As opposed to buying a resale home (one that another family has lived in) this is an interesting choice. It has both benefits and disadvantages.
A resale home will have at least some deferred maintenance; repair jobs that the other family (or their landlord) couldn’t afford to do, or never had the time, or the desire to complete.
The myth about new home builders is that they make huge profits. A really good builder, with perfect timing, a favorable market, and a relatively quick turn around time (from start of planning to delivery of the last home in two years) will make between 2% and 5% profit. Here is an odd wrinkle though. They make that profit not on each home but literally on the last 2 – 5 % of the homes which close. So if they are selling 50 homes, ALL of the profit is made on the last three homes. When you ask for a 5% discount on the home you are asking the builder to build that house at risk over a two year period, for free. He just gets out with what he put in and no compensation for his time or effort.
The community is one giant construction site. Attempting to enter your home prior to the close of escrow can be both dangerous and cause delays in the completion of your residence. Please do not communicate with the men and women working in your home or ask them for entry. If you absolutely need something contact your Sales Professional for a solution. Workers, perhaps in a less than PR related tone, would ask you to leave if you entered the construction area. They are doing this for your safety and in order to complete your home as nearly as possible on schedule.
Story - As a Sales Professional I knew that all the tradesmen working on homes consider themselves, and rightly so, to be craftsmen, some even artists. On a cold rainy winter day I walked the reserved Buyer into the garage of his under construction home. The predominantly Latin painters were having their lunch in the shelter of “his garage” To my shock the Buyer said, “So, are there any burritos in the walls?” The foreman said, “No.” and added in Spanish, “Not yet.” DO NOT INSULT THE WORKERS!
In purchasing new, you will be given the opportunity to add many things to your home. They might include items like wood stair treads, additional interior doorways, ceiling fan pre-wires or the actual fans, upgraded cabinets, home theatre systems, fancy iron work or railings, every possible kind of flooring from cork to marble to high end carpet. The Design Center for a builder is a very high profit center. Like everything in life, there are times that you can negotiate and times that you cannot. This is one area where you should give them one list of all your desires and then work on getting a better overall price on the package. If you are only getting a few thousand dollars worth, don’t expect much of a break. If it is $30,000 then negotiate hard. You will save money.
Do not wait to order your options. As construction progresses it becomes impossible to add certain options. Even one day can make a difference. If the house is framed for instance, one of the next steps is the staircase. A good carpenter can do that in two days tops. If you were thinking about getting open railings instead of drywall railings you would have missed your opportunity.
Before the close of escrow, there will be a New Homeowner Orientation, during which you may ask questions about your residence and share any concerns over the work which remains to be completed. At the time of this Orientation, there may be backordered items or work in progress. Consult your contract for the details of this situation.
You will probably need to install, and pay for, at least landscaping the back yard, a back patio, trees, window treatments, and perhaps fencing. Don’t discount the cost of these items. If your new home has 28 windows and you plan to drape and blind them it can easily run $200 per window. That is $5,600. You will need that money in cash. Landscaping and fencing can be modest or very expensive depending on your tastes.
If you have been using a Loan Officer to get prequalified there are a few notes that take on special significance when purchasing a new home. Often new homes are reserved and/or contracted as sold for many months prior to the actual completion of the home and its closing of escrow. For this reason, the Seller/builder needs to take special care in making sure a Buyer is fully qualified to purchase the home. This is especially true because to some degree you may be asking for options that customize the home to your needs and tastes. The Seller/builder will have a preferred lender with whom they willrequire you to do a full application.
If you continue with your original Loan Officer and the preferred lender’s Loan Officer this is called a “double application” or double ap. Because Seller/builders are never certain about the honesty and the accuracy of what they call “outside lenders” they will probably offer you an incentive to use the preferred lender to complete your loan and the transaction. They will tie this incentive, which can be quite substantial to your final use of the preferred lender for obtaining the loan. The only exception to get the incentive without the use of the preferred lender is in the case of an all cash transaction.
If you have been working with another lender, that Loan Officer knows that the builder incentive will probably knock him or her out of the box as far as getting your loan business. For them it is just part of the game and they may complain, but they do know it is inevitable. They expect to lose a certain number of loans that way. They cannot compete with a cash incentive up front, though they may save you money on a monthly basis. It can take many years to make up the difference.
You CAN double ap and use the rates that you obtain from one to improve the competitive nature of the other. You must get these kinds of commitments in writing to make them effective.
One of the hardest questions for most Buyers to answer is: how long will I own this property? If you are in the military, for instance, and plan to transfer in three years and sell the place at that time, your approach to everything you do will be different. If you plan to live there for two years and then turn it into a rental, then different again. This is especially important in how you analyze the loans in which you are interested. If your outside lender offers say a 5.25% interest rate on a $200,000 loan and the builder’s lender is giving 5.50% but paying $5,000 of your closing costs here is how you analyze the difference.
You will save $32 per month at the outside lender’s lower rate but you will lose the $5,000 in free closing costs. It will take you 156 months to make up the difference (13 years.) If you don’t plan to keep the property that long then you would be better off to go with the builder’s preferred lender. The other misunderstood part is that $5,000 today is worth a lot more than $5,000 a decade down the road returned at the rate of $32 per month. Cash is king.
Also, don’t assume that the preferred lender will have a higher rate. Remember, it is the Seller/builder that is paying for the closing costs, not the lender. So it is in the lender’s interest to be competitive and they can usually match or beat the outside lender’s rate.
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