4 Things to Know Before Building a New Home

There are new homes – that is to say, a home that’s new to you – and then there are new homes – a home that’s new to the world.

When you’re buying an existing home, you assume there are a lot of things that need attention. But a house that’s new to the world? Surely that’s a house that’s pristine and perfect in every way.

Not so fast. Houses are incredibly complicated structures and have a lot of moving parts (and different people who put those parts in), so there will never be one that’s perfect. Here are four things to know before plunging into a new construction.

1. Buying New Doesn’t Have to Mean Spending More

Although buying a new home technically means you’ll spend a little bit more on your house, as of October 2023, the difference between an average new construction home and the average existing home was very small, according to the Census Bureau and the National Association of Realtors, respectively. New homes came in at just $409,000 versus an existing home that was $391,800.

On top of this, some builders have been offering to buy down interest rates for the life of the loan, making those new construction homes even more attractive.

“Builders have been using mortgage interest rate buydowns for many years as a sales incentive whenever interest rates are relatively high, and generally build that into their sales and marketing budgets,” said U.S. News Senior Real Estate Economist Patrick S. Duffy of Long Beach, California, via email. “Today more builders are offering rate buydowns for the entirety of the loan, allowing buyers to finance more home for the same payment amount.”

Although buydowns may not seem huge in the grand scheme of things, if a builder is, for example, offering a 0.5% buy-down on a 30-year mortgage, a $409,000 home at 7.16% with a 5% down payment from the buyer has a principal and interest payment of just $2,626. Compare that to the $391,800 existing home with the going interest rate of 7.66% and the same 5% down payment. The existing home principal and interest payment is $2,643.

Industry experts agree that buying a new home could be the right move right now, especially considering new homes also come with additional warranties that existing homes can’t match.

"In today’s inventory-constrained environment, driven by current homeowners staying put due to high interest rates, many customers will have an easier time finding a home that meets their needs and budget by shopping for new construction homes,” says Alex Toth, head of business development and pioneer of the builder partnership program at Opendoor in San Francisco.

2. Always Have a Home Inspection

New homes are new, but they’re not without flaws. Although all the systems are fresh out of the box, they’re installed by humans, which can make for less-than-perfect outcomes. When you buy a new home, it’s important to have a home inspection so you have another set of eyes on your home.

Once documented, your home’s builder can arrange for the problem item or items to be repaired, so you go into your new home as worry-free as possible.

“Always, always, always have a home inspection,” says Jenn Newman, real estate agent at The Brokery in Phoenix. “Although new construction is a highly overseen process, things happen. I always remind my buyers that it is imperative to be aware of any issues up front before they close, because failure to do so could lead to unnecessary surprises and warranty issues down the road.”

3. Pay Attention to Insurance Premiums

Houses in risk-prone areas are getting more and more difficult to insure, putting increasing numbers of homes at risk of dramatic increases in the price of their homeowners insurance policies, or even outright nonrenewal. According to the First Street Foundation, 4.4 million properties are at risk of negative insurance outcomes due to wildfires, 23.9 million due to wind, and 12 million (on top of houses already listed in FEMA’s Special Flood Hazard Areas) due to flooding.

 

However, newer homes are often built to stricter codes based on local hazards, which may make them cheaper to insure. You still need to check on insurance premiums before committing to a home. Location is also a huge factor in insurability and risk maps are being redrawn regularly due to changing climate.

“Insurance has been a huge motivating factor for many buyers over the past 12 months,” says Carly Sostheim, real estate agent and luxury home specialist with Corcoran Reverie in Santa Rosa Beach, Florida. “Renovated homes show well and some are even the quality of new construction, but the state of the insurance market in Florida has become cumbersome and has buyers leaning toward new construction homes versus existing homes to get a highly desired lesser premium annually on insurance.”

4. Expect the Unexpected

Literally anything can happen with a home under construction. Weather delays and material shortages are practically inevitable, but there are a thousand other things that can change your plans at the last minute. It’s important to be aware that while everyone involved in the process wants your home to be finished on schedule and close to on time, a lot has to go right for that to happen.

“One recent experience took place when the builder had to withdraw the purchase contract due to the zoning and flood maps having changed during the course of construction on our buyers' preferred lot,” says Nicole Christopherson, broker and founder of NMC Realty Group by eXp Realty in Austin, Texas.

 

"The builder immediately accommodated our buyers on another parcel within the community. This was considered an upgrade for the buyers, due to the fact it was larger and in a better location, and was at no additional cost. Furthermore, for the troubles and the increased time to close, they provided a backyard patio cover upgrade at no additional cost. Timing aside, this worked out in our buyers' best interest,” she adds.

Although Christopherson's situation was a bit unusual, as most delays add stress for the buyer, who may have to push back closing on their current home and risk alienating their own buyers, it's just one example of how new builds can have surprises for everyone involved.

Buying a New Home Doesn’t Have to Be Hard

If you decide to look for a new construction home in the current real estate market, you can expect to be faced with a different set of challenges from buying an existing home. With an existing home, you already know what you’re getting because the house is complete and right in front of you. But with dramatically short inventory and high prices, it might make more sense to buy a new home right now.

Choosing a good builder in a neighborhood you love can help make the other uncertainties a lot less uncertain as you go through your home purchase.

 

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Source: usnews.com

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Drawing on his decade of experience in finance, investment management, and holistic financial planning, and as a Chartered Financial Analyst ( CFA ® ) charterholder, he leverages his financial acumen and analytical focus to help his clients navigate the sophisticated San Francisco market.
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