11 Things to consider when buying that new home!

BUILDING NEW?—11 Things to Consider

It is not an exaggeration to say that your financial future is at risk. Many of the current foreclosures and short sales are occurring in developments built since 2000—because buyers did not take these things into consideration:

1) What’s the true cost of that new home?
There are many, many costs that you will have the first couple of years of ownership. These items will have to be paid for in cash as they occur after buying the home. In an existing home, these items are already included in the price and thus can be financed. Items like landscaping, window coverings and fencing can add up to thousands of dollars. Even little items like curtain rods can add up to a lot of expense.
2) Construction time frame
Building a new home can easily take twice as long as projected and not even be the builder’s fault. Weather, labor shortages, and material shortages are not controllable. Now that new construction activity has peaked and fallen off, most builders are laying off staff and are not able to meet deadlines they formerly could.
3) “Special Financing”
Taking advantage of the special financing offered by the builder might be a huge financial mistake. There are two problems here: First, that special financing often involves bad loan products that are highly speculative. The low initial payment turn into a financial nightmare several years later when the “teaser” rate expires. And second, the cost of this financing is built into the sales price of the home, but does not create permanent market value. So the new construction buyer has paid more than market value for the new home and finds themselves upside down when trying to sell later. The only thing “Special” about this financing is that it helped the builder sell you a home.
4) Quality of Construction-
Many times an existing home is of a much higher construction quality than a new home in the same price range. There has never been a perfect new home built, due to the complexities of the construction process. The only question is which mistakes will be made on your home, and how serious will they be? An existing home has “settled out” in this regard. And sometimes, new building techniques designed for cost control or ease of construction are proved to not be such a good idea: PVC, improper EFIS installation, UFFI insulation and Aluminum wiring are just some examples of where hard lessons were learned from experience.
5) Market Value-Long Term
This is very important. Market values in a new development do not settle out in relation to the rest of the market for up to 10 years after the plat is built-out. Declines in market value often occur during this period. Values long term are determined mostly by outside factors and are beyond the control of the homeowners. When a subdivision is new and in “growth phase” it can have the “Wal-Mart” effect—that is, it creates its own demand even if it is not located in the best spot with regard to future demand for housing in the area. Sometimes new developments-for cost reasons-do not even include the basics of long term value. For example, laying out streets in a pure grid pattern may net the developer an extra couple of hundred thousand dollars in profit, but does not lend itself to making a desirable place to live.

6) Market Value-Short Term.
Also very important. If a buyer will need to sell in the short term (less than 5-7 years), there is a huge risk that they may find themselves upside down. New subdivisions have appeal to people whose jobs are more transient, as they consider buying a new home to be a safer choice in an area they are not familiar with. A new subdivision may sell out within a couple of years- by definition there will many homes on the market at the same time several years later. Add to this the fact that the builder is probably still down the road offering similar floor plans with special financing and it’s not a pretty scenario.
7) Over-improvement
Be very careful here! Builders will sell you “upgrades” which are hugely profitable for them, but put you at risk. It is tempting to add on those nice features because you can include them in your mortgage just remember that those nice features may not add value. When you sell, trying to sell your garden tub and marble fireplace for the same price as your neighbor’s bigger home will not work—you may lose every bit of what the item cost you. And there is simply no way to know at the beginning which improvements will add long term value and which ones won’t. In a buyer’s market square footage wins against amenities nearly every time.
8) Style.
Will the style of the home still be in vogue in the future? If not, it creates something called “Functional obsolescence” which is fancy way of saying “Loss in potential value”. Examples abound of trends that have come and gone in style, floor plans, and siding. We’re seeing market resistance to some of the “vinyl villages” as one example of this. Buyers driving into a plat and looking down a long street of homes all with the same color vinyl siding react very negatively.
9) Potential Subdivision issues
If you are one of the first to buy in a development you take on a lot of additional risk. Will the builder be able to complete the development or will they sell the remaining lots to another builder who will build much cheaper homes? Will the homeowner’s association get off the ground? And the first person to violate the covenants, restrictions and “style” of the area is the developer when trying to sell the last few lots.
10) Be sure to understand what you house payment will be in a few years
Your initial house payment almost never includes the full taxes on the property—I have seen payments go up by as much as $500 per month a year or two after the home is built. And unless you are paying attention at the time, you may not find out until your escrow account is way behind—and that amount also must be made up. In addition be sure to understand fully what the terms of your financing are. Tomorrow does come.
11) You have NO representation in the decision!
While most new homes salespeople are nice and they are honest, please remember that their interest is opposite of yours. They not only are not your agent, they are employees of the builder! And even if they tried to look out for your best interest, they are not in a position to do so—they have no market experience to help you evaluate all of your choices.

Despite all of this, can that new home still be a wise choice for you? Of course it can! This is just cautionary–there are many positives that are not listed here. For example, it is probably true that never in history have better new homes been built for the money. Each of these 11 items were drawn from what I have seen buyers experience. The advice of an experienced, competent professional agent who represents you is always advised. And since the builders almost always pay the cost of the agent without increasing the cost of the home to you—(they consider it a marketing expense no different than paying the salesperson who works for them), there is no reason not to call me first!