New Construction – Part 1

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You don’t have to look at the statistics to know that residential new construction is booming in many areas of the country. Both first time and “move-up” buyers are deciding to be the first occupants of a new home, but what are some of the reasons these buyers are deciding to go through the process of building?

Today’s new homes offer more benefits than ever before, in terms of technology, energy efficiency and style. This is the first of a series of articles outlining eight of the reasons many buyers are making the choice to build from the ground up, or connect to a home at some point in construction.

#1 – The Opportunity to Make Your Own Design Choices

Over the last decade, even homebuilders selling homes at the lower price range of the new construction market have allowed buyers to influence the design by picking from pre-selected options for flooring, cabinets and both interior and exterior colors. The options for selection can be limited or so numerous that the task can be confusing AND drive up the price. After purchasing an existing home, most buyers put their own touch on the home by painting and decorating so their new home will reflect personal style. Being able to make decisions during construction allows buyers to incorporate these selections into the purchase price. Instead of spending the first months painting and installing new light fixtures, and paying for them after coming up with a down-payment, buyers can have full or limited design, depending on the builder, price point and at what point they commit to the house.

At the lower new construction price ranges, selections are usually very limited. They may include color choices among the same grade of quality, such as choosing among two brown and a grey shade of the same carpet or selecting one of two neutral paint colors.

Generally, as price increases, the number of choices available will also increase. Buyers may be invited to a builder design center, where they can choose from a greater selection of floor coverings, cabinets, granite, fixtures and other design elements. Most often, builders group these elements into various “levels” that are associated with a charge to upgrade to the next level. For example, builders might offer two standard choices for granite countertops with a wider variety of granites available at level two and three and selections of other materials, such as quartz or marble at level four. Changes can also be made to a completely different group of materials, with level one being Formica countertops and vinyl tile in the kitchen to a granite countertop and ceramic tile or engineered hardwood at level two. At the far end of the “choice spectrum” are totally custom homes, in which the buyer generally initiates the selection of the lot then finds a floor plan and builder.

Although it seems there can’t possibly be a drawback to being able to choose how your home will look when the keys are placed in your hand, there are a few considerations buyers should weigh as they start the process.

Model homes, generally at the entrance to a development, are typically homes with several, perhaps numerous, upgrades. Buyers fall in love with the designer choices, but the sticker shock of the total price tag of all those choices can raise the base price significantly. There are two considerations here. The first is whether the base price plus desired upgrades will still fit within the buyer’s budget and the amount a lender has pre-approved them to spend. The second, and more challenging, is which of those selections will add value when it comes to appraisal and resale.

This is where a Realtor® with experience representing buyers in new construction can provide value. Knowing local market values for comparable homes (such as price per square foot, style and level of amenities) is crucial. While a Realtor® might not influence a buyer to choose grey or beige tones, they can be instrumental in helping a buyer decide at what point they should stop spending money on upgrades in order not to overprice a home compared to other homes in the same area, limiting potential for the buyer to capitalize on their investment if they sell again within a few years. A buyer’s representative can also help buyers decide what features will add resale value by pointing out that saving money by selecting carpet for a living room instead of paying the upgrade for hardwood might cause future buyers to pass on the home in favor of another. It is also important to consider the value of various levels within the same product. For example, a level two standard engineered hardwood might not look much different (or add equivalent monetary difference in value) as compared to the level six hardwood the buyer falls in love with, both when it comes to the appraisal or future resale value. It’s all about getting the most bang for your buck.

Appraisal is another key word here, as a buyer who spends too much on upgrades risks running the purchase price up past the appraised value. In most cases, this means the buyer must come to closing with additional cash (beyond their planned upon down-payment and closing costs) if the home doesn’t appraise for the final purchase price. This is often a stipulation of a builder contract. If the home doesn’t appraise and they can’t come up with the cash to close, a buyer may risk losing the home and potentially all the deposits paid to the builder. Again, an experienced Realtor® can help buyers avoid this pitfall by providing CMAs for the community, as a way of measuring the market value of completed homes in an effort to guide buyers to a price at which they should consider applying the brakes.

It’s not just about price when it comes to the selection of upgrades, it is also neutralizing personal choices. While a buyer may love a strong green and want to splash it everywhere…carpet, walls, countertops, paint….it might personalize the home so much that it also affects future resale potential. The builder’s agent or a builder’s design consultant may also limit a buyer’s ability to make very personal choices as well, in an effort to limit the builder’s risk in the event the buyer backs out if financing falls through, or for other reasons. No builder wants to be stuck finding another buyer for a pink stucco house with a red roof and orange door.

If a buyer has questions, it’s a great idea to ask their Realtor® to show them comparable homes, both new construction and relatively new resales of what was purchased as new construction. The final consideration relates to the deposit. Builders charge a standard deposit to connect a home to a buyer, but most builders also require a second deposit when the upgrades are selected. The structure of this deposit can vary widely, from no additional deposit if the buyer doesn’t go above a certain amount, to a complete deposit for any selections made above the standard choices of the base package. Typically, it is a percentage of the upgrades selected, and it is usually non-refundable even if the initial construction deposit is. It is important to ask about the selections deposit in advance, before you go under contract with a builder. It is also important to ask what part, if any, of that deposit is refundable if you don’t go through with the purchase. The choices can be limited, or almost unlimited. Although there is a lot to consider, careful planning and the help of an experienced buyer’s representative can eliminate much of the stress.

Observing the construction of a new home is rewarding and can be fun, with support and guidance.