20 Facts You Need to know before Buying New Construction (Builder Home)
You are in for a big surprise if you are buying new construction for the very first time. There are many items you may not consider when you sign up for new construction. The topics covered here will prepare you for what to expect when working with builders, and perhaps save money and headaches in the long run as well.
Based on my personal experience over the last 20 years in purchasing over half a dozen new homes from builders, I have learned many lessons that have led me to share this information.
Builders in different regions may deal pre-qualification per their corporate guidelines. Here in Mountain House CA, the builders would like the client to qualify with their own lender. Which means if you have already pre-qualified with your bank or mortgage lender, you still need to satisfy the builder’s requirement and fill out a new application with builder’s lender.
The good news is you don’t have to stick with builder’s lender. Once you are pre-qualified with the them, you can go with your own mortgage lender.
Some builder’s lender may give the incentive to go with them, and they will pay the partial closing cost. It is worth checking out if you have not picked your own lender. However, it would be advisable to make sure they are competitive and giving you a good interest rate on a mortgage.
Unlike re-sale, the time to build the house from the dirt lot varies depending upon the size of the house and the season you have signed the contract. The builders have some limitations which prevent them from delivering the house on a dime.
The rainy season prevents the builder to work on the house foundation. Similarly, the house will go through inspection and permit approval process by the county. That means it takes time to get the permit approved by the county. In every stage of the construction, the county inspector must inspect the work and give permission to the builder to move forward.
All this requires coordination and uncertainty to get a commitment from the builder when exactly they will deliver the house after you signed the purchase contract. You should plan five to eight months before you will get the house.
No Exact Date to Deliver the House:
As a new construction buyer, you must be prepared to accept this condition. When you sign the purchase contract, the builder will never give you an exact date when the house will be completed. Instead, you will be given the time window in months.
Once the house structure is up and pre-drywall inspection is scheduled, the builders can narrow down when the house will be completed tentatively.
Supplemental Tax on New Construction:
Generally, the suburban land on which builder construct the new house is classified in different category. The lot was appraised as agricultural land; therefore, the appraiser assesses property taxes accordingly. In other words, the tax rates are different initially for agricultural land vs. developed community land for a single-family residence.
For that reason, expect an additional tax bill. Why? The reason is once the house is closed in escrow the deed is registered to county how much it was sold for and all good details about the house. The property is exchanging hands when a new deed is signed. At this point the lot you purchased had minimum value- now that land is part of house doweling; the county assessor will assess the property again. Hence there will be a supplemental tax bill you should expect to receive.
The builders probably will not inform you about it. Knowing this fact ahead of time will prepare you for additional expense coming out of the blue. It is highly recommended to make this part of the house buying budget.
These days the tax payments are collected by mortgage lender and county will mail your regular property tax to the lender. Therefore, your property tax statements two times a year will be sent to your lender. However, in the case of supplemental tax, the tax statement will not go to your lender. You must pay the supplemental taxes.
How many times have you noticed if someone is walking on the second floor or taking a shower upstairs? If you are like many people, you want peace and quiet when you are at home.
You may not recognize the value of this option beforehand. However, soon after closing when you move to your new house, you will notice it quickly. The solution is to take the option to put the insulation between room walls and the floors.
We all assume the builder will put the insulation to these areas automatically; that is not the case. It all boils down to the cost. The more options you take, the higher the price gets. This is a good option to consider.
Design Center Visit and Option Selection:
This experience will be like buying a brand-new car from the showroom. You have selected the car and now must choose what upgrades and conveniences you want in your car.
The basic house comes with standard options from the builders. Some builders include few upgrades as part of their base prices, others will dime and nickel you. Let’s be clear on one thing. You don’t have to take any extra options and you can buy the house from the builder as is. If you do add more options it will be considered an upgrade, thus the house will cost more than the base price builder quoted.
I recommend the following strategy. There are some options you cannot do or will be very expensive after the house is built, therefore, it is better to select those options up front. Other options or upgrades you can do later.
