Buying a New Construction Home

Buying a New Construction Home

Buying your first or next home is one of the most important decisions in your life. The quality of the decision you make will affect you far into the future and may have a positive or negative impact on your life and financial situation. Extensive research and due diligence should go into the process to ensure making the best decision possible. While there are many guides available for buying a new construction home, experience can be the best teacher. This article is written based on firsthand experience and experience helping others while working in the relocation industry.

It is important to start off by finding the right professionals to work with and then leveraging their training and experience. Certain homebuyers like to avoid incurring the costs for realtors, inspectors and other professionals, in the hopes of saving money. More often than not, however, this leads to higher total costs and sometimes more serious issues. Buying real estate and taking out a mortgage are incredibly complicated steps to take. That’s partly why there are so many rules and regulations governing these industries and why becoming a realtor or loan officer takes a significant investment of time. The good news is these professionals should have your best interests in mind and can guide you step by step.

The often untold story for many homebuyers is one of remorse, as one in four homeowners ends up regretting their purchase. The biggest factor contributing to this regret is affordability, according to a recent survey by real estate brokerage Redfin. Younger homeowners are more likely to experience this problem as are those who earn less than $100,000 per year. A Trulia study found that half of all homebuyers had remorse. A significant complaint in Trulia’s study was the home purchased wasn’t large enough. In addition, one in five stated they wished they had inspected the home more carefully. The bottom line is everyone needs professional help when it comes to buying an existing or new construction home.

The following nine steps are not a comprehensive list of everything to consider, but will still go a long way to ensure buyers have a positive experience:

1.  Utilize a Real Estate Agent
When buying new construction, anyone can walk into a model home, talk to a builder representative and start the home buying process without a real estate agent. Many builders even have a real estate agent on staff to provide assistance. However, this may not end up being in the buyer’s best interest due to their affiliation with the builder. An unaffiliated real estate expert, who has walked other buyers through the process many times before, is best qualified to assist. Having someone to rely on, who knows the process and when and where the buyer can negotiate, is critical to obtaining the best possible deal and avoiding major issues. That’s why the first step to buying a home is finding the right real estate agent.

2.  Read the Contract
Read every page, read every word. It is important to not rush and to stop and take the time to read and understand each line of the purchase agreement. The contract commits the buyer to making a significant purchase and usually includes penalties for backing out. Therefore the buyer needs to know exactly what he or she is signing. Utilizing a real estate agent is extremely helpful in this regard. They will be able to act as another set of eyes, ensuring nothing is missed, potentially catching errors and verifying the terms are what was discussed and verbally negotiated.

3.  Negotiate the Best Price
Do not just accept the price as is since sellers often list a house for more than it is worth. In a competitive buyers’ market, builders may not be as willing to negotiate; and, in extreme situations you may need to be ready to offer more than the list price. Builders typically have extensive experience with pricing real estate. In order to match their knowledge in this situation, work with an experienced real estate agent who has knowledge of the local market. Builder representatives may be willing to offer incentives in order to get the deal done too, such as monies to use towards design elements of the home or upgraded appliances. Even if the builder isn’t offering incentives, prospective homeowners should investigate all the options. Upgrading appliances through a builder, for example, may be more affordable than buying them retail and thus still represent an opportunity for the buyer.

4.  Obtaining a Mortgage
Buyers should know that you do not have to use the mortgage company that the builder recommends. Buyers can select any financial institution they choose, however, be aware that builders often have incentives available for anyone who uses their preferred mortgage company. Incentives can include the waiving of fees or upgrades to the home for free. However, exercise caution, as there are often additional fees or contingencies that could cost you more in the long run. Always compare both the rates and fee structure offered by different lenders. The annual percentage rate (APR) is the most accepted way to compare two different offers. This is something a loan officer can help the buyer with, in addition to explaining the pros and cons of different mortgage products. They can also assist with navigating all the paperwork.

5.  Review the Construction Materials Being Used
One of the hardest things to do when buying a new construction home is picturing the finished product. Normally there is a long list of design decisions that the buyer has to make. The starting or default options for items like appliances or flooring can often be lower end and very basic. Don’t just concern yourself with style, however; building materials, heating and air conditioning systems, roofing, windows and flooring, for example, can often look similar but vary significantly in quality. Know what you’re buying and how it compares to other options. It may be necessary to get assistance in this phase of the process, as the number of choices and products needing evaluation can be overwhelming. A professional home inspector can often provide advice on the quality of different systems or construction materials.

6.  Review the Home Warranty
With homeownership comes risk. While renters are accustomed to a landlord fixing or replacing a broken appliance; in a new home, the homeowner is the landlord. Home warranties, however, can still provide significant assistance and protection. Most new construction home warranties are backed by the builder; in other cases, the builder purchases the warranty from a third party company. It is also possible to purchase additional coverage to further protect the buyer’s investment in the property. Be aware that some loan types (FHA and VA, for example) require a third-party warranty. Warranties cover different elements of the home for different periods of time and different issues. Homeowners should familiarize themselves with the details of warranty coverage, in order to decide whether additional protection is needed. An inspector or a real estate professional can provide advice in this area too.

7.  Homeowner’s insurance
Years after the purchase of a new construction home, when a storm hits, homeowners can rest easy knowing they purchased the proper protection from their insurance company. Spending time researching homeowner insurance is highly recommended. It’s a critical step towards protecting any new home investment. Homeowner’s insurance (sometimes referred to as Hazard Insurance) proof is also normally required by a lender. When looking for a plan, homeowners should never be satisfied with a single quote. Get multiple quotes and compare the coverage options and pricing from each company. Part of this process is becoming familiar with the coverage terms and definitions. Homeowners would be wise to investigate and determine the best approach for making payments too, as options do exist. The research homeowners do up-front will not only give them peace of mind once they purchase their home, it can be especially useful if they ever need to submit a claim.

8.  Have a Professional Inspection Done
Yes, even on a new construction home, an inspection is needed. An inspector will call out any issues with the home before the sale is closed. If you have a reputable builder, there probably won’t be many issues; but, nevertheless, inspectors still know what to look for and can be held accountable for their work. The cost to pay an inspector is also very low in comparison to the cost of a home, making this step a no-brainer. Real estate agents will most likely know the reputation for local inspectors and can be a good source for recommendations. Most importantly, inspectors will verify that the home meets local building codes. It is tempting to rush through this step, especially for first-time home buyers. However, be patient, take your time and bring all defects back to the builder to be fixed before closing on a new home.

9.  The Walk-Through
It is always important to do a final walk-through. When it is time for this step, the buyer should bring a second person with them and blue painter’s tape. Then, utilizing the painter’s tape, mark any flaws, stains or spills, cracks, nicks, nail-pops, loose door knobs, etc. Next, flush all the toilets, turn on the water for the sinks and showers, and test the oven, stove and dishwashing machine to ensure they work properly. Make sure the home meets expectations in every way and that you do not notice leaks or hear any loud sounds. The builder will correct any issues identified. After closing, homeowners have to go through the warranty department, which is not always a smooth or quick fix.

The best preparation for buying a home is often talking with existing homeowners and finding the right experts to consult, but nothing can replace doing your own due diligence. Researching hot topics online can also be helpful. Learning what to look for before proceeding is a homeowner’s best protection. To avoid buyer’s remorse and live happily ever after, dedicate the appropriate time and effort to these important steps to new home ownership.


Jennifer Morabito
Manager, Consulting Services