how to buy new construction (Metro denver)

how to buy a new construction home

          Having a new home built can be one of the most exciting real estate purchases out there.  Or, it can turn into a stress filled ordeal.  The goal of this article is to give you a thorough understanding of how this process works, how to navigate through it, and how to avoid any of the potential pitfalls that can occur.  The information contained below is a culmination of my years of experience in helping around 100 people purchase new builds.  If you have any questions, or would like professional representation, give me a call/ text at 303-520-8700.

          Similar to my web-page entitled “The Path to Buying a Home in the Highlands Ranch Area”,  the number of “if this”, “then that” scenarios possible in any given transaction are too numerous to describe.  Every transaction is different and each has its own nuances.  Above is just one of the reasons that using an experienced real estate agent to help you in this process can be invaluable.  Using a real estate agent to help you build a home does not cost you anything – the agent is paid by the builder at the closing table.

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why do i need an agent to buy a new home

          “Why would I want /need to use a real estate agent when buying a new home?  Doesn’t the builder handle everything?”

          The builder certainly works hard to get the house built in a timely manner and to code.  But, who does the builder’s agent work for?  You, or the builder?  Do you think that the builder’s agent has you, or the builders best interest at heart?  Yes, the builder can get everything done, but will you have the home that you wanted when you move in?  Continue reading below to get a full understanding  of what I am talking about.

          “If I don’t use a real estate agent, I will save money by not having to pay a commission.”

          When you utilize a real estate agent to purchase a new home, the commission is paid by the builder at the closing table – you pay nothing.

          “The builder will reduce his / her price on the home if they don’t have to pay a real estate commission.”

          Most builders will not reduce the sales price because you are not working with a real estate agent.  Sales prices need to stay high to make it easier for them to raise base prices and for other homes to get appraised for their value.  Also, builders rely on real estate agents to bring them buyers, so it is not in their best interest to undercut agents.

          The bottom line here is that having solid, experienced representation costs you nothing.  In fact, it will most likely save you money down the road.  This will become more clear as I get into things that you need to be on the lookout for while the home is being built.

pre-qual / pre-approval

          This first step is the exact same as if you were buying a re-sale home.  You need to know that if you buy a home for “x” dollars that you are going to be comfortable with the payments.  Also, the further along you are in this process, the stronger you will be as a buyer.  A builder will want to know that you are going to be able to purchase the home before they will place it “under contract” and effectively take it off the market.  

          More will be talked about later in regards to incentives that some builders offer if you you use either their lender, or their preferred lender.  

          For a deeper look into why this step is necessary,  read steps #1 and #3 – “The Path to Buying a Home in the Highlands Ranch Area”

where to buy

          This one can be a little tricky since you are limited to where builders are building.  Here are some questions that you can ask yourself:

           Is there anything that I need to be close to?  Work, schools, light rail, bus line, entertainment, shopping, trails, recreation, hospital, the airport?

           Is there a certain type of community that I am looking for?  A bigger community with a pool, tennis courts and a rec center?  Trails in the neighborhood?  A certain style of home (ranch, 2-story, etc…)?  An active adult (55+) community?  A townhome or condo community?  A community with larger lots, or minimal lots?  An infill situation (a single or paired type home built in an existing neighborhood)?  A community with larger or smaller homes?  

           Does the price range of the homes fit my budget?  Keep in mind here that there are typically a variety of upgrades (depending on type of builder) that can be tacked on to the base prices of the homes.

           The next step is to create a list of “definitely need”. “definitely want”, “would love to have”, and “could live with or without”.  From here you can start to formulate a few different areas in the city that may work.  

where in the neighborhood to buy?

           What exactly does this question mean?  This does not pertain to all variations of new builds, but it is a question that should be asked before you put a down payment on a new home. 

           Let’s start with a larger community (100+ single family residences).  Do you want to live on a cul-de-sac versus an interior street (more kid friendly)?  Do you want to live on a corner lot, or does an interior lot work?  Are you okay living at the entrance of the community (more traffic and more car lights at night), or deeper in the community?  Do you want to live next to the pool (possible noise, or ease of getting to the pool)?  Do you want to back to open space, another home, or a road?  Do you absolutely want a walk out, garden level, or a regular lot?  Would you be okay living near power lines?  Would you be okay living near a “future” elementary school?

           So, when you find a lot or two, the best bet is to walk them and anticipate the pro’s and con’s of each one.  You also need to pair this up with the home that you like.  I mention this because builders do not build all homes on all lots.  The homes that can be built on certain lots are prescribed when they get the city to sign off on their final plot plans.  If you love the builders ranch model and find a lot that you can only build a 2-Story on, it is not going to work.

           Keep in mind that you will probably be living in this home for the foreseeable future, so if you choose a lot that does not work, will you be able to live with it?  When working with new home buyers, I always walk the lot with you and share my pro’s and con’s.

