How To Buy A New Construction Home

Buying Houses and Condominiums under Construction

How To Buy A New Construction Home
May 8, 2017

The housing market is still suffering from an inventory problem. Available houses are not sufficient to meet demand, either because of a mismatch between the type of home and homebuyers or a pure lack of supply.

In such a tight housing market, potential homebuyers may turn to buying a house that is in the construction phase. The process is mostly the same as when buying an existing house, but there are some subtle differences to consider.

Homes under construction are typically projects that are built on spec by builders/developers. They have already secured their required financing for their overall project and mapped out the construction and sales plans. Model homes are built so that potential homebuyers can look through these houses and consider the options for their own home. By buying unbuilt or unfinished, you can experience the satisfaction of partially designing your own home.

Your best approach toward unbuilt homes may depend on the builder's spot in the overall building cycle. Earlier in the project, the builders may be anxious to get the first few homes under contract to build word-of-mouth advertising and momentum for future sales. You may be able to negotiate a better deal, but the tradeoff with signing early is that you are committed to the contract even if the rest of the subdivision is never built. Do homework on the builder's track record of previous projects. They should be happy to provide examples.

Toward the end of the project, you may pay more because of appreciation of the nearby homes. Builders will be less likely to negotiate on price at this point to avoid the impression that price cuts are necessary to maintain sales. It may be possible, however, to negotiate on upgrades and amenities like higher-end floors and finishes or deluxe appliances.

These new homes may not necessarily be listed in your local Multiple Listing Service (MLS). They are often found through alternative advertising such as nearby billboards, listings in the local papers, or through targeted online advertising.

You will usually need to put down a sizable deposit, perhaps up to 10% of the final price. Since you must wait for the home to be finished, that money is tied up for a longer time than with an existing home purchase. Weather delays and other project concerns can drag the process out, potentially putting you in a cash crunch. Plan your cash needs ahead and build in slack into your calculations to account for delays.

If the builder has already secured a conduit to financing, the loan application process may not be much different from the process for existing homes. Otherwise, it may be more difficult to find a lender and fewer financing options may be available based on the risk of the builder not following through.

The process is similar when buying a condominium in process, but it is even more critical that the overall project succeed. Otherwise, you could be stuck in a half-empty building — or even worse; the remaining condos could be sold to investors as rentals, sticking you in what is effectively a rental unit. (Of course, you could always decide to join them and rent out your unit while you buy somewhere else.)

When buying during the construction phase, you can end up with a home partially customized to your specifications at a great price, but only if you can afford to allot enough money to the project while the home is being built, fully research the developer, and secure suitable financing.

MoneyTips is happy to help you get free mortgage quotes from top lenders.


Photo ©iStockphoto.com/gmnicholas

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