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What You Need To Know Before Buying A New Construction Home

Terry Story, Buying A New Construction Home

With Terry Story, a 31-year veteran with Keller Williams located in Boca Raton, FL

In this week’s Real Estate Roundup, Steve spoke with Terry Story, 31-year veteran at Keller Williams, about the two basic types of homes you can buy: an existing, or used, home or a new construction home. They discussed both the benefits and the downside to buying a new construction home, and also talked about the importance of having a real estate agent assist you whenever you’re buying a home.

Buying A New Construction Home

There are two basic types of homes you can buy: a used one, one that’s been lived in, or a new construction home. As you might expect, used homes—pretty much like anything else you might buy used—are often less expensive. However, they come with all of the issues left behind by previous owners or tenants. This means you may be left with problems such as shoddy repair work, cheap replacements, and a host of other things that come with older, lived-in homes.

Buying a new construction home, however, means you get to start from scratch. You see all the work being put into the home and often get to personalize the home you buy, making decisions about elements being put into the home.

Buying a new construction home comes with its own set of complications, though. One of the biggest complications? The wait. Developers and builders typically aren’t building homes to sit around in inventory. They want to build a home and get it sold. But—and this is especially true if you go through a large developer—you’re probably going to be waiting up to a year or more for the home to be move-in ready. But if you want to get the best price, that’s when you have to buy. You can’t wait to buy when it’s ready to move in because it will cost a lot more then.

The Issue Of Price

You’re likely going to be paying significantly more for a new construction home than for a used home, well above the sticker price. Advertisements for homes will list an attractive number— you’ve seen the ads that say, “Homes starting at just $299,000”, but that 299 home doesn’t really exist. Just like buying a car, that “starting at” price doesn’t mean much in the real world. The price for the home might start at that advertised price, but as soon as you start adding all the extras you want, the stereo option, leather interior, and V-8 engine on a car, the price starts going up.

The price advertised by a developer doesn’t include much of anything except the bare bones of the home. If you want items such as doors, windows, and staircases, or for the home to actually be sitting on a piece of property, be prepared for that price to jump up by a significant amount. If you’re thinking you want to buy a $300,000 home, that home might cost about $550,000 after you add in all those “extravagant” luxuries like having electrical wiring and running water. The moral of the story is, “Bring some extra money when you go to buy a home”.

Most of the model homes you walk through are all tricked out, so the price on the sign outside of the model isn’t likely to be accurate. And, of course, the builder is going to try to sell you on all of the best options because that means more money in their pockets.

Using A Builder’s Lender

Builders often encourage you to use their lender. The good part is that the builder gets a good idea of your finances and the approval process often moves more quickly because you’re not going through a third party. On top of this, a lot of builders will offer you some type of financial incentive to use their lenders. Ultimately, it’s important to understand that the builder’s desire to have you use the same lender from whom they received a construction loan isn’t some type of nefarious tactic to charge you more. In most cases, it’s simply the builder looking to have as much control as possible throughout the whole process. He’s just looking to minimize his exposure and risk.

Why You Need A Real Estate Agent

It’s vitally important to use a real estate agent. Understand that builders, when gauging their prices for new builds, factor in the cost of a realtor; it’s built into the price of every home in the development. It’s more money in the builder’s pocket if you don’t use an agent because then he doesn’t have to pay them a $20,000 or whatever commission, so he might try to tell you that you don’t need an agent. But walking in without an agent is basically walking into the deal without anyone in your corner. It’s just you, the layperson, trying to negotiate with a professional.

Real estate agents are most likely familiar with the builder and can offer you insight into how a particular builder operates and determine if you’re getting good prices on the new builds you’re being shown. The realtor will also be able to help walk you through the builder’s contract and possibly negotiate a better price.  A good realtor can be at your side making sure you end up with the home you want, the home you’re going to be happy living in for the next 20 years.

To learn more about buying or selling a home, or about Terry Story, check out Keller Williams!