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dirt start, or spec inventory?

          To clarify the difference above:

          Dirt Start – this refers to going “under contract” on a home before ground is broken ( the hole is dug for the foundation), or shortly thereafter.

          Spec Inventory – homes that are in the process of being built and are typically within 45-75 days of completion.  Most, if not all, of the options for the home have already been chosen.

          Builders will often be more aggressive with their Spec Inventory than they will with their dirt start homes.  Why is this?  Many of the bigger builders are traded on the stock exchange and standing inventory is looked at negatively by investors when earnings are reported.  Too much standing / spec inventory and their share prices could suffer.  This does not apply to all builders, but many of the bigger names.  Another reason is that builders have carrying costs that only increase as the home nears completion.  The closer to completion, the higher the costs.  

          To give you an example, back in 2006, I was able to help a buyer get a Spec Inventory home that was listed at $292,000 for $245,000.  While this may sound great, one of the issues with Spec Inventory is that it is usually in short supply, if at all.  Spec Inventory encompasses a builder just building a home on spec that has not sold as quickly as the builder had hoped, or a home that was being built for someone else that is now back on the market.  So, a Spec Inventory home can be a great deal.  The problem is that you have to hope one or more is on the market and also hope that it is in a location in the neighborhood that will work for you.  And, can you live with the options that have been chosen.  If Spec Inventory is available, it is definitely worth looking at!  Also of note here – the deals that can be had on Spec Inventory are directly correlated with the current state of the real estate market.

          Dirt Start homes represent the majority of new homes that are built ( not including smaller / boutique builders ).  One of the big advantages over Spec Inventory is you have more options for locations in the neighborhood.  Also, you get to choose all of the options included in the home.  Plus, in stronger markets, you have the ability to walk into your home with equity already in place.  You agree to a price 6-9 (or more) months in advance so price can appreciate while you wait for your home to be built.

incentives

          This applies to the bigger builders and not so much to the smaller builders.  While builders generally do trust other mortgage companies, they prefer to have their own people handle the loan in house.  For this, they will offer you incentives that are tough to match if you use their lender and in many cases, their homeowner’s insurance company and their (or their preferred) title company.  Even if you prefer to use your own lender and forgo any incentives, they will still want you to get pre-qualified with their lender to give them more confidence that the home will ultimately sell.

          Incentives are not set in stone and can change at any time.  I’ve seen as low as a $2,500 closing cost credit, and upwards of $30,000+ to use in the design center (where you choose your upgrades).  Again, these numbers can vary based on the motivation of the builder.  Remember when I mentioned that many of the bigger builders are traded on the stock exchange…if their numbers are down for a quarter, they may get very aggressive and up their incentives to get more homes sold.  If the real estate market is red hot, they may dial these incentives down.

          Builder’s lenders are typically competitive when it comes to the interest rates and closing costs that they charge.  The bottom line here is that we want to keep them honest, so I always advise that you have another lender “shadowing” the loan to make sure that their numbers are in line with what is going on in the market.  If the numbers are skewed, then we can go to the builder and negotiate better terms.

          Incentives can be great – who doesn’t want a deal?  You just need to know what they are and then you can dissect how good a deal they are and if they are worth it.

interest rate risk / reward

          Another question, what exactly do you mean by interest rate risk?  This pertains to Dirt Start homes and possibly some Spec Inventory homes early in the building process.

          When you go under contract on a regular home, you typically lock in your mortgage rate right away or shortly thereafter depending on your lenders advice.  This lock can last 30-60 days depending on the type of the loan and the lender.  After that period expires, they will ask you to pay for the privilege to lock your loan.  These fees will depend on the lender and how long you are looking to lock.  They can range from 1/4 (0.25%)  to 1 (1.0%) + points and have nothing to do with closing costs.  So, if you are getting a $400,000 loan, you are looking at an extra expense of $1,000 – $4,000+.  

          Dirt Start homes can take 6 – 12 months to complete.  Spec Inventory usually does not apply here, but there are times when it can take 3-4 months for them to be completed.  Let’s say you went under contract on a new build in January 2018 and interest rates were roughly 4% and you closed in November 2018 when interest rates were roughly 5.0%.  Also, you are financing $400,000.  At 4%, your PI (Principal & Interest) would have been $1,910 and at 5%, your PI is now $2,147 (these numbers do not reflect taxes and insurance).  A difference of $237 / month, or $2,844 / year, or $14,220 / 5 years.  Of course you could always refinance if rates went lower, but there is no guarantee of that happening.  

          The reverse can also be true so you may have saved $237/ month by not locking.  Hence , the title of this section as interest rate risk / reward.

          Just one of the many little nuances of buying a new build home that is not thought of every day.

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the process

          At this point, I am going to assume that you are at the point where you have chosen a lot to build your home on.  The above information that I have given was just a primer to get you to this point.