you have to rush into anything that's available. Just because you're feeling discouraged by what's happening in the market right now.

Representation

So when you're looking at getting a new build, you could go with a realtor or you could just stick with the builder's sales rep. So normally when you talk with the builder, you're going to be interacting with the sales rep. So it's the person who works for the builder. They represent the builder. So if we're talking about who do they represent, it's the builder.

Don't let them push you to any upsells

And what they're going to do is they're going to talk with you about customizing and the process and everything like that6. So what you want to be careful of, or be mindful of is that you're not getting pushed into any up-sale upsells from a salesperson like this. So consider using a realtor.

Now, what you can do is you can actually talk to the builder and say, "Hey, If I don't use a realtor, is it possible to get any cost savings". Because sometimes builders will actually build in the cost of paying a buyer's realtor at the purchase price. So if you're not using a realtor, they might be able to decrease that purchase price for you. It's not a guarantee, but it's worth asking.

Just know that a realtor does have a significant benefit for you, especially considering how much earnest money might be required in the build. But a realtor is going to help you navigate the process. Help you negotiate incentives or credits and really make sure that you're represented through the contract the entire way through because it can be a little overwhelming to manage this all by yourself.

Don't be shy to ask questions

What you also want to do during this stage is you want to ask a lot of questions. So basically anything that you see, just ask questions either that's to your realtor or your sales rep. The more that you can understand about the process, the more you make sure that you have no overwhelming time or a stressful time, and you might be able to explore extra credits or incentives as you walk through that process.

Cost Savings

So the huge benefit of being able to ask these questions is you get to explore, especially with a sales rep, if there are any extra credits that they might have. When you are looking at building maybe potential add-ons or concessions that they'll give you towards your closing costs.

You've chosen your representation. So who's going to represent you as a realtor or as a sales rep, going to be the main person you're working with.

Customize

Then what you want to do is you want to customize that home. Now, not all builders are going to have customization options, but most are going to allow you to choose from a few selections.

So obviously you're not custom building a home but you might be able to choose. Maybe out of three kitchens, you get to choose an option or you get to choose flooring out of four different options. Maybe you get to choose a couple of different layouts. So there's a little bit of customization that can go on here.

Timeframe of customizing your home

What you'll want to do is you want to talk with that sales rep about your customization. Now, this process probably is only going to take about an hour. It's not going to be super in-depth because again, you only have a few options to go through here.

What you are purchasing is a base model

Now, what to be careful. Has a lot of these builders are going to advertise to get people, to come into the door and see their homes. So you'll most likely see these ads where it says, new homes starting in the two hundred. Now obviously that's going to be the base model. It's probably not going to have any added things to it. The models that you actually go tour in the very beginning probably are not going to be the ones that are $200,000. So be very careful. That's when you're exploring these homes and you're actually going in and seeing them that you understand what the value of that home is and what it's being sold for. Because just because it says it starts in the two hundred, that might not be a home that you want to purchase, because it's probably a very bare-bones model.

Be mindful of expensive upgrades

So with that, you want to watch for expensive upgrades. So upgrades are fine, right? Because if you're looking at a home and a neighborhood that's starting in the 200s. Most likely though the average home is probably going closer to 300,000. So you just want to be careful that you don't get so far in the process and then realize, "oh, the home that we actually toured as a lot more expensive than the $200,000 price tag that we saw on the street".

Tour several homes

So make sure you're touring several different models that they have.

Explore several types of builders/ development

And also maybe look at touring several different types of builders. You might have one neighborhood that's being developed over here, but you might also have another development growing across the street. Even if you're wanting to stick in one specific development or one specific builder, it might be worth it just to explore what's happening in your local market.

Be patient

Then finally be patient through this process because as you're customizing it. Every lender is different. Every prefab lender is a little bit different. You might get through the customization phase and then you might have to wait months, like six to eight months before that home actually gets built.

So again, this is where you can talk with that sales rep or with your realtor, get a realistic idea of what you can expect through the process.

Deposit

Then you have your deposit. Each builder is going to be different with the contracts that they have. But when you first want to understand is this home a prefab or is it not?

Sometimes a new construction isn't necessarily sold by a builder. It might be sold by an independent party. And if so, then they might not have an earnest money requirement, but most often, if it's sold by a builder normally in their contract they want to have earnest money deposited. or a builder's deposit. They're the same thing.

Basically what it's doing is you're putting money upfront to say, you're going to follow through with the contract because keep in mind what's happening with. The builder is actually the one who is financing the construction of the home. You're only purchasing the home after it's built.

So they could go build this home for you. It's not custom, but you selected options. And maybe some upgrades that were more expensive for them to put in. And then if you walk away at the end, they now have this home that they have to try to sell and find another buyer for. So that money commits you to that contract with that builder. And make sure you read in there. Is there an option for you to get out of this and get your earning earnest money back if you need it.

And this is where having a realtor can be helpful because they're going to help you negotiate and figure out the way that you can protect yourself if you need to in that contract.

