Buying a new-construction home: Pros and cons

1

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Just like buying a new car, purchasing a newly built home comes with the benefit of owning property in pristine condition. But there are drawbacks to new construction, and it’s important to consider them as well. Here are the advantages and disadvantages of buying new construction.

Buying new construction: Pros and cons

The term “new construction” can include a variety of properties, including single-family, multi-family, a condo or townhome, according to Jen Horner, a real estate agent with RE/MAX Masters in Salt Lake City, Utah. It also encompasses recently built homes or “planned new construction,” in which a homeowner might be part of the decision-making process.

“New construction appeals to seasoned homeowners, busy business professionals and first-time buyers alike,” Horner says. “The biggest advantage is that it’s brand spanking new and no one else has lived in it.”

Pros

  • Ability to customize – With a new-construction home, you can choose everything from appliances to paint colors, tailoring the home to suit your needs and preferences. “Many of our Utah buyers find that established homes in their price range require significant updates and renovations to get them aligned with [their] expectations,” Horner explains. “New-construction homes are desirable because you can customize as you see fit.”
  • Energy-efficient features – Many new-construction homes use the latest energy-efficient building materials, which means you could save money on energy costs over time.
  • Ideal when you can’t find what you want – In competitive markets (a seller’s market), it can be hard to find a home that suits your needs. Building a new home can help you get just what you want without waiting for it to come on the market.
  • Low-maintenance – New construction can lend you peace of mind, since there are no immediate projects to do for the foreseeable future. “Everything is new or turnkey, so no projects or fixing-up needed,” notes Chuck Meier, senior vice president and mortgage sales director at Sunrise Banks in Minneapolis.

Cons

  • Construction timeline – If you have a short window to move into a new home, building or buying new construction might not be for you. “One of the biggest disadvantages is time to completion if designing yourself,” Meier says, adding that it could take at least three to nine months to get into a newly built home.
  • Cost – “Cost overruns happen quite frequently through unforeseen costs or changes made during construction,” Meier says. Plus, newly constructed homes tend to be more expensive both in list price and price-per-square-foot (PPSF) due to the use of new materials, builder scarcity, market growth and home value increases, Horner notes.
  • Decision fatigue – Unless you’re an experienced interior designer, it’s easy to get overwhelmed with all of the choices out there, from tile and flooring to paint colors and light fixtures. Allowing yourself to get paralyzed by the options can slow down the process. In addition, while you may get to make selections on finishes, colors, appliances and designs, the “included” options are typically limited. “There are limitations to the customizations that can be done without increasing price,” Horner says.
  • Limited negotiating power – Don’t expect to haggle or talk down the builder when you’re shopping for new construction. “The developer or builder is usually the seller of new construction, and they never want to decrease the list price,” Horner says.

How much does a new-construction home cost?

The median sale price of a new-construction home is $326,800 as of September 2020, according to the U.S. Census Bureau and Department of Housing and Urban Development. The average sale price is higher, at $405,400.

While new-construction homes are usually more expensive than established properties, they can be even pricier if you run into unexpected or hidden costs. Here are a few costs to watch out for:

  • Materials – Many builders include a clause that allows them to increase the purchase price if material costs go up, Meier says.
  • Omissions – Look out for what’s not included in the purchase price. “These hidden or future costs may include thousands of dollars more for things like a new fence, sod or the big one of finishing out the basement,” Horner explains. “Many of these property elements are included with established homes but not new construction.”
  • Loan terms – Some builders might be able to increase the cost if there are “delays that might cause an increase in interest accruals on construction loans,” Meier says.

What to ask your builder

Finding a builder you trust is key to a smooth project. Here are some questions to ask:

  • What warranties do you offer? – “Are they giving you options around protecting internal issues, short-term full structure warranty as well as a longer-term exterior warranty?” Horner asks. These warranties help cover you as the buyer should anything need repair for a set amount of time.
  • Can you share references of past clients? – Horner suggests asking for a minimum of five references. “The quality and reputation of the builder is key,” she says, adding that having a trusted real estate agent in your corner can help as well.
  • How is your credit? – This might seem like an odd or invasive question, but Meier notes that a good credit score and ability to get funding can impact how quickly a builder can get supplies and workers to ensure your project is completed well and on time.

How to finance a new-construction home

If you’re purchasing a new-construction home from a developer or builder, you can obtain a mortgage that meets your needs from the lender of your choice. However, Meier notes that you may need to obtain a longer rate-lock period, since building timelines can be delayed.

On the other hand, if you own a plot of land and are completing the build yourself (or hiring a builder to work for you), you’ll need to obtain a construction loan.

“The buyer will incur the interest payments on the loan throughout the process, and the mortgage company will control the draw process,” Meier explains.

Construction loans can be much more involved and nuanced — there are construction-only loans and construction-to-permanent loans, among others — so it’s important to engage the expertise of an experienced lender if going this route.

Learn more: