Buying New Construction 101

Looking to buy a home from a builder? We've got you covered with all the important do's and don'ts!

In today's competitive housing market, purchasing a brand-new home might just be the solution you've been searching for. With existing homes in short supply, many homeowners are reluctant to put their properties up for sale and give up their low-interest-rate mortgages.

Recent data from the National Association of Realtors reveals that new-home sales now make up around 15% to 20% of all home sales, and in some markets, that number could even reach 30%. It's clear that more and more people are opting for the appeal of a newly-built property.

But why the sudden surge in popularity? Well, for starters, the price gap between new homes and older ones is shrinking. In fact, it's now the smallest it's been in nearly two decades. In June 2023, the median sales price of new houses stood at $415,400, compared to $410,200 for existing homes. So, the financial advantage of buying new is becoming harder to resist.

Builders, fueled by pandemic profits, are also sweetening the deal by offering incentives to buyers. Whether it's reducing mortgage rates or covering closing costs, they're doing what they can to make the experience even more attractive.

Of course, there are factors to consider when going the new-home route. While existing homes might offer quicker move-in times, they often come with pricey repairs and upgrades. On the other hand, new homes tend to be pricier, and buyers must remain flexible with move-in dates due to potential completion delays. However, new-home buyers also sometimes enjoy the advantage of customization options and the ability to add personal touches to their dream abode (not all builders do this, however).

Before you jump headfirst into the new-home buying experience, it's crucial to be well-prepared. Financial advisors and builders recommend paying close attention to purchase contracts and being patient with any potential delays.

So, whether you're a first-time buyer or searching for a fresh start, keep these five important factors in mind as you embark on your journey to homeownership:

1. Which upgrades are really worth it? Consider the upgrades that may become difficult and expensive to do once your house is finished, like installing a gas line for an outdoor grill or wiring for additional outlets. These improvements are more cost-effective when you're building your home from the ground up.

It's also important to think about the resale value of your home when deciding where to invest or cut corners. Focus on systems that keep your home running smoothly, such as plumbing and electrical, as well as areas that offer a high return on investment, like the kitchen.

2. Now, let's talk about special metro tax districts. Special metro tax districts are areas within a city or metropolitan region where property owners pay additional taxes in order to fund specific projects or services. These districts are sometimes referred to as "special assessment districts" or "special service districts". The taxes collected within these districts are used to pay for things like infrastructure improvements, public safety, and other services unique to the area. In these districts, property owners pay an additional tax on top of their regular property tax to fund these projects. When considering new construction within a special metro tax district, it's important to weigh the additional tax burden against the potential benefits of improved infrastructure and services.

As an example, the standard property tax rate in Colorado is 0.5% (one of the lowest in the country). Most metro districts I have seen raise property taxes to be between 1-2% of the value of the home. On a $500,000 home, your taxes outside of a metro district would be about $2500 per year ($208/month). In a metro district with a 1.5% tax rate, your taxes would be $7500 per year ($625/month). These districts can drastically increase your monthly payment after your first couple of years in the property, so make sure you understand what your risk is!

3. Pay close attention to the fine print. Home builders often have the flexibility to substitute materials based on availability and to meet deadlines. Read the developer's contract carefully and noting which choices can be overridden by the builder and in what circumstances.

Keep in mind that the top-of-the-line stoves and refrigerators you see in model homes may not necessarily be included in a standard builder home. Don't hesitate to ask your builder about the appliances that are included with your house.

Additionally, most contracts are set up to favor the Builder. They can sometimes increase the cost of the home while you're under contract, and there aren't penalties to them for delays as long as they complete the home build within 2 years of the Contract.

4. Stay Prepared for Unexpected Costs. Builders have the right to adjust prices based on material costs, so it's crucial to have some extra cash set aside just in case. It has been suggested to allocate around 10% to 15% of your budget for contingency expenses. Better safe than sorry! Additionally, most new builds will be in communities with HOA's. Initially, those HOA fees are low - expect that they will go up in the first few years as the HOA starts to take care of more things as homes sell. Additionally, the property taxes will be artificially low because they will be based upon the raw land. Once the land is improved, your property taxes will increase.

5. Don't Overlook the Importance of Home Inspections! Home inspections are extremely important, even if your new home comes with a warranty. While a warranty covers various defects, it's always best to be thorough. Consider getting a pre-drywall inspection to catch any hidden issues before it's too late. You can have an independent inspection done at three key stages of the building process: before the foundation is poured, before drywall is installed, and at the final stage for code compliance. Investing in quality inspections is totally worth it! It is also highly recommended that you perform a home inspection around the 11 month mark of owning your home, just before your 1 year warranty with the builder expires. This way you can make sure any new issues are addressed before the builder is off the hook!

Remember, being proactive and well-informed throughout the whole process can help ensure a smoother and more enjoyable home-building experience!

Have more questions? I'm here to help! Email me at brandondazzo@brandondazzo.com