Buying new construction? Avoid these 5 costly mistakes

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Existing-home inventory is dreadfully low in many areas and prices keep climbing. If you can’t find a suitable resale or you just want to start fresh, new construction might be an option.

New homes offer enhanced safety and energy efficiency, amenities and layouts more suited to modern lifestyles, and sometimes the ability to customize spaces that you don’t get with a resale. But if you’re not careful, costs and expectations can spiral out of control.

Here are five costly mistakes to avoid when buying a new house.

Settling on one lender without shopping around

Many large builders have in-house mortgage lenders or preferred companies they work with who may or may not offer competitive rates and terms. Unless you shop around for mortgage rates, you won’t have a basis for comparison.

Chyrise Harris is a prime example. She was preapproved with an outside lender and was keen on sticking with that company to buy a new paired home in Denver’s Stapleton neighborhood. But her builder’s preferred lender won her business with a better customer experience.

“Knowledge is power, but if you don’t have anything to compare your experience to then you don’t know if you’re getting the best service,” Harris says.

When in-house and outside lenders compete for your business, you gain more leverage to negotiate loan costs or interest rates, says Kerron Stokes, Harris’ real estate agent with the Resource Group at RE/MAX Leaders in Centennial, Colorado.

Look carefully before accepting incentives offered by a builder’s lender; they don’t always save you  money, he cautions.

“If a builder’s lender says, ‘We’ll give you $15,000 in incentives if you choose us,’ but an outside lender charges a quarter of a percentage point less in the interest rate over the life of the loan, that $15,000 incentive may wind up being more expensive in the long run,” Stokes says. “You want to rate-shop for your loan throughout the entire build process.”

Not understanding builder warranties

When you buy a home, there are two types of builder warranties you’ll hear about: implied and express warranties.

Implied warranties cover defects in workmanship that impact a new home’s habitability, livability and safety, based on local building codes and standards, says David Jaffe, vice president of construction liability at the National Association of Home Builders. Implied warranties tend to be vaguely worded, and they usually have a 10-year liability cutoff period for builders, Jaffe adds.

Builders sometimes offer an express warranty, which has more precise wording on what is covered and cutoff times for varying parts of a new build. Sometimes, builders ask buyers to waive their rights under an implied warranty when an express warranty is offered so it’s important to read all warranties closely. Enlisting a real estate agent or attorney to review warranties, as well as the purchase contract, may help you avoid doing business with an unscrupulous builder, Jaffe says.

“An express warranty spells out the problems and remedies a builder is responsible for, as well as the duration of the warranty and a mechanism for disputing issues,” Jaffe says.

“Builders live and die on their reputation, so they don’t want to get into long, drawn-out legal battles; this type of warranty provides more defined terms.”

Builder warranties are not a blanket guarantee for all types of defects or problems with a new home. Here’s a list of items Jaffe says builder warranties do not typically cover:

  •       Products covered by a manufacturer’s warranty (such as appliances)
  •       Damage caused by ordinary wear and tear
  •       Defects caused by lack of maintenance or neglect by the homeowner
  •       Defects in items installed by homeowners or contractors other than the builder
  •       Damage caused by natural disasters

Choosing upgrades that won’t increase your home’s value

The options and add-ons seem limitless when you walk into a builder’s showroom. But before you go on an upgrade spree, it’s wise to pick upgrades that will boost the home’s value rather than making it merely look nicer, advises Stokes, the RE/MAX agent.

“There is always a cost associated with upgrades, and there are some that will help you realize value more than others,” Stokes says.

For example, upgrading to quartz countertops from laminate, or from linoleum flooring to hardwood or tile, are safe investments. But if you opt for the top level of cabinets that cost an extra $10,000, you’re unlikely to recover that value at resale, Stokes warns.

You may want to consider the cost difference between a builder upgrade versus hiring your own contractor to do the work later. Harris, the Denver buyer, had the option to include an air conditioner in her new home. She saved $1,000 by having the unit installed after she moved in rather than adding it her construction tab, she said.

Assuming you can’t negotiate with a builder

The top myth buyers of new homes tend to believe is that builders won’t negotiate with them. But that’s just not true, Stokes says.

“You can negotiate price, lot lines, loan fees and other items,” Stokes says. “A builder may initially say ‘no,’ but keep pressing. If you don’t ask, you don’t know the answer.”

Hiring a real estate agent who specializes in new construction can give you the extra confidence in negotiating with builders. Also, hiring an agent costs you nothing as a homebuyer; builders typically pay the agent’s commission from their marketing budgets, Stokes says.

Not budgeting for items you’re responsible for

New builds are blank slates. For instance, many new homes don’t come with landscaped yards; you get that big-ticket honor after move in. And if you live in a development that belongs to a homeowner’s association, you might have a limited window to put down grass or plant trees, which can cost thousands of dollars.

Read your contract and the HOA rules so you can anticipate and budget for these expenses as early as possible. Nothing rains on a new homeowner’s parade like getting a scolding HOA letter pointing out something you failed to do. Even if your home won’t be finished for months or a year, get estimates for the items you’ll need to pay for and put money aside specifically for those projects.

New homes also don’t come with window coverings, toilet paper holders, towel racks and even light fixtures in all rooms. Clarify what is and isn’t standard with your new home so there are no surprises.

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