Low Inventory, Should You Buy from Home Builder? Know the Pros and Cons First.

For those individuals facing frustration due to the scarcity of available homes on the market, purchasing from home builders might appear to be a straightforward solution until complications arise.

Below is a summary of an article by Veronica Dagher of WSJ (Sources 1 and 2) that was recently published.

The allure of brand-new homes has surged in neighborhoods where homeowners hesitate to part with their properties because of their low-interest-rate mortgages.

Recent statistics reveal that new-home sales constitute approximately 15% to 20% of all home sales in the current market, which could soar to 30% in specific regions. This is a significant shift from the historical average of 10%, as Lawrence Yun, the National Association of Realtors chief economist, points out.

Interestingly, the price discrepancy between newly built homes and older ones is contracting and now stands at its narrowest margin in nearly two decades. According to Sheharyar Bokhari, a senior economist at Redfin, the median sales price for new houses sold in June 2023 was $415,400, whereas existing homes went for $410,200, as reported by the NAR.

Buoyed by profits from the pandemic, builders are also enticing potential buyers with incentives to reduce mortgage rates or closing costs. This trend has been exemplified in the case of Hayley and Tyler Dupee, who recently acquired a four-bedroom, two-bath new home in Ladson, S.C., for roughly $312,000. Their decision was partly swayed by the alluring incentives provided by the builder, such as an intelligent home security system and window blinds. Hayley Dupee remarked that choosing a new home became a clear-cut decision due to budget constraints, especially after encountering fierce bidding wars and the prospect of expensive renovations associated with existing homes.

While moving into an existing home may expedite the relocation process, it could entail steep repairs and upgrade expenses. On the other hand, new homes generally command higher prices, and buyers often need to display flexibility regarding their move-in dates due to potential construction delays. However, purchasing from a builder allows for some customization options. According to data from the Commerce Department, constructing a house takes more than eight months. Financial advisers and builders caution that buyers of new homes might need to be more accurate in their purchase contracts, make ill-advised shortcuts, and become frustrated with unforeseen delays.

 

Here are five key factors to contemplate when considering a purchase from a builder:

Strategic Upgrade Selection:

When opting for upgrades, it’s prudent to consider elements that could become costly and challenging to implement post-construction. Angie Hicks, the chief customer officer at home-services company Angi, advises that these improvements are more cost-effective during construction. It’s also advisable to assess the potential impact on the home’s resale value before deciding where to invest or cut corners. Focusing on essential systems like plumbing and electrical and high-return areas like the kitchen can be a wise approach.

Selective Cost-Reduction Measures:

Builders often provide opportunities to save on costs without compromising quality. For instance, modifying the steepness of the roof pitch can reduce expenses while maintaining structural integrity. Similarly, opting for square corners in drywall installation instead of rounded ones can yield savings.

Scrutinize the Contract Details:

Careful examination of the builder’s contract is essential. Builders might exercise the flexibility to substitute materials based on availability to meet deadlines. It’s essential to understand which choices can be overridden by the builder and under what circumstances. For instance, some appliances showcased in model homes might not be included in the standard package. Clarify which devices are part of the deal.

Budget for Potential Price Increases:

Builders often retain the right to adjust prices based on fluctuations in material costs. Homebuyers should factor in the possibility of cost increases when setting their budgets. Charlene Wehring, a financial adviser in Bellville, Texas, advises careful contract analysis and suggests setting aside around 10% to 15% as a contingency budget.

Anticipate Imperfections:

Homebuyers sometimes forgo a home inspection before closing, assuming their new home’s warranty covers any issues. Mark Barnes, a Realtor in Charleston, S.C., recommends against this practice. He suggests getting a pre-drywall inspection to identify problems that might not surface until after the warranty expires. Angie Hicks offers three inspection points during the home-building process: before pouring the foundation, before installing drywall (when electrical issues can be quickly addressed), and upon completion, to ensure compliance with building codes. Engaging an independent inspector for these checks, typically costing between $280 and $400, is advised.

 

Typical problems identified during inspections include humidity within the home, drywall cracks, and improperly installed siding.

 

Sources:

1) Wall Street Journal: https://www.wsj.com/articles/buying-newly-built-home-tips-mistakes-437b3cbb

2) Wall Street Journal: https://www.wsj.com/articles/new-home-sales-boom-builders-6c736630