Mistakes to Avoid When Buying a New Construction Home
After many years of experience working with Buyers of new construction homes in the San Diego area, I have put together a list of important factors to consider during your buying process. I want your buying process to be as effortless and rewarding as possible.
1 – Not Getting Pre-Approved Before You Start Home Shopping
2 – Making the Wrong Homesite Selection
3 – Not Factoring in the Time and Cost to Landscape
4 – Not Knowing What’s in the Pipeline
5 – Poor Decisions on Upgrades and Options that Cost You More
6 – Not Knowing the Neighborhood, Builder and Planned Area Changes
7 – Not Researching the School Districts
8 – Paying Too Much for the Model Home
9 – Not Working with a Buyer’s Agent
#1 Not Getting Pre-Approved Before You Start Home Shopping
Before you start looking for a new or an existing home you should be pre-approved for a mortgage. My suggestion for all buyers is be pre-approved prior to looking at any new home community. This will save you countless hours or days visiting new home communities only to find out you will not qualify for a loan at that community.
By getting pre-approved prior to your home shopping this will make sure you have all your financial information in order. If you need to make any adjustments to correct discrepancies on your credit this would be the time to take care of it. You will then be ready to start shopping and if you need to get pre-approved by the Builder’s Preferred Lender you will be able to either cross-qualify with your Lender or at least have all your information ready to go in case you find the perfect opportunity and must act fast.
Let your Lender know you might be shopping for a new home so they can be prepared to fight for your business with competitive terms.
Using the Builder’s Preferred Lender. Pretty much every Builder in the San Diego area will require you to be pre-approved by their Preferred Lender prior to you going to contract on a new home. Many Builders will not put you on their list for upcoming home releases until you have been pre-approved by their Lender.
One of the advantages of using the Builder’s Preferred Lender is that most Builders will offer an incentive to do so. These incentives are often in the form of a credit that is applied at close of escrow to pay for closing costs or a credit towards any upgrades or options. In the San Diego area, I am typically seeing credits in the amount of approximately $5,000 to $10,000. Lenders can afford to offer these incentives due to the volume of loans they will be processing for the new home development.
Builders like to use their Preferred Lenders as it simplifies the process of appraisals, underwriting and escrow closings as the Builder is dealing with one source through the entire sales and escrow process.
A wise new home shopper should always shop for their mortgage. Although it may be attractive to receive the Preferred Lender credit, are you really getting the best terms on your mortgage? My recommendation is to consult with any financial institutions you have a good relationship with. Many banks will offer very competitive rates and discount them if you already have a banking relationship with them.
You are not required to use the Builder’s Preferred Lender.
You could also consult with an independent Mortgage Broker that is able to offer many various loan options and competitive rates. These independent Lenders have more flexibility in their underwriting standards and have many sources for investors. The more choices you have the better chance of obtaining competitive terms and rates.
Keep in mind that the Builder’s advertising their home prices with base pricing. Prices will vary depending on the floor plan, the homesite, views, any pre-selected options and upgrades that the Builder has already applied to the home and closing costs.
The Lender incentive may look like a great way to save. However, if the interest rate the Preferred Lender is just a small percentage higher than what you can get elsewhere you will end up paying more in the long run.
#2 Making the Wrong Homesite Selection
Most buyers of new homes in today’s market do not have the option of waiting for the perfect homesite as the Builders only release a few homes for sale in phases. If you are on a schedule where you must have your home by a certain time you are stuck with what they have to offer at that time. What many buyers do not consider, although the homesite and plan for that homesite seems to work, is how it will affect the resale value of the home.
Homes near busy roads, a steep slope in the rear yard, lack of privacy, size of lot and view all affect the resale value of the home. They may sell quick when the Builder is flying through their sales program but when it comes time to resell your home may not sell as quick or at the price you thought it would.
#3 Not Factoring in the Time and Cost to Landscape
New homes in the San Diego area do not come with the rear yard landscaped. Many are not offering landscaping in the front yard as well. You will probably receive your home with a small concrete stoop outside you rear and side doors as required by the building codes for occupancy. This means you will have to landscape you yard which ii typically required by the Builder and the HOA within a period, typically between 6 & 12 months. Landscaping will include the design, design submittal and approval by the HOA prior to any work beginning. Minimal standards will be required so don’t expect to just mulch the yard.
Depending on the size of the yard and whether your new home is a townhome or single-family home you could be spending a considerable amount. I have seen townhome yards landscaped for as little as $10,000, and single-family homes landscaped for up to $150,000 without including a swimming pool.
Before you make the commitment to buy your home be sure to evaluate what your landscaping wishes are. Get some design concepts and estimates from Landscapers and then determine how you are going to pay for it. You won’t be able to bundle this expense in your purchase mortgage as the work will need to be done after the close of escrow.
My suggestion is to understand the costs to landscape prior to purchasing. If the new home community has been selling and there are homes already landscaped, ask some of the owners nearby what they paid for their landscaping. By talking with them they can also share with you the challenges they may have had during the process and recommend any Contractors.
