The Process of Buying A New Construction Home
The Process of Buying a New Construction Home
Purchasing a new construction home can have its unique challenges. There can be less room for negotiation in the purchase price, it may take longer to close if you must sell your current home first, and you could face restrictive covenants from an HOA.
It's also a good idea to have a real estate agent with experience in this type of sale. A knowledgeable Realtor can help you make the right choices throughout the process.
1. Find a Lender
A new construction home is one that has been newly constructed from the ground up. It could be a custom home or a spec (designed and built before sale) home that is sold directly from the builder. New construction homes often come with a warranty that provides coverage for certain systems and appliances. They also typically require a down payment and may be subject to closing costs similar to those of traditional resales.
When looking for a lender, be sure to choose one that has experience financing new construction homes. Ask for referrals from friends and family and search online reviews. You should be prepared to provide the same financial documents as you would for a typical mortgage application including income verification, employment details and asset information.
Be cautious of builders that try to force you to use their preferred lender. While it is in their interest for you to finance with them, you are not required to do so. Be aware that the process can be delayed by construction delays or issues like permit problems and you should plan accordingly for potential additional living expenses while the house is under construction. Once the construction is complete, a Certificate of Occupancy will be needed for you to close on your home loan and take ownership. This is a requirement by most local governments. It is usually performed by a local inspector after a thorough walkthrough of the property.
2. Find a Realtor
Unless you’re working with a builder that allows you to bypass the real estate commission, you should always work with a Realtor when buying new construction. A specialized Realtor will be familiar with negotiating with builders and will also know how to help you navigate the new home warranty process. They’ll be able to explain contract items that may seem complicated at first, and will give you the confidence to confidently walk into your new construction purchase.
When interviewing potential agents, make sure they’re experienced with new construction sales and negotiation. Many real estate professionals have a file of example contracts from different builders, and they can use this to demonstrate their expertise in the area. They should also have a strategy in place for addressing any contract items that might come up during the transaction, such as price negotiating and closing credits.
While it’s important to understand that most builders won’t be willing to budge much on their list prices, you should be prepared to negotiate upgrades and other amenities that can add value to the property. It’s also helpful to talk with your agent about their knowledge of the market in your area, as they’ll likely be able to provide you with insight into future home values and resale opportunities. They’ll also be able to advise you on whether it makes sense to buy a semi-custom or spec house, as each has its own set of advantages and disadvantages.
3. Find a Home
New construction homes are a great option for homebuyers in today’s market, where housing affordability is low and inventory of pre-existing homes is limited. However, purchasing a new construction home is not a simple process. For one, you must first decide which type of home you want to buy — tract homes, custom homes or spec homes. Then you must find a real estate agent who specializes in new construction, or is at least familiar with the building process. In addition, you’ll need to research builders and developers. This includes looking up business reviews, feedback from the Better Business Bureau and public records that may reveal lawsuits or fines.
Another big factor when buying a new construction home is timing. It typically takes about a year for a new home to be built, and sometimes even longer. As a result, buyers with a tight deadline should consider moving into a community that offers quick move-in homes or spec homes.
It’s also important to understand the financing process for new construction homes. Typically, buyers will need to secure a mortgage with a lender that specializes in this type of loan. These lenders offer a special home construction loan, which releases funds to the builder in increments (called draws) and eventually converts into a traditional mortgage once the home is finished. You’ll also need to save for a down payment, and pay for closing costs and property taxes.
4. Negotiate
As with buying any home, negotiating is an important part of the process. For new construction, this can mean everything from the price you pay to the upgrades you’re offered.
It can be difficult to get builders to budge on the purchase price of a new construction home, but it’s not impossible. One way to work with a builder on the price is to ask for a line item breakdown of every single cost that goes into building your home, and see what you can cut out or negotiate down from there.
You should also talk to your mortgage lender about rate locking, as this is typically an option for new construction homes as well. This can help protect you against interest rate increases during the construction period, which are sometimes inevitable.
Lastly, it’s important to set realistic expectations when it comes to the timeline for your new home’s completion. It’s important to discuss this with your builder, and find out how long it will take from start to finish. If you have a specific timeframe in mind, finding out if your builder offers quick move-in homes or spec homes can be helpful. If not, it’s worth considering a relocation plan or other living arrangements while your home is under construction. Also, make sure you read the fine print of your builder’s warranty. Many will include a limited home warranty, which can cover repairs and replacements for the first year or so after you move in.
5. Sign the Contract
The purchase and sale process for new construction is similar to that of a resale, but there are a few additional steps. For example, a buyer will typically meet with their builder to select options and design features of the home (such as flooring, cabinets, countertops). Depending on the stage in construction, buyers may also be required to attend walk-throughs during various stages of the building process.
Once the buyer and builder have agreed on a final contract, it is signed. A buyer’s agent can help navigate the specific terms of the agreement to ensure that the home buyer is protected. This can include provisions stating that the builder is not responsible for construction delays and the amount of money the buyer will receive if the home isn’t completed by the projected date.
A new construction home warranty is another aspect that a real estate attorney can review for the buyer. It is important to understand the extent of the coverage in case any issues arise after settlement.
The purchase and sale agreement for a new construction home is legally binding. However, it is possible to back out of a contract if there are any changes to the property that are not agreed upon by both parties. For this reason, it is imperative to have an experienced real estate lawyer on your side who can read and interpret the contract and provide advice on your behalf.
6. Close
When you close on your new construction home, you’ll typically sign at the title company (unless you opt for a mail-out closing). It’s important that all buyers that are party to the contract are present to attend the closing.
You’ll also need to bring proof of homeowners insurance to the closing. This is a requirement of your mortgage lender before you can receive your loan funds.
While your builder will conduct inspections throughout the construction process, you’ll want to have your own home inspector review the home before you move in to make sure everything is as expected. Your Realtor can assist you with choosing an inspector that specializes in new construction.
Another thing to keep in mind is that, when you tour model homes, what you see is not necessarily what you’ll get. Model homes are usually outfitted with every possible premium and custom option, but those won’t be included in your home unless you pay for them. Be sure to carefully read your contract to understand what you’re getting.
While buying a new construction home has its own unique set of challenges, it can be a great way to get into a great neighborhood that you love at an affordable price. As with any real estate transaction, it pays to have the right strategy and team by your side to protect your investment. To learn more about how to buy a new construction home, contact a local expert Realtor today!
