Many homebuyers think that purchasing a newly constructed home is smarter than purchasing a "used" one. A brand-new home's maintenance and repair costs should be minimal; its construction materials, systems, and appliances should be up to the latest code and energy efficient; the floor plan and amenities should meet the needs of contemporary living, and the place should be move-in ready. A brand new property also has an emotional appeal for buyers: No wear-and-tear, and no dealing with someone else's taste or mistakes—or so the reasoning goes!
What many buyers don't realize is that new homes still often have numerous hidden costs. If you're purchasing new construction from a builder or real estate developer, here's what you should look out for to make sure you're spending your money wisely and don't incur any unpleasant surprises.
- Buying a newly constructed home requires almost as much attention to detail as buying a previously owned one. Inspect a new home carefully, as it can have hidden defects.
- When viewing model homes, understand what's standard and what constitutes an upgraded feature, which of course will cost you more.
- You should have your own real estate agent and research your own mortgage—don't assume the builder's terms are the best.
Just like an older home, a brand-new home can contain several hidden, or "latent," defects that could require expensive repairs. A weak slab could crack. Siding could fall off. The wood floors could warp. Your toilet could overflow. Electrical wiring could be done incorrectly. Heavy rains can reveal inadequate waterproofing or grading that leads to leaks or flooding. Any problem that you might be afraid to find in an existing home can also appear in a brand-new one.
To protect yourself, research the builder's reputation along with the subcontractors used before you commit to a purchase. And always pay for a thorough inspection by an independent home inspector who is not affiliated with the builder.
It can be smart to arrange for two inspections at different times to make sure your new home is truly free of defects and in move-in shape—one after the home has been constructed but before all the finishes have been put in (problems can be easier to identify), and another just before you close and take possession.
In addition, find out what kind of warranty the home comes with and read it carefully before you commit to purchase. You may have to rely on that warranty if any latent defects pop up that your homeowners' insurance policy will not cover. Different aspects of the home may be covered for different lengths of time so make sure you're aware of those limitations—for instance, the HVAC system may be under warranty longer than bathroom fixtures. Report any problems to the builder as soon as you notice them.
Newly built homes often come in a standard or basic form and may not include everything you need or want. It is quite common for these properties to lack interior essentials such as some appliances and window coverings, and exterior features like decks, fencing, and landscaping.
Each of these missing items can be an added expense. Before you make an offer, ask what is included in the price of the home, note what is missing, and do some research to figure out how much these items will cost. Make sure to factor these purchases into your budget. If you can't afford to pay for them out of pocket, getting the builder to pay your closing costs might free up the cash you need for blinds, sod, and a washer and dryer.
If that proves too expensive or time-consuming, look for a new home that comes with all the essentials, or consider a property that is almost brand new and is just lived-in enough that the previous owner has installed all the missing necessities.
The showy model you will tour will typically have all the available upgrades the builder offers, from hardwood flooring and granite counter-tops to bay windows and oversize bathrooms. Seeing what you could have can lure you into spending significantly more than the base price that originally attracted you to the property and the community. The price difference between the base model and the model with all the bells and whistles can be many tens of thousands of dollars.
Also, if you buy the upgrades through the builder, you might pay an up-charge and have a more limited selection compared to doing the upgrades by yourself. You also have to consider the future resale value. Make choices that will appeal to a wide variety of buyers and won't result in your home being over- or under-improved for the area.
Some builders do include upscale features in the standard model and factor them into the base price. Just make sure you know what you're looking at before you tour a home and fall in love with something you cannot afford—or feel ripped off because the standard model seems to fall short of the deluxe one.
An Uncertain Future
In a new community, you may not really know what you are buying into in the long-run. What will your neighbors be like? What will be built on that vacant land next door? How reliable will the services be (like snow plowing, utilities, or garbage collection)? How will these unknowns affect your quality of life and your home's resale value? "New construction" is not necessarily a synonym for "low crime," "friendly neighbors," or "great neighborhood maintenance."
It's okay to take a chance on these unknowns. Just realize that you are taking a chance. Conditions can change in established neighborhoods, too, but at least those areas have a history and reputation that could give you a better idea of what life will be like in your new home, compared to a brand new development.
Lack of Representation
When you buy a new home, you should not just walk into the sales office unarmed, even though it can seem like a simple one-stop-shop operation. The builder's sales agent represents the builder—and not you. Any financing the builder may have arranged will not necessarily be the best or lowest cost available financing. Do your research and familiarize yourself with the different mortgage types available and the interest rates available for lenders in your area.
Then, based on your research, get your own real estate agent and your own lender to make sure you get the best price on the home and the lowest interest rate and fees on your mortgage.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
The Bottom Line
Don't make any assumptions about what you'll be getting if you buy a new home. It can be more expensive and come with many more uncertainties than you bargained for. However, if you prepare for the experience, you'll know how to watch out for your best interests and spend your money wisely.