Options to consider up front: Additional bedroom downstairs, third car garage, ceiling fan connection in each room, Multimedia TV wall mount access. CAT5 internet connection in the office area, flooring option carpet vs. tiles or wood, granite counters top in kitchen, sink, kitchen exhaust vent out, additional recessed lights, fireplace, home elevation, bathroom shower stall vs. tub, wiring for security camera and kitchen cabinets. There are other options like faucets, door knobs you can upgrade later.
Some builders will ask you to pay upfront 25% of options you selected after you reach certain dollar figure options. Just be prepared for additional expense and ask the builder their policy before visiting the design center.
It is always a good idea to visit the design center with a budget in mind. That way you will not overspend. Start with options which are most important for you in your list.
This will be one of the most significant expenses you will take on after you close the house in escrow. The house will come with a dirt backyard. The backyard is not finished. Depending upon the lot size it could cost you from $5K to $50K. You can go with simple concrete floor, to tile or color stamped concrete. It all depends on your budget.
Of course, if you love grass, you can finish the yard with sod with the combination of mulch to finish the backyard with the fraction of cost upfront. However, up keeping the grass, in the long run, could be expensive for lawn maintenance and water bill.
Although a finished backyard is important, you don’t have to start this project right after you move.
Yes, there is such a thing as builder’s incentive. Don’t expect the builder’s incentives in the summertime. During the slow season, you will see the builders offering incentives at the beginning of the year, or at the end of the year.
The incentives could be in the form of options you can select when you go for your design center appointment, or the builder’s lender helping with the closing cost.
The builders will also give incentive if they have inventory homes available. It is supply and demand at the end of the day. You are in a much better position to negotiate when the builder has already built the house and would like to sell it fast. Make an offer to the builder and see if it sticks.
Consider many factors when you are selecting the options in the design center. One day you will be selling the same house you are buying now. So, why not prepare now? Select what you like but also consider it’s value when if you choose to ever sell your home. This advice will save you money in the long run.
If the budget permits, your first floor should have the same flow for either tiles or wood. Builders will most often give you the tiles in a small area in the foyer and the wet areas.
Also, if you have an allergy from dust, it is a good idea to install wood or tile floors instead of carpet while you have the option.
Mello-Roos / Special Tax – AKA -Community Facilities District or CFD.
In California, this is additional tax you can expect to pay in many new developments. in 1978 California passed proposition 13. This act authorizes the local governments and developer to create the CFD the special tax via bonds for various ongoing public services, i.e., law enforcement, public park maintenance.
The property taxes would be higher where Mello-Roos is assessed. You need to check with the builder to make sure you calculate the property taxes accurately for your monthly payment. In Mountain House CA, the taxes are around 1.7% this includes the Mello-Roos / special taxes. It is always a good idea to check with the builder for the exact percentage when shopping for a home.
If you are a first-time home buyer, this is something important to consider as well. Most people like the big yard. However, with the big backyard consider the cost to finish it and the ongoing maintenance. Some families like to have a big yard for children or if you are a gardener the big yard will be an ideal.
Often the corner lots are more desirable. You need to make sure though the corner is not on a busy street where traffic noise could be a nuisance at night.
Many families opt for cul-de-sac location; especially if you have little kids. It would be relatively safe for small children to play in front of the house in a cul-de-sac.
All these lot options are good to consider if they are available. The builder will charge a lot premium if the size is bigger or if it is a corner lot. Be prepared to pay extra for lot size and location.
One of the perks of buying a new house is that you can choose the home elevation. You can select brick, siding, or stucco. The house exterior color options are also available to choose from. The challenge you can face would be finding the lot location and elevation you desire together.
Most of the time builder has pre-selected which house elevation will be built on which lot. You may have to compromise on either the lot location or house elevation. In some cases, you may get lucky, and you will get the lot you desire and house elevation you have selected.
Once again, the standard elevation will be free. However, upgraded house elevations will cost more. It is worth paying extra to get the feel and look which you like.
