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Do’s and Don’ts When Buying New Construction Homes

The vision of a new home with the ability to upgrade finishes, alter floor plans and be first to occupy a home draws buyers to model homes from builders and developers every day. According to industry sources, more than 70% of home buyers want a new home. These new construction-focused buyers may see a picket fence, but they must be prepared to ask the right questions and watch for red flags before signing on the line.

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-Have your own agent. Believing they could get a better deal or out of ignorance, many buyers use the developer’s sales agent to represent them. New construction buyers should research what a dual agent can and cannot do under state real estate licensing laws. Most states require written acceptance of dual agency by both parties. All homebuyers must be represented by an agent who has a fiduciary responsibility to them. Buyers should not forget that most developers require their agent to accompany you the first time you visit a sales center.

-Ask how much this house costs as we see it. Models can be completed with each update that the developer offers as an example for buyers. Buyers are free to ask how much the model costs as they see it. Typically, this cost will vary drastically from the initial advertised prices for a development.

-Choose the right developer. Working with a developer is like a short-term marriage. Ask the developers’ sales agents for references. Do your own research on developers’ past projects, length in business, and complaints filed with business offices.

-Consider resale features. The allure of being the first to occupy a house sometimes clouds a secondary location or poor craftsmanship. Consider a resale home in a prime location before you sign the line just because it’s new construction.

-Ask for percentage of project sold. Developers love to promote the direct sale of projects. Ask how much of the percentage sold are reserves (dating back to the project) versus contracts (committed to the project). Some bookings do not go through due to a change of heart, financial concerns or occupancy deadlines.

-Have a lawyer review all contracts. Developer contracts favor the developer and are different from standard contracts approved by the local real estate board. Hire a real estate attorney to review all contracts. There is little leeway once you sign a developer contract, and they don’t like home sale contingencies.

– Investigate property taxes independently. Property taxes can be a financial surprise you didn’t expect with a home purchase. Because tax assessors have not valued a home or project, developers may underestimate how much property taxes will be. Complete your own due diligence and call your local tax authority to find out what the worst case scenario is.

-Carry out a home inspection. Never skip or waive the right to an inspection, the benefits far outweigh the costs and could save you a lot of headaches and expense down the line. New construction is not immune to flaws and dullness in workmanship. Hire a professional, not Uncle Bert. Perform the inspection at least seven days before closing.

-Consult about units purchased by investors. In the post-real estate bubble world, many developer contracts restrict speculators from buying units to trade in upon completion. Look for clauses in contracts that require buyers of units to be owner-occupied for the first 12 months after closing. Ask the sales agents what the owner occupancy percentage is for the project.

-Obtain habitability certificate. Local municipalities issue a certificate of occupancy after a unit has passed all building code inspections. Most mortgage lenders require a certificate of occupancy before closing on a loan. If you are paying cash, check before closing that the developer will give you a certificate.

-Understand why developers request paid updates in advance. Experience has taught developers that some buyers will not buy the unit in which they have specified the floor coverings, countertops, and kitchen cabinets that the developer has installed. Other buyers will want to select their own finishes and a unit that has finishes pre-selected by a finished buyer is a marketing problem for developers. Plan to pay upfront for all updates and changes you make to a unit, and if you decide to leave the project once you’ve paid for the updates, expect a fight from the developer if you want a refund for installed changes and updates.

-Require that your deposits go into an escrow account. Request that all deposits and payments you make go into an escrow account, not the developers’ business account. Research state brokerage laws to find out what regulations developers must follow with buyer funds. If disputes arise, it is easier to receive refunds from a neutral third party or escrow agent than from a developer.

Request copies of blueprints, floor plans, and surveys. It’s easy to forget about getting clean copies of your new home plans and floor plans with all the activity and decisions during the construction process. In the future when you want to make changes or sell, having the footprint of your house will save you money and time. Make sure the developer provides you with an up-to-date survey, showing only your parcel. Check that your new home also has its own parcel identification number issued by tax authorities.

-Investigation of guarantees in structure, finishes and electrical appliances. Developers often offer five- or 10-year warranties on the structural elements of a home and rely on manufacturers’ warranties for appliances, ovens, windows, and overhead garage doors. Beware of one-year warranties on structural elements.

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-Forget about requesting withholdings of unfinished jobs. Weather or material supply problems can interrupt the completion of a house. If some items are not needed for occupancy, the developer will want to close on your home. Make sure that any substantial items or features that are not complete in your new home have designated funds set aside for their installation or completion. Request that these funds be held and deposited into an escrow account at closing.

-Omission of the final written lists of pending points. You must have a final walk through at least three days before closing on your new home. Create a checklist of all incomplete or unfinished items. To-do lists can also call attention to items that need to be repainted or need extra attention. Both the developer and the buyers must sign the final agreement checklist. Developers must complete checklists within 30 days of closing.

-Tune during the construction process. Family, work, or distance can take your focus away from closely monitoring the construction and completion of your new home. Proactive buyers can spot design errors or irregular materials by visiting the job site regularly. For insurance reasons, some developers limit access to construction sites. Stipulate in purchase contracts the schedule of all visits during the construction of your new home.

-Be fooled by low ratings. Developers may use artificially low monthly homeowner assessments in new construction marketing materials. Plan for at least a twenty-five percent increase in assessments the first year after the developer hands over the association to the owners.

-Look at the costs between standard and enhanced features. There can be a big difference in quality and lifespan between construction grade and upgraded finishes and fixtures. It might be worth the extra expense to install better carpeting, cabinets, and faucets. Check builders’ prices for upgrades at your local housing center.

-Ignore developer incentives as a sign of slow sales. Free condo evaluations, stainless steel appliances, and plasma TVs are included to entice buyers to write purchase contracts. What many buyers think is a freebie are actually signs that a development is slow to sell due to increased competition from a lack of buyers. Incentives are a Band-Aid for flagging development.

-Be surprised when the developer sticks to the pricing. Developers of popular projects do not usually negotiate unit prices. However, sometimes a developer will add upgraded appliances or hardwood flooring in lieu of standard carpet. When a developer does not move in prices, it is because he has an investment formula for the project, which is normally costs plus twenty percent of profits.

– Disregard the risks of buying in pre-construction. Pre-construction prices can attract value-driven buyers. There is some risk in getting into a project before it has started. Verify that the developer has received the green light from local building authorities and has a proven track record of timely completion in the community.

– Defer the discovery of the costs of construction loans. Variables beyond the developers control can extend the completion of your home. Have contingency plans for cost overruns, temporary housing and bridging loans. Research rate lock expiration dates on mortgages, construction, or term loans.

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