If you read part one of this article on the advantages of buying a new construction home, you are probably all fired up and ready to go purchase one!
Before you go rushing out the door with pen in hand to sign on the dotted line, let’s take a look at some of the possible drawbacks of buying a new construction home.
Note – for the purposes of this article, “new construction” home means those from a builder, such as Lennar or Beazer, that develop a community of similar homes. This article excludes homes where someone purchases their own single plot of land and designs their own home by finding their own independent contractor.
Disadvantages of Buying a New Construction Home
- Paying a Premium – One of the biggest possible drawbacks of purchasing a new construction home is paying a premium. Without a doubt, the builder is going to price the new construction home in order to make as much profit as possible. After all, they have to cover the cost of the land, materials, labor, etc. and, in order to stay in business, they will include a mark-up to generate acceptable margins. While the builder will be making at least some profit when you buy a new construction home, that does not mean the premium will be so steep that you’re getting ripped off. Think about it – a builder has to price competitively enough to stay in business. If their margins are so high, then the price of the home won’t be attractive in the marketplace. Also, keep in mind, the builder can earn profits through other mechanisms such as when you finance through them.
- Financing – We talked about financing through the builder in the advantages of buying a new construction home. Why would I list it as a disadvantage too? Isn’t that a contradiction? I have listed builder financing as a potential disadvantage because, just like with any other lender, you could end up overpaying through too high of a rate or too many fees. You should be on guard with builder financing because they are probably used to buyers not doing their “homework” and instead automatically choosing their financing because it is easiest. Meaning, the builder might offer non-competitive financing terms. It is always advisable to shop around. Even if the closing process will be smoother by going through the builder’s mortgage options, you owe it to yourself to get the best pricing and deal available when it comes to financing.
- Drawn Out Process/Long Timeline – As a general rule, you should not ever be in a rush to buy a home no matter whether the property is resale or new construction. When you rush, you stand to make a bad decision by not doing all of your due diligence. That’s a major “no no” for such a huge purchase. That said, new construction homes may have a long time horizon until you complete the transaction, close, and get to move in. For resale homes, closing usually takes place from 30-45 days after the offer is accepted. There may be a few new construction homes that the builder has completely finished and has readily available. For these, the 30-45 day timeline is applicable. But, if you purchase anywhere prior in the construction process, you will have to wait until construction is complete before closing. This could be anywhere from several months if you sign the purchase agreement mid way during construction or up to 6 months if you buy before the builder even breaks ground. For instance, we purchased in early July and did not close and get to move in until the end of September. The longer and drawn out process does not have to be a disadvantage if it works with your timeline, but just be aware of it especially if you don’t have the means to be so patient!
- Less Inventory – There will be less new construction homes in the market than resale homes. The ratio of resale to new construction homes will vary by location. Builders can only construct so many homes at any one time. All of the new construction homes from all of the builders in your area will amount to less inventory choices than the summation of the resale homes. Just keep this in mind as you embark on your house hunting.
- Unfinished Backyards – Your beautiful brand new construction home is going to have a big pile of dirt for a backyard! Builders tend not to include landscaped backyards mainly to save on costs. The cool and fun thing is you can have your backyard designed to your own vision and desires – as long as it fits within the budget! That’s the catch. You will need to factor this extra expense into your overall budget and purchase price target.
The good thing is there isn’t necessarily a rush to get your backyard completed. Of course, the longer you wait the longer you have a non-functioning backyard (which is difficult if you have kids and/or dog(s)).
- Cannot Renovate – Some people love to renovate. The joy gained from putting your own “stamp” on your house can be highly rewarding. Except, for new construction homes, there is not really any need to renovate. About the only exception here is the aforementioned backyard. So, if you are a do-it-yourself-er or are merely looking to transform a house to fit your ideal vision, then a new construction home may not be your best choice. Do keep in mind – new construction homes have upgrade options available. While picking your cabinets or flooring options is a far cry from renovating to your own ideals, it does allow you to at least customize a bit.
- Location – Builders often make large land purchases towards the outskirts of cities where land is generally cheaper and more available. This makes sense – large new home construction developments usually occur as cities expand outward. Therein lies a possible problem: new construction homes in the suburbs can be a considerable distance away from work or the heart of the city. Also, initially, there may be less amenities (restaurants, shopping, etc.) nearby. Location is important factor when buying a home. What good is your dream home if you have to drive 3 hours in traffic every day?
Other Considerations about New Construction Homes
- HOAs – One other aspect to keep in mind: new construction homes may have Home Owner’s Associations (HOAs). HOA advantages and disadvantages exist as well. I advise reading up on whether owning a home with an HOA is right for you.
- Realtors – Believe it or not, you can use a realtor for a new construction home. The rule seems to be that you must either have your realtor with you or at least disclose you are represented by a realtor upon your initial visit to the builder’s community “showroom” office. We were not aware of this, so the realtor we had been casually engaged with prior did not represent us during the purchase of our new construction home. There is some element of negotiation when buying a new construction home, but it is far less than during a resale home purchase. Thus, you may gain some benefit by using a realtor. If you don’t, though, you should still be just fine.
The Final Verdict: New Construction Home – Yes or No?
The answer is – it depends on the situation! There are countless considerations when buying a home. In the end, you have to evaluate all of your strategies and options and then make the choices that are best for your unique circumstances. For us, buying a new construction home ended up making the most sense. For you it may be the same or it may not. One thing I can convincingly state: new construction homes should not simply be discarded as unfeasible from the get go. Rather, the advantages and disadvantages should be taken into consideration at least somewhere during your process (even if it’s only a cursory consideration).
Happy home hunting!
Do the disadvantages of buying a new construction home outweigh the advantages? What are your thoughts/opinions on new construction homes versus resale homes now?
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