5 Things You Should Know About Buying New and Pre-Construction Homes

by on April 29, 2012Shannon O'Brien

That new car smell can’t hold a candle to the smell of a brand new house. Nobody’s nasty cooking odors, no doggy or baby smells and no third hand smoke odors. Instead, you’re surrounded by the smell of new carpet and fresh paint. A new house is pristine, and that’s what attracts many to new home developments – the ability to impose one’s own style on a clean canvas.

Before you get into the car to visit your local model homes, take a minute to bone up on the differences between buying new and existing homes, and heed the following advice.

1.  The Greeter

buying new home constructionThat nice person you meet when you walk into the builder’s on-site office isn’t an official greeter; he or she is the builder’s real estate agent. Her job is to get you excited about the project, help you tour the model homes and sign you up to purchase one.

During the time you spend with the agent you may be pressured to use his services in the purchase of the home. A word of caution: don’t do it. Sure, it seems more convenient. After all, this person is right in front of you and can help you purchase the home you just fell in love with and can do so now – as in no waiting.

Although it may be legal in your state for this agent to represent both the builder and you, it isn’t wise, and here’s why: Fiduciary duty.

A real estate agent has a legal obligation to perform certain tasks for his or her client. One of the agent’s fiduciary duties is loyalty – the obligation to act solely in the best interests of his or her client. The agent must do everything he or she can do to gain her client an advantage.

How does this work when the agent represents both sides, a situation that is known as “dual agency?” Although agents in states where dual agency is legal claim that it works, the situation flies in the face of an agent’s fiduciary duty.

In layperson’s terms, imagine your divorce lawyer claiming that it’s perfectly fine for her to represent both you and your soon-to-be-former spouse. Dual agency is dual agency, whether it’s an attorney doing it (which is illegal) or a real estate agent.

So, above all else, remember that this agent’s primary obligation is to the builder, not you. Take the time to secure the services of your own real estate agent before viewing homes in the new development. When you arrive at the builder’s on-site office and sign in, there should be a space to list your agent’s name, so don’t neglect to do so. Once the on-site agent sees that you’re working with another agent, the pressure will be off to sign with him.

2.  The In-House Lender

Many new home developments are one-stop shops. It’s like being in a casino in Las Vegas. The whole place is set up so that you don’t have to leave for any reason – everything you need is right there.

The builder will most likely have an in-house or “preferred” lender and you may be pressured to use this lender. You may even be subtly given the impression that you must use this particular lender if you want to buy the home. Don’t give into the pressure and don’t be deceived. You have every right to secure your own lending, independent of the builder.

In fact, you owe it to yourself to shop a number of lenders, in addition to the builder’s. Ask the builder’s lender for a Good Faith Estimate (GFE). This form will list all the fees and costs of the loan being offered.

Since the GFE was standardized a few years ago, it’s much easier to compare offers. If you have any questions when comparing the lenders’ GFEs, ask your real estate agent or attorney for help. You can find a copy of the GFE, and an explanation on how to use it when shopping for a lender, on the U.S. Department of Housing and Urban Development (HUD) website.

3.  The Builder

Homeowners who defer maintenance of their homes are more common than we like to think. Putting off repairs only allows problems to fester, and many of them do so in areas we can’t see, such as behind walls or beneath foundations. It can be frightening to the novice homebuyer to think of all the things that may go wrong after the sale is final.

A new home, they surmise, won’t have these problems. And, they are correct in this assumption – there are no deferred maintenance nightmares awaiting them. There may be other problems, though, that a homebuyer should consider and guard against.

Builders and subcontractors frequently take shortcuts, causing the very nightmare conditions the new homebuyer is hoping to avoid.

While your loan application is being processed, take some time to check the builder’s reputation. It’s a simple process but one that may save you from throwing your money away on a home with major problems.

  • Check public records at your county courthouse. Look for lawsuits against the builder.

The experts at the National Association of Realtors® suggest that you walk around the development if there are homeowners living there. Knock on some doors and ask the occupants if they’ve experienced any problems with the new home.

4.  The Bling

Model homes are alluring – it’s easy to fall head over heels in love with them. The builder knows this and loads the models with her top-of-the-line options and upgrades. So, while you dream of having a replica of the model home, the builder dreams of giving it to you – at tens of thousands of dollars over the original price of the home.

New home specialists suggest that you choose options and upgrades that appeal to you and will make living in the home more pleasant, rather than trying to copy the model home’s features.

Ask the builder’s representative if you will be held financially responsible for installed upgrades should you need to cancel the sale.

Finally, if you absolutely must have an expensive upgrade, find out how much it would cost to have an outside contractor purchase and install it after the close of escrow. You may be surprised how much money you can save by going this route.

5.  Inspect to Protect

Because of the very real chance that the builder or his subcontractors took shortcuts in the building of your home, and because building inspectors typically don’t spend a lot of time inspecting each new home, it is critical to have the home professionally inspected by an independent, third party prior to closing escrow.

Experts with the California Real Estate Inspection Association take the inspection process one step further, suggesting that the home should be inspected during construction. This helps “ensure that the work completed is in compliance with plans, specifications, and the construction schedule.”

Finally, real estate legal experts suggest that you purchase a new home warranty that takes up any slack in the builder’s warranty.

{ 2 comments… read them below or add one }

Tim June 16, 2012 at 3:12 am

Go talk to a loan officer in the real etatse loan department in a bank before signing up for classes. A standard business course aimed at finance might be more likely to get you the curriculum you want. Most RE courses are geared to get you into Real Estate as a salesperson or broker, not a loan officer.

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Katie April 30, 2012 at 1:18 pm

In my experience of purchasing a new construction home, one additional thing I wish I had done was have a lawyer look over the contract before I signed it. The builder’s contract was much different than a standard home purchase contract, and everything written into it is in favor of the builder! I wish we had better understood the terms and conditions of their contract. I would highly recommend having a lawyer explain everything it says prior to signing.

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