Appliances You Need to purchase:
There are three appliances which builder will not give you when buying new construction. The refrigerator, washer, and dryer. These three items you will have to purchase after you close the house in escrow. Rest of the kitchen appliances the builder will install and is part of the home price.
If you are taking gourmet kitchen option or otherwise, you may consider the kitchen exhaust hood over the cooking range to vent out. You must select this option in design center if so desired.
You can purchase, fridge, washer, and dryer during the design center visit. If you are on a budget, you can roll the big-ticket items in your mortgage instead of buying after closing the house. The only caveat is the builder design center may not have the appliances variety as you would find in the market.
Depending upon the house price, the closing cost of the house could be upward $10,000 or more in Northern California. You need to budget it in addition to the down payment 5%, 10%, or 20% you will have to come up with. To avoid PMI (Private Mortgage Insurance), you need 20% down payment. Discuss with your lender for mortgage options like 80/10/10 or 80/15/5 if they offer to avoid PMI.
The new construction takes six to eight months for a house to be completed. Once you have selected the house and are ready to sign the purchase contract, expect to put anywhere from $10,000 to $20,000. The earnest money you deposit upfront will be counted towards your down payment.
After Closing Builder Warranty Period:
The new house will come with a comprehensive warranty. The structural items will have a longer warranty period than for the normal wear and tear. The new owner will get a one-year warranty to fix anything in the house either stopped working or need to be fixed, within reason of course.
Each builder operates differently. I would check with the builder’s sales office and get educated on how they handle the after-sales services. During the twelve months warranty period you could come across few items to fix.
You always have the option to hire an inspection company to inspect the house before closing. It could cost you anywhere from four to five hundred dollars. Or, discover on your own along the way; most people find what needs to be fixed after living in the house for a few months.
You don’t need to address this until one year after you have moved to your new house. It is recommended to treat the fence after one season and seal the wood to last it long. Some people opt for varnish and others do paint. It is a personal choice. You will protect the wood either way.
Builder’s Systematic Price Increase:
Have you ever wondered how builders increase their home prices? They use human psychology to entice you by creating the scarcity mentality. The builders will release only four to six lots to the public. This is to control supply and demand as well as to increase the house price with every release. By taking this approach builders control flooding the market with excessive inventory, potentially driving the homes prices down.
Structural Items to Decide when Signing Contract:
We all buy things with emotions and justify it with logic later. If this is true, we also are guilty of being easily manipulated if we don’t buy at this moment the opportunity will be lost. It is an easy trap to be caught especially under pressure.
When you are in the builder’s sales office signing the purchase contract, the sales office will ask you to make few critical decisions about the house structural options before you leave the sales office; otherwise, it will be too late to add or change later. Therefore, it is essential to be educated before visiting the builder’s sales office.
The home structural items could be: adding a third car garage if the option is available, converting a den downstairs to a bedroom, converting a loft upstairs to a bedroom, adding a door to master bathroom arch, etc. These are some of the options to consider beforehand, so you can make educated decision when asked to select structural options.
After waiting months, the house is finally ready. The builder will call you once pre-drywall inspection and 2nd-time final walkthrough when they are ready to hand-off the house to you and escrow has a firm closing date. During the final walkthrough, the construction supervisor will explain how to take care of a new house, warranty, and after-sales support.
Once the loan is funded and escrow records the deed to the county. You are ready to pick the house keys from the builder’s sales office. Often once the loan is funded the deed is registered the next day with the county. Congratulations you are the owner of a brand-new house.
It will be an exciting experience of your life to purchase a brand-new house from the builder. The best approach is to educate yourself about the new house buying process; know what to expect at different stages of the new house construction. Make this journey memorable by following the twenty facts covered above.
About the Author: Shaheen Pasha is resident REALTOR in Mountain House Ca. She has over two decades’ experience buying new construction for herself and the clients. Please reach out to Shaheen should you have any questions related to new construction purchase in Mountain House, Dublin, Pleasanton, San Ramon all East Bay in California.