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

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Steve Pomeranz: It’s time for Real Estate Roundup. This is the time, every single week, we get together with noted real estate agent Terry Story. Terry is a 31-year veteran with Keller Williams located in Boca Raton, Florida. Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: 31 years.

Terry Story: 31 years.

Steve Pomeranz: Hooray for you. Congratulations.

Terry Story: Still here.

Steve Pomeranz: So you know, in my simple mind, there are two kinds of homes that you can buy. You can buy new construction or you can buy a used home.

Terry Story: New or used.

Steve Pomeranz: New or used, right? And each has its benefits and in each has its drawbacks. Let’s talk about purchasing brand new construction.

Terry Story: Okay, great.

Steve Pomeranz: Well, one of the reasons people would do that is they know that they’re not buying into someone else’s problems or shoddy repairs or cheap replacements.

Terry Story: They can make it their way.

Steve Pomeranz: And you can see everything from scratch.

Terry Story: They like the shiny object, that shiny white object.

Steve Pomeranz: Does a new house smell like a car? So anyways, but purchasing a new construction house or whatever you’re buying can be a more complicated at times.

Terry Story: It can be more complicated and one of the things you also have to realize, a lot of the builders, they’re not building inventory houses to let them sit there. I just did a new construction deal and it’s not going to close until like next year, so if you’re interested in new construction, be it you have a house built or you’re going through a big developer, a lot of times you’re going to be waiting. So know if you’re thinking that, this could be a year, year and a half out.

Steve Pomeranz: It reminds me of my older clients used to say to me, they don’t even buy green bananas. I can’t even imagine buying a place and it’s going to be done like 12 months from now.

Terry Story: You forget about it.

Steve Pomeranz: You forget about it.

Terry Story: Like, “Oh, wait a minute, I think I have a house coming here sometime soon.”

Steve Pomeranz: Exactly right. And you know that neighborhood that they’re just putting up across the street, that looks so much better.

Terry Story: Right, exactly.

Steve Pomeranz: Okay, that’s not what we’re here to talk about. So number one, one of the issues is that you’re likely—everybody listening to me—you are more than likely to pay more than the advertised price.

Terry Story: Oh, no question. So the billboard will say, “Starting at 499.” Okay, so you walk in, it’s like, “Well, where’s that 499 house?” It doesn’t exist. It may on paper start there. It’s like, “Oh, you want a lot with it? You want the house to sit on a piece of property? Well, let me show you what’s available. Well, for 50 thousand, you could have this.”

Steve Pomeranz: That’s the house that backs up to the turnpike.

Terry Story: Well, there’s an upgrade because there’s no backyard neighbors for that lot.

Steve Pomeranz: I never knew that. I hope you’re not right about that.

Terry Story: I’m exaggerating a little bit but recognize that those numbers there, there’s a lot more to-

Steve Pomeranz: Well, I mean you always hear about these nightmares about… You see the tile that comes with it and then you see the upgraded tile and you go, “Aww…”

Terry Story: “Aww, just a little bit more.”

Steve Pomeranz: “I have to have that. I’m going to be in here for 20 years.”

Terry Story: Oh, and don’t think those model homes are all standard.

Steve Pomeranz: Oh, that’s for sure.

Terry Story: They’re trying to sell you. And not all cases. I mean, there are builders display some of their standard features, but it’s a little tongue in cheek, but just realize that, especially some of these really nice models, they’re all macdaddyed out.

Steve Pomeranz: They are. So the idea here is when you go in to buy one of these things, make sure that you have a cushion of extra money to spend because you’re going to be spending.

Terry Story: Right. The builders like to tell you, “Well, we just want to show you what options there could be.”

Steve Pomeranz: I know. It’s the anchoring sale. I talk about that with you guys, real estate agents a lot. “I want to buy a $450,000 house.” “Okay, well, let me show you the $700,000 house first.”

