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Great Deals in New Construction Homes

New construction homes may represent some of the best bargains available in this buyers? market. However, like any important financial decision, solid research is essential to ensure you get the most for your money. This article will discuss how to find the best values and avoid some of the ?gotchas? when buying new construction home.

Just where are the best values and how do you find them?  The best values are usually in homes that are "deliverable" (nearing completion). The builder "wants them off the books." Since most builders are not building "spec" homes in this market, they are usually a result of a "failed contract" meaning the original buyer couldn't get financing, had a change of plans, or for some other reason, the original contract didn't make it. Now the builder is anxious to stop paying the carrying costs and may sell it at steep discount, or pay discount points to reduce the loan interest rate, give away upgrades, or a combination of these incentives. It's important to know that a lot of the large builder's corporate bonuses are tied to moving inventory, thus they want it sold on schedule. The closer they get to the delivery date, the more negotiable the price and incentives become.

Since most of these homes are not "spec" homes, it's likely that the prospective buyers in the original contract added numerous upgrades and extras. Also, since they are probably within 60 days of delivery, the settlement and occupancy timing work very well for many military buyers. 

Can you look for these on realty websites?  Maybe, but many builders try not to place their listings into the Multiple Listing Service so routine searches on websites may not reveal these great deals. Here's where a local, knowledgeable Realtor comes in handy. They should be aware of the new construction in your area of interest and may even have a strong working relationship with the on-site sales representatives for new construction. In many cases, they get phone calls or e-mails from representatives when the "great deals" become available. As a technique, they should check with builders before, and during, your house hunting trip for these possibilities. By the way, "new home deliverables" are not unusual and we see them frequently. As an example, we recently visited a new home site with a client fully aware that there were no such opportunities. While we were touring the model homes, the sales rep received a call that a contract failed (due to military orders no less). They offered a deep discount of more than $50,000 on the house, added numerous incentives to the package, and helped buy down the loan rate. The house was perfect for the client and they're now enjoying their new home. 

  That depends entirely on the stage of the construction and what has been ordered. In some cases, yes, in other cases nothing can be chosen.

Can you choose some of the options?

So what's the catch? Generally, the great incentives require you to use the builder's preferred lender and settlement company -- and you guessed it -- they typically cost more. It's important to closely compare the lender fees and settlement company fees to the competition, and then compare the value given with the discount. That said, we generally find that it's well worth those additional fees to take the buyer's incentives and discount. Carefully review the loan product offered and, among other things, verify that it doesn't have a pre-payment penalty. If it doesn't, there is nothing to prevent a refinance of the loan immediately after settlement but do consider all costs including the refinance costs as well.

What else should you consider? Despite the builder's insistence of a great quality assurance program, you should have a home inspection conducted by an independent home inspector.  Ideally, the inspection would be conducted before drywall is hung to inspect electrical and plumbing work. If the home is "deliverable" the drywall may be complete. Even so, in our experience home inspectors frequently find significant issues in new homes that are overlooked by the builder's quality department -- and even the local government code inspectors.

Here are some other helpful tips: 

  • Each builder has their own contract written by their attorneys to protect their interests. They will rarely change their terms so it is critical to understand the contract clearly.
  • The earnest money is definitely negotiable. Many builders will ask for huge sums of earnest money on "to be built homes," but will accept any reasonable earnest money amounts with "deliverables." We have seen builders ask for $15,000, but accept $1,500.
  • The builder will pretty much dictate the settlement date and will try to close it out before the end of a month for reasons stated above. If you can't be there, plan for a "power of attorney" well in advance. Special POA requirements will be required so check with the lender for specifics.
  • Make sure you fully understand the scope and conditions of the home warranty, before you sign the contract. Insist on meeting the building supervisor and whoever will do the follow up on home warranty issues. Building a strong relationship with this person can go a long way in getting things fixed after move in.
  • Check out the company. A lot of builders, large and small, are in financial trouble in this market. Make them convince you your earnest money is safe and that they will be around to complete the construction and perform the warranty.
  • Verify how quickly your contract offer will be ratified. Usually, it can be turned around in a matter of a few days, but in some cases, it could be greater than a week. At a minimum, insist that they give you a verbal acceptance before you stop your house hunting.
  • Regardless of whether you use the builder's preferred lender, apply with their lender. A face-to-face meeting is definitely preferred if possible. Ensure they give you a good faith estimate of both the lender's and settlement company costs. Then compare with another reputable lender. 

Finally, your Realtor can be an invaluable asset throughout this process. Keep them in the loop. Use them to negotiate the price and earnest money, attend inspections, follow up on delivery process, and take pictures at different stages. If you're half way round the planet at settlement time, you may ask them to settle by power of attorney. For example, new homes have new sod. If you settle in the spring and don?t move in for a month while PCSing, ask your Realtor to coordinate a lawn watering and mowing service. New sod will die after a few days in hot weather and the builder will not be responsible for watering after all is said and done.  

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