If you are working with a Real Estate Professional that knows new construction, that person should be able to provide suggestions on Designers & Contractors as well as what will increase the value of your home. Just like spending too much on upgrades and options, if you spend too much on landscaping it will be hard to recapture the costs when it comes time to resell.
#4 Not Knowing What’s in the Pipeline
Most new home buyers are only considering what is selling now. They tour the model homes and fall in love with the homes. I believe that you should explore all your options. The sales person at the new home community is not going to tell you about other homes that might be coming on the market soon in the area. Many times, they just don’t know. They will always suggest you should buy now because prices are going up, or homes are running out, creating a sense of urgency.
Not all new homes are advertised in the same way. Some do not publish on national websites and some never make it to the local listing service. The Builder’s don’t want you to know what’s coming next as they are eager to sell what they have in place now. The advantage of working with me is that I know what’s in the pipeline, where and when the next community will open for sale.
If you are on a tight timeline to buy, it makes sense to buy what is available to meet your deadline. If you are flexible on timing be sure to understand the pipeline as there might be a better home and community that will fit your needs.
#5 Poor Decisions on Upgrades and Options that Cost You More
I have written several articles on the upgrade and option process when buying a new construction home. There are three big mistakes I see buyers make:
Over upgrading the home. When you see the new model home you pretty much want it all. It’s very tempting. You need to consider for an example on a $1,000,000 house that if you spend $150,000 on upgrades (15%) the cost of the house is now $150,000 more. This means you will be paying tax on the base price with the upgrades and options price added to the assessed value.
Assuming your new home is worth more compared to others. After closing, your home will be more expansive then others in the new community assuming that others did not spend as much. There may be many custom upgrades you selected that have no interest to a future buyer. This includes custom painting designs, very expensive flooring, custom tile work with designs that only appeal to you, unique countertops that can be outdated and much more. When it comes time to sell, you will not recapture your costs on those upgrades.
Here is where I see buyers get carried away. Upgrading the cabinets excessively. You can easily spend another $20,000 to $30,000 on that million-dollar house upgrading the cabinets. The Builder will only offer you a few cabinet door designs and colors as their standard. Be sure to consider the make, colors and construction of the base cabinet package the Builder offers.
Part of the due diligence before you go to contract is to ask to see the costs for all the options and upgrades offered by the Builder. I also encourage, if the Builder will permit, for you to visit the Design Center prior to going to contract.
Not upgrading something that will cost more to do so later. If there are a few items you think you can wait on to upgrade later yourself, that is understandable. There are some items that are not easy to perform later and may end up costing you more then if you had the Builder do so. A few items include:
- Changing the kitchen sink where you will have to resize the sink cutout.
- Re configuring your kitchen cabinets to facilitate a built-in refrigerator or a double oven.
- Adding more recessed lighting, pendant lighting or electrical outlets. On the lower level it is expensive to rewire in the ceiling. On the upper level this should be a bit easier since you should have attic access.
- If you plan to have wood or tile floor throughout, there is extra cost to later tear out and replace the baseboard trim, door trim and undercutting the door frames to accommodate the higher floor levels.
It is my opinion that if you plan to stay in your home for a very long time and can afford all the bells and whistles then do so. If you must sell in less than 5 years you are making a mistake.
#6 Not Knowing the Neighborhood, Builder and Planned Area Changes
Get familiar with the neighborhood. My best piece of advice before buying in a new community is to walk around the areas of the new home community that has already been built. Plan a visit in the evening to see what kind of activity is going on as well. Try to talk to some of the new homeowners and get their opinions of life in the neighborhood, challenges they may have gone through and how the Builder performed with delivering their home and handling any deficiencies and warranty work.
The community sales team will never say anything negative regarding the community. They will only point out how wonderful everything is.
You should also be aware of any new changes that may be happening to the area outside the new home community. If you have the time, visit the city Planning Departments to inform you of what is planned in the future. There may be impacts with new development such as housing, schools, commercial, road construction, parks and more that could benefit your community or have a negative impact.
#7 Not Researching the School Districts
So many homebuyers with school age children buy in a certain area because of the schools. Get to know the schools your children could attend. Make an appointment with each school to discuss any future changes planned for both the school itself and any realignment in school districts. School districts change especially when you are in an area of rapid growth.
#8 Paying Too Much for the Model Home
If you want to wait and buy one of the model homes be it known that the price is almost always negotiable. The Builder wants to close out the community and move on to the next one, so they are eager to sell. Unfortunately, they would like to recapture all their costs they have in the models, so they usually price them high.
#9 Not Working with a Buyer’s Agent
There are so many items that a Buyer’s Agent can assist you with while buying a new construction home to protect your interest. Best of all there is no cost to you as most Builders pay a referral fee to the Buyer’s Agent. My 25 plus years’ experience in real estate, construction, development, and sales for Home Builders, makes working with me a wise decision when it comes to finding you the right home.
No one in the North County San Diego area knows the new home market better. For an example, I get many calls from prospective Buyers that are interested in a certain community. Once I know their desires, I gladly assist in shopping that community with the Buyer and make suggestions on what other communities might satisfy them both for a better home and for a better investment in their future. There may also be an existing home on the market that will fit your needs.
Don’t let your purchase be influenced by the salesmanship of the Builder’s team.