New Construction Guide

Types of new construction

A spec home is a new home built without a buyer lined up to purchase it. The builder buys the land and begins to build a home using their own design plan.  

From that standpoint, spec homes offer buyers the least options in terms of customization. The builder has likely at least started construction of the home, so changes to the site or the layouts are already off the table. If a buyer purchases the property midway through the process, they may have a say on upgrades and finishes.

Spec homes are perfect for buyers that want a newly built home, but don’t want to wait very long to move in or be involved in the entire design process.

Model Home: A model home is similar to a spec home, as they are built without a buyer contracted to purchase the property. However, model homes tend to be built in batches for larger communities or subdivisions to showcase the different floor plans and features available to prospective buyers. Essentially, model homes are a marketing piece to sell the remaining lots in the neighborhood.

A truly custom home requires the buyer’s attention to every minute detail of the home’s construction, floor plan, and finishes. Nothing goes without the future homeowner’s stamp of approval. Some buyers shy away from a truly custom home as the decision-making process is quite exhaustive.

As is the nature with custom products in general, this is the most expensive choice for a new home. Because the builder is carrying the risks of constructing a home truly unique to an individual buyer, they typically require a large non-refundable deposit upfront.

For the detail-oriented buyer that knows precisely what they want, a custom home is perfect. The buyer has near-total control of the home’s layout, look, and feel. A builder, designer, and architect work hand-in-hand with the buyer to realize their vision.

Semi-custom homes offer a nice middle-of-the-road choice in lieu of spec or custom homes. The buyer chooses upgrades and finishes within their budget. Depending on the community, the buyer may be able to choose the lot and select a floor plan from the builder’s design portfolio. It could even be possible to make changes to the interior layout.

Semi-custom homes are ideal for buyers that want to buy a new home that is unique to them, but don’t want to get hung up on every detail of the construction process. Semi-custom homes are also less expensive than custom homes, as they aren’t designed entirely from scratch.

How to find a new construction home

When you start thinking about buying a home, your first step should always be to hire a real estate agent. If you’ve already found a builder, they have already handed you to a sales rep or agent. However, a builder’s agent is just that – someone that works for the builder first and foremost. Without an agent on your side, you could end up spending far more money.  

You want an agent that is well-versed in new construction. An agent will protect your interests and be a voice for your concerns. They will answer your questions throughout the process and negotiate the best terms for you. You should always vet an agent before signing up to work with them, and it is strongly recommended that you find a real estate agent before you start working with a builder.

Loan options for a spec home are the same as buying a resale property – the buyer applies for standard financing, typically in the form of a conventional, FHA, or VA loan. The builder has already financed the construction of the home, so the buyer’s lender is not taking on any risks in that regard.

Custom homes, however, require a construction loan. Banks that offer construction loans typically require a substantial down payment, between 20%-25%. The bank is taking a bigger risk by financing the build of a new home, rather than an existing home that can act as collateral if the buyer defaults on their loan. The bank supplies funding to the builder through a “draw schedule.” The bank sends an inspector to the site to assess the progress as a construction phase is completed, and then pays out funds for the next stage. During the construction period, the buyer makes interest-only payments while the bank pays the builder in installments.

Builders often have relationships with lenders that finance new construction homes. They may offer financial incentives to use their preferred partner. It’s best to interview a few different lenders to see who offers the best rates on financing.

There are a few options to finance a new construction:

Construction-to-Permanent Loan: A construction-to-perm loan is pretty straightforward – the buyer borrows money to finance the construction of the home, and once that home is completed, the loan is converted into a permanent, or traditional mortgage.

The main benefit of a construction-to-perm loan is that the buyer only goes through one loan application, one closing, and pay closing costs a single time. Construction loans are quite niche, though, and many banks do not offer construction loan packages. As a result, these loans may carry higher rates, becoming more costly in the long term.

Construction-Only Loan: As the name implies, a construction-only loan solely funds the building of the home. That means the buyer must either pay the loan in full at the time of delivery or obtain a second loan in the form of a mortgage to secure financing.

The main disadvantage of a construction-only loan is that the buyer must go through the entire loan approval and closing process two times, which can be rather costly. That being said, a construction-only loan offers buyers the freedom to work with any lender for a traditional mortgage after construction is complete.

Bridge Loan: A bridge loan is a form of short-term financing that takes the equity from the borrower’s current property as collateral. This is a useful option for buyers that won’t be able to sell their existing home prior to the completion of their new home, but need the cash to finance closing.

Qualifying for a bridge loan on a new construction can be tough. Rates are higher, too. The bank is hedging its bets on the borrower paying off the loan or selling their existing home within a short time span. However, it is a helpful short-term solution when your timeline for the purchase of your new construction and the sale of your existing home don’t quite align.  

