How To Buy a New Construction Home

Buying a House, Real Estate, Tips for Buying a House


There’s something special about buying something custom-made for you and a home is no exception. A new construction house gives you the freedom to design your own home to your particular specifications. Just don’t forget that new construction homes come at a premium and that you’ll have to endure a lot of planning and waiting.

Even if you don’t want a fully customized home, buying new construction might be a good option, especially if you’re one of the millions of frustrated home buyers battling it out with competing offers in a seller’s market.

In this article, we’ll cover the process of purchasing a newly constructed home, guiding you on the benefits and drawbacks, what to expect and some tips and tricks to help you along the way.

What to Know About New Construction Homes

A new construction home is a home that’s brand new and has not been occupied by anyone else.

There are several different ways to buy a new construction home, including:

  • Purchasing vacant land and building a new construction home on it.
  • Buying an existing house, demolishing it, and building a new construction home in its place.
  • Buying a new construction home in an existing neighborhood.
  • Buying a new construction home in a new subdivision.
  • Buying a unit in a new construction condominium.
  • Buying a new construction townhome.

As you can see, there’s more than one way to get your hands on a new construction home. But is buying a new construction home better than buying a house that’s been around for a while?

New build vs. old house: Which is better?

Buying a new construction home has some distinct advantages over buying an older house, but each has benefits and drawbacks. Ultimately, deciding whether to buy a new house or an old house comes down to budget and personal preference.

In general, new construction homes tend to cost roughly 10% more than older construction homes. As of May 2022, the median sale price of new construction homes in the United States was $449,000; meanwhile, the median sales price of existing homes in the U.S. was $407,600.[1] [2]

Part of the reason new construction homes are more expensive is that builders have to make money for all the time and effort that goes into constructing a new home. While it’s hard to pinpoint the average markup on new construction homes, the National Association of Home Builders reported builders had a net profit margin of 7% in 2020.[3]

On the other hand, new construction homes usually have good resale value. In addition to using newer materials and construction techniques that are more energy-efficient, a new construction home will often have a more modern design that appeals aesthetically to home buyers.

Customization

Finding your dream home in your price range is virtually impossible, but by customizing a new construction home, you can design the home of your dreams.

No bidding wars

Bidding wars can be commonplace in a strong seller’s market, but by buying new construction, you may be able to bypass having to compete with a dozen other offers.

Less maintenance

New construction homes are far less likely to require maintenance than older homes simply because everything in them is new.

Choose your location

Whether you’re building a custom home from the ground up or intend to buy a new construction home in a completed development, you’re going to get to choose the location of your new home.

Most up-to-date energy efficiency features and technology

Technology has advanced almost every part of a home and we’re not just talking about smart thermostats and high-tech security systems. New construction homes are more energy-efficient all around, from the windows and doors to appliances and air conditioning.

Potential for appreciation in value

Homes are one of the few purchases you can make that will appreciate in value. Though it’s never a guarantee, new construction homes have solid potential for price appreciation if you hang on to them for a few years.

May come with builder’s warranty

The builder of a new construction home may offer a warranty on their work. A builder’s warranty can range from 1 – 10 years, offering coverage on things like structural defects.

Personalization can get expensive

With new construction homes, prices can be a moving target. And let’s be honest, those prices only move in one direction – up. A custom home built to your personalized tastes is a wonderful way to create your dream home, but the costs can quickly get out of hand.

It can take a long time

A lot of materials and work go into building a new construction home, so prepare to endure at least a 6 to 12-month wait if you’re planning to build a new home.

Budget creep

Labor and materials shortages and supply chain snags can easily delay a project, not to mention the possibility of issues with government inspections and permits. In many cases, you can also expect budget creep, with the original price estimate increasing as the home is built.

Bad or inexperienced builder

If you buy a new construction home but don’t choose the builder, there’s no telling how well the home was made. Though it might be rare, ending up with a bad or inexperienced builder could leave you with a poorly built home and a handful of problems.

Area could take a long time to mature (especially the grass and trees)

If you’ve ever been to a new development, you probably noticed that the grass, trees and shrubs can look a bit scraggly. Because, in a new development, even the landscaping is new. After a few years, the neighborhood should blossom into a lush oasis, but keep in mind that this process takes time.

Houses might all look the same

We’ve all seen neighborhoods filled with homes that all look eerily alike. If you’re buying a semi-custom home, there’s a good chance your home will look a lot like the other homes in the development.

The Process of Purchasing a New Construction Home

The process of purchasing a new construction home consists of many of the same steps as buying an existing home, with a few deviations along the way.

Decide which type of new construction home is right for you

The step in purchasing a new construction home is deciding which type of new construction you want to buy. There are three main types of new construction homes: tract homes, custom homes and spec homes.

Tract homes

Tract homes are constructed by builders who purchase a plot of land and split it up into smaller lots to build individual homes on. With tract housing, builders construct homes in large quantities, with little or no variation between the different homes. The benefit of tract homes is that you can move into them faster, but they offer little opportunity for personalization and may be more basic than other types of new construction.