Usually 5%

Again, all builders are different, but you're probably going to run into an earnest money deposit of around 5%. Now, this is a lot higher than the average that you see on an existing home purchase. An existing home purchase is closer to the 1% range. New construction is going to be closer to the 5% range. It could be higher or lower depending on the builder.

End Loan

So now let's talk about the loans you're going to get with this. A new construction loan is what's called an End Loan. So think of loans and two different categories for right now on one side, we have Construction Loans and the other side, we have End Loans and think of an end loan as it's the category. The four main types of loans, conventional, FHA, VA, and USDA.

Who funds the construction?

A construction loan is going to be a loan that's going to actually fund the construction during the process. So it's going to give them money to the contractors to do the work. Then once the building is complete. Then you have a loan that takes over after the building's complete for the rest of the term, which is, maybe a 15-30 year mortgage. So what we're talking about here is actually an End Loan.

There's no limit or special constraints

So with new construction loans, you can purchase any loan that you had purchased a regular home with, right? Conventional, FHA, USDA, and VA, then they're all going to be the exact same rate that you get on an existing home and the exact same down payments that you get on an existing home as well.

So if you're a veteran, you can go 0% down on a new construction home. If it's in USDA eligible area, you can go 0% down on a new construction home. So this is fantastic. You don't have any special constraints with these new constructions. Now, if you're getting an actual construction loan, so maybe you're working with a custom builder then you're probably going to be. A larger down payment, closer to 25 to 35% down on a construction loan.

Yes, we can use a regular loan

But since the builder actually financed the building of the home until it was complete and we're just taking an end loan, we can actually just use a regular loan. So the builder funds the construction now.

Preferred lender incentives

Something you want to keep in mind is the builder normally has an in-house lender, and since they have a partnership, you normally can actually get incentives from that lender. Sometimes it's incentives and a closing cost credit. So maybe the builder or the lender pays a portion of your closing costs. And the incentives might be in terms of discounts that you get on the home or add-ons that you get on the home.

So for instance, I've seen if somebody uses the preferred lender that they would get like a $4,000 add-on, in a kitchen. So you get incentives and this is where you want to talk to your sales rep or your realtor. Ask them if you can explore what options you have available when you work with these two together.

I know that anytime we've tried to go up and compete with a loan against a builder, Or with a builder's preferred lender, it's incredibly difficult. They have a relationship that's a lot tighter. And since they often are owned by parent companies, they can do elements of some revenue sharing, which allows them to cut down on some of their margins a little bit.

Credible

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So you went ahead and you got representation. You customize things, you put your earnest money down, and now the building is actually going to start. Again, this is not a custom-built home, but probably the building isn't completed. So a general contractor is going to be working on actually putting your home together.

Build a good relationship

According to my friend Scott Smith, one of his biggest pieces of advice is to develop a good relationship with the general contractor.

The general contractor is going to be the one who's out there, overviewing the build for you. So they're going to be finding any problems and correcting that for you. To establish a good rapport with them, connect with them in the beginning. Just let them know that you're there, and you'd love to be a little bit part of the process. Obviously don't annoy them. Don't always follow up with them every week, but stay in good touch with them. Keep good communication, and most likely you'll actually be able to visit them.

Visit the construction site

It might be worth going out to the construction site. Once or two times just to explore how everything is coming along because you're most likely going to be eager to move into that home very soon.

Tax Assessment

This is a huge thing that people do not realize when they purchase new construction. So when you pay property taxes, you're paying based on the assessed value of the home. So somebody came out and they assessed the value and then you pay taxes based on the assessed value. So this only happens normally once a year, your home gets reassessed. So keep in mind that home, when it was last assessed was most likely just a plot of land.

So its value is very low. And so there aren't a lot of taxes required to be paid on it. When that home is built and he gets reassessed, that assessed value is going to skyrocket. All right. And now you're going to have a larger tax bill due. So where this trips up people is, they'll close on their loan and see the monthly payment. Without having the new tax value in there. And there's no way really for you to for a lender to put in and collect escrows of what they think your taxes are going to be. They're going to go off the assessed value. So keep that in mind.

Talk and get an idea of your tax

What might be beneficial for you to do is to maybe talk to people who are already in that developers and who have been there for a while.

Talk to the sales rep, get an idea of what taxes are going to be, because you're not going to be able to estimate them on your own and your lender. Won't be able to estimate them before. What you'll have to do is be prepared for when that bill comes due. Because the last thing that you want is to expect, Hey, your taxes were only, 30 bucks a month, but in reality, they're closer to $400 a month, $500 a month because your assessed value went up after got reassessed because it went from a plot of land to now land with a new home on top of it.

Manage your expectations

Finally, what we want to do is we want to manage expectations. So when you purchase a new home, it doesn't mean that it's going to be perfect. Even a new custom-built home that's a million dollars is going to have things that are wrong with it. So you need to have those expectations.

Warranty is important

So this is where it's really helpful to hold on to anything that the builder gives you about any warranty that you might have. And it might be really good to have to go with a warranty option if they give it to you, even though it's a new home, you want a warranty to cover things. If it wasn't installed correctly, or there are just some things that need to be patched up.

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