Terry Story: “Then we’ll work our way down.”

Steve Pomeranz: Then we’ll work our way down. I can’t go back. I love that 700… All right. So also, the builder is going to recommend or, not pressure you, but entice you to use their lender. How does that work?

Terry Story: So basically, what the lender, and it’s good for the lender if you’re using his lender in that he knows what’s going on with your finances, it’s not going out to a third party. And as a matter of fact, he’s willing to pay you an incentive to use their lender, so you’re not required. The key thing to this is knowing that you’re not required and the lenders that they use, there’s nothing wrong with them. They’re not charging you a higher rate or anything like that. It’s truly the builder’s desire to stay in control of what’s going on with the process. Because again, he took out the construction loan, he’s now building this house-

Steve Pomeranz: On spec.

Terry Story: … on your spec, even though it’s not complete spec.

Steve Pomeranz: That’s right.

Terry Story: So there’s risk on his part and he’s just trying to minimize his exposure and risks.

Steve Pomeranz: What about using a real estate agent?

Terry Story: Oh, you should absolutely use a real estate agent. What you have to understand with these new constructions, I’ll give you an example. A builder’s building a hundred homes. He factors that say, I don’t know, I’m going to make up the numbers, 85% of the consumers are going to come in with their real estate agent. So when he calculates his cost, he’s calculating paying all hundred homes based on a realtor coming in. So if you’re one of those that go in without a realtor, you’re not saving the commission.

Steve Pomeranz: He’s making the commission, so he may suggest, “You know, you really don’t need an agent here.” Let’s say you don’t have one.

Terry Story: Right.

Steve Pomeranz: Because it’s more money in his pocket. If he’s going to be paying 20 grand to an agent, he’d rather keep the 20 grand without having to pay it. But either way, it’s built into the price of the house.

Terry Story: It’s built into the price, you’re not saving any money, but why wouldn’t you want somebody to be on your side as an advocate?

Steve Pomeranz: I was going to ask that. So tell me, what is the value of having an agent on new construction?

Terry Story: Well, I’ll tell you, the agent on new construction A, will know a lot about the different builders because they—especially if they’re experienced—they’ve been in town for a long time, they know the reputation and can bring you through the pitfalls. When it comes to the contract, there’s not much that you can do with the builder’s contract. He’s not going to alter it. You can even send it to an attorney. Good luck, they’re not going to make any changes. But the realtor is there on your side. Actually, I think one of the best benefits that we bring to the table is to help you not make stupid decisions. And when I say that, I just had a buyer at a new construction place and we’re looking at the different lots.

Well, you know, she’s in love with the $150,000 lot, and I just brought it to her attention. I said, “You know, when it comes to resale, you’re not going to get back $150,000. You’re paying for that now. You’ll get a premium when you go to sell your house, but it’s not going to be 150,000.” So there’s things that a realtor can just ground you a little bit.

Steve Pomeranz: Right. But also-

Terry Story: And help you make wise decisions.

Steve Pomeranz: You have a full view of the lay of the land. So this community over that community based by, maybe you want to be near the turnpike because you worked down in Miami or something like that, you kind of have the big picture, so a realtor can prevent [crosstalk 00:07:28],

Terry Story: And they can help steer you. Sometimes you didn’t even know that you want a new construction, but they start to feel like, “You know what? Maybe new construction is good for you because you’ve been looking at all these resales.” Where we have a hard time as agents is when a consumer goes and looks at these new construction places and then I take them to go look at used homes. Oh, my gosh.

Steve Pomeranz: I can’t do it.

Terry Story: They are just like flabbergasted.

Steve Pomeranz: It’s the anchoring again.

Terry Story: Yep.

Steve Pomeranz: Okay. My guest is always Terry Story, a 31-year veteran with Keller Williams located in Boca Raton, Florida, and she can be found at terrystory.com. Thanks, Terry.

Terry Story: Thanks for having me Steve.