Custom homes

Custom homes are the most expensive type of new construction home, but give you the freedom to choose the specifications you want. You can think of custom homes like custom clothing, with the house being built from the ground up and incorporating your personal preferences.

Spec homes

Spec homes (short for speculative homes) are houses constructed by a builder who is speculating on what home buyers might want. A spec home is like a semi-custom home, since the builder put some thought and effort into the home’s design, though their style might not match yours.

In addition, you may be able to select some of the finishes of a spec home, though you won’t be able to customize it much beyond that. Finally, spec homes are usually move-in ready (or close to it).

Choose a mortgage lender and get preapproved

Unless you plan on paying with cash upfront, the next step in buying a new home is to find a lender to finance your new construction home. Since there are different types of loans you can use to finance the purchase of a new construction home, you’ll want to work with a mortgage lender who has the relevant experience to provide you with the proper guidance.

Though you might take out a traditional mortgage on a tract home that’s already been built, it might be more appropriate to look into a construction loan or bridge loan to pay for a custom home. Regardless of the loan type you choose, you’ll want to get pre-approved so you can present yourself as a serious buyer.

Using The FHA’s One-Time Close Loan

Hire a real estate agent who is experienced in new construction homes

Many real estate agents will specialize in certain types of property. If you’re looking for a new construction home, hire a real estate agent who has experience working with buyers of new construction houses.

Choose a location

Location, location, location. You’ve heard it a thousand times before, and that’s because it’s such an important part of the home buying process. You can always build a new home or make improvements to an existing home, but you’re going to have a tough time changing the location.

When evaluating where you want to build or buy your new construction home, it’s important to evaluate:

  • The school district
  • Public transit options
  • Local amenities, like shopping and parks
  • Crime rates
  • Proximity to your workplace
  • Property taxes
  • Whether there is a homeowners association

Research builders and home construction companies

Before buying your car, you probably asked a lot of questions, like how many miles it gets to the gallon or charge, how it handles in the snow, what the warranty covers and whether it comes with leather seats.

Buying a house is no different, and you should thoroughly investigate builders and construction companies (and their previous projects) before deciding which one to entrust with building your home.

So, what exactly should you ask when researching builders and home construction companies?

You can also ask your real estate agent for a recommendation and, as with anything else, you can benefit from reading online reviews about the companies you’re considering doing business with.

Design your home

For fully custom homes, you should, at a minimum, hire an architect and a general contractor.

Before any ground is broken on your new home, you’ll need to select some basic details for your house, like how many square feet the house should be, how many levels it should have and the number of bedrooms and bathrooms.

Thankfully, most builders can get you off to a rolling start by showing you some examples of model homes, floor plans and finishes (like countertops and cabinet hardware), which can help give you some ideas for what you want your house to look like.

Your home building team will be able to walk you through all the steps in designing your new construction home, including the zoning and permitting requirements, budget, finishes and more.

Inspections

Unfortunately, just because something is new doesn’t mean things can’t go wrong, and it certainly doesn’t mean you should forgo a formal inspection. If you’re buying a new construction home, you need to have an experienced inspector come out to make sure everything is in perfect working order.

If there are any defects or concerns, create a checklist of tasks to be completed before project completion. Then, once the builder has addressed these items, have the inspector revisit the property once more to make sure all issues have been fully resolved.

Final walkthrough

During your final walkthrough, make sure to bring a checklist of everything you want to inspect, including, but not limited to:

  • The home’s exterior
  • Doors and windows
  • Appliances
  • Lights
  • Sinks and toilets
  • Floors, walls and ceilings
  • Cabinets

If you find a defect, make sure to document what the issue is and notify your real estate agent ASAP. At this stage of the game, most home builders are quick to provide a solution since they want to get to closing, which is why it’s imperative to do a thorough walkthrough before you give the go-ahead to move forward to closing.

Close on your new home

Congratulations! Closing on a new home is an exciting milestone in your life and one that should be celebrated. And how do you celebrate? By signing your autograph on all the paperwork, of course!

The actual closing on your new home will usually take around 1 – 2 hours, during which time you’ll be asked for your signature more than once, so make sure to bring an ergonomic pen or get ready for some nasty hand cramps. But don’t worry, it’ll all be worth it when you’re handed the keys to your very own brand-new home.

Tips and Tricks to Buying a New Construction Home

When you’re ready to take the next steps to buy a new construction home, here are some additional tips and tricks you can add to your arsenal to get yourself a better deal and avoid unnecessary headaches and stress:

  • Negotiate with the builder on the price
  • Include additional funds in the budget to account for unpleasant surprises
  • Shop around for lenders
  • Understand the builder’s warranties and delivery timelines
  • Avoid upgrades that won’t increase the home’s value

To Build or Not To Build

Choosing a new construction home can come with a whole suite of unique benefits, but it’s not for everyone. If you have the funds to buy a new construction home and don’t mind the wait, you’ll probably enjoy the modern finishes and reduced maintenance associated with a new home.

But, if you want to move into a fully developed neighborhood or have a limited budget and timeline, buying an existing home might be a better fit.



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