If you’re starting from scratch, you’ll need to find a buildable lot. Your realtor should be able to help you set up a search for active lots for sale in the area. If you’re looking to purchase and immediately build on the lot, you should have a builder walk any property you’re considering buying to determine if it will suit your needs.

An experienced agent should also be able to tune you in on new developments in the area. This eliminates the lengthy process of finding and evaluating the suitability of a lot, as the builder will have already done that work for you. In this circumstance, you’ll focus more on the size, location, and price of the lots in that development to choose the best one for you.

Mistakes to avoid

You’ll see this one on every list – the number one mistake you can make is choosing the wrong builder. You’ll be working with this builder for months, and they’re building the home you’ll ultimately be living in. The relationship with your builder will largely shape the trajectory of your new construction project. You want a builder that will communicate with you effectively throughout the process. A good builder should be an expert in the area and the type of home you envision.

Do your research – check online reviews and see what former clients are saying. Ask the builder for references. Tour a finished home by the builder to get an in-depth understanding on how they execute their projects.

Hiring an agent can be particularly helpful at this juncture. Not only can they recommend builders to you, but they can also help you make an educated decision based on your research. An experienced agent has likely already worked on new construction purchases, so they’ll know what to look for in a builder. Working with the wrong builder can have costly and potentially disastrous consequences.

While you’re caught up in the whirlwind of picking finishes and upgrades for your new home, it’s important to keep your overall budget in mind. Before you empty your bank account on luxury finishes, keep in mind that the construction process will take time. Delays may affect the price of materials, for instance. You may also decide that you want to save that money for furnishings or future upgrades to the property.

On the flipside, you also don’t want to pick a builder purely on cost. If a builder is offering to build your home under market value, they might use lower quality materials and cut corners during construction. Alternatively, the builder might demand more money midway through to complete the project, leaving your hands tied or risk losing your deposit.

You might think you’ve found the perfect new home, but you aren’t too sure of the area. Choosing an ideal and stress-free location should be high on your priority list. Consider your commute, nearby amenities, schools, and hospitals to ensure you can conveniently access basic needs.

Now that you’ve picked the right area, it’s time to narrow your focus to choosing the right homesite. If you’re planning on living in this home for years to come, you may want to install a pool or an outdoor living space. You’ll want to factor in room to grow.

You might think you can handle the purchase of a new build without a real estate agent. The builder may have a sales representative that can guide you through the process, but at the end of the day, that salesperson is more interested in closing the sale for the builder, not for you. A real estate agent represents you, and works solely in your best interests. And because the builder pays the commission, it costs you nothing – whereas a builder’s rep may cost you thousands in missed savings by not negotiating on your behalf.

Pros and cons

Minimal Maintenance: First, the obvious – when you buy a new home, everything is new. If the builder is good, your home will likely not require any major repairs for some time. For added peace of mind, most builders offer a rather expansive home warranty that covers everything from the appliances to the plumbing to the structure itself.

Customization Options: Unless you’re buying a completed spec home, you’ll usually get to pick out your finishes. Depending on your budget and tastes, you can make upgrades to counters, floors, cabinets, and more. In a custom or semi-custom home, you’ll have even more control over the build – from interior layout to exterior elevation.

Modernity: The new construction industry is a beauty contest. In order to attract clientele, builders invest a part of their budget into a design team. That means your home will be built with all the latest trends in mind, which will keep your home looking stylish for years to come.

Builder Incentives: Many builders offer monetary incentives for using their partners, like their lending institution, or their closing company. Like in resale, it’s best to compare the loan packages from at least one other lender to see who will offer you the best deal and highest quality service for your business.

Price Tag: On the upside, major maintenance and updating usually isn’t in your near future when you buy a new home. On the downside, you’ll probably pay more upfront. Typically, the price you see on a new construction listing is the “base price,” or the fixed list of features that are included in the standard build for this home.  What is not included are any upgrades, options, or unexpected build costs, which can add up quickly. It’s important to account for these items in your budget when you are looking at new constructions.

Timeline: To start, building a home takes time. Unless you are buying a spec home, expect to move into your new home in six months to a year (or more) after you sign the contract. The move-in date, or “delivery,” is rarely a hard deadline. When a builder offers a delivery date, it means they are estimating the home will be built and all permits will be issued by that date. But all sorts of issues can arise in construction, from shortages in building materials to weather delays, or problems with obtaining permits. It can be frustrating trying to stay flexible on timeline when you’re ready to move into a new home.

Less Negotiation Room: This varies largely from builder to builder, but new construction usually does not offer much flexibility on price. If you’re looking to buy in a large community, it can be particularly difficult to negotiate price, as your sale will affect the value of other homes in their community. Builders are all about protecting their bottom line.

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