Hey, Kyle here with winthehouseyoulove.com today.
We're talking about the ins and outs of purchasing a new construction home.
So you're going to learn three things in this video.
Number one, we're going to talk through the process.
So what's the order of everything that's going to happen.
Number two, we're going to talk about the numbers.
So what kind of down payment, earnest money, and rate are you
going to expect in new construction?
And then finally, we're going to talk about incentives of purchasing with
new construction over an existing home.
So let's go ahead and dive into this.
We first need to talk about the difference between new and existing and specifically
what we're talking about here in this video is we're talking about a home with
a builder who already has a home built.
It's a prefabrication and normally what you do is you go, you talk to
them and you customize the home and then they build it and then you buy it.
Okay.
This is not for custom built homes.
Okay.
So, what do you need to first consider is looking around and exploring if
building a home might be a very similar price to purchasing, especially in
this market when home values are continuing to grow and grow building
might actually be very similar.
I have a video that I'm going to link at the end with Scott
Smith, sharing his experience of purchasing a new construction home.
And he actually talks about how building was actually the same cost as purchasing
a home for the exact same specs that they were looking for in their area.
So consider as an option building might not be as far out as you
expect, especially if you're not going with a custom build routes.
Okay.
Now, what you also want to do, is you want to talk to an agent about how
a build might have a resale value.
Okay.
And this is all going to depend on your market.
It's impossible to say as a blanket statement, all builds are better
than existing homes or all existing homes are better than builds
in terms of the resale value.
It's just not a fair comparison to do that.
So talk with a real estate agency, see if that market is expanding and
growing to make sure that if you purchase a new home, and you're going
to be in there for a couple of years that you'll see that value come back.
All right.
So before we dive into the next one, what I want to do is
jump into a quick CalmMoment.
And the reason why is because if you're looking at a new build, you're probably
feeling the pressure of the really low inventory happening right now.
We are in a crazy sellers market nationally.
And this is where sellers have the control, home prices are
continuing to increase and there aren't a lot of houses available.
So if you're putting in offers, you're probably seeing multiple
offer situations, you might be getting beat out by other buyers.
And if so, I don't want you to look at construction or new construction
just as this last ditch effort to try to get the ball rolling.
It's okay to slow down, to put the brakes on things if what's happening
right now isn't working for you.
So if you're in that situation, explore new construction as an option, but
don't feel like you have to push into anything that's available just because
you're feeling discouraged by what's happening in the market right now.
Okay.
So we covered new versus existing.
Now what we need to tackle is representation.
So when you're looking at getting a new build, you could go with a realtor.
Or you could just stick with the builders sales rep.
So normally when you talk with the builder, you're going to be
interacting with the sales rep.
So it's the person who works for the builder.
They represent the builder.
All right.
So if we're talking about who do they represent, it's the builder.
And what they're going to do is they're going to talk with you about customizing
and the process and everything like that.
So what you want to be careful of, or be mindful of is that you're
not getting pushed into any upsells from a sales person like this.
So consider using a realtor.
Now, what you can do is you can actually talk to the builder and say,
Hey, if I don't use a realtor, is it possible to get any cost savings?
Because sometimes builders will actually build in the cost of paying a
buyer's realtor in the purchase price.
So if you're not using a realtor, they might be able to decrease
that purchase price for you.
It's not a guarantee, but it's worth an ask.
Just know that a realtor does have a significant benefit for you, especially
considering how much earnest money might be required in the build.
And we'll talk about that here in a second, but a realtor is going to help you
navigate the process, help you negotiate incentives or credits, and really make
sure that you're represented through the contract the entire way through,
because it can be a little overwhelming to manage this all by yourself.
Okay.
So, what you also want to do during this stage is you want
to ask a lot of questions.
So basically anything that you see, just ask questions, either that's to
your realtor or your sales rep, the more that you can understand about
the process, the more potential you're going to have to make sure that you
have a not an overwhelming time or a stressful time, and you might be able
to explore extra credits or incentives as you walk through that process.
Okay.
So that is a huge benefit of being able to ask these questions is you get
to explore, especially with a sales rep, if there's any extra credits
that they might have when you are looking at building maybe potential
add-ons or concessions that they'll give you towards your closing costs.
So.
You've chosen your representation.
So who's going to represent you a realtor or as a sales rep, going to be
the main person you're working with.
Then what you want to do is you want to customize that home.
Now, not all builders are going to have customization options,
but most are going to allow you to choose from a few selections.
So obviously you're not custom building a home, but you might be
able to choose a couple, maybe out of three kitchens, you get to choose
an option or, you get to choose flooring out of four different options.
Maybe you get to choose a couple of different layouts.
Okay.
So there's a little bit of customization that can go on here.
And what you'll want to do is you want to talk with that sales
rep about your customization.
Now this process probably is only going to take about an hour.
It's not going to be super in-depth because again, you only have a
few options to go through here.
Now what to be careful of is a lot of these builders are going
to advertise to get people to come into the door and see their homes.
So you'll most likely see these ads where it says, you know, new
homes starting in the $200ks.
now obviously that's going to be the base model.
It's probably not going to have any added things to it.
The models that you actually go tour in the very beginning probably are not
going to be the one that's $200,000.
So be very careful that when you're exploring these homes and you're
actually going in and seeing them that you understand what the value of that
home is and what it's being sold for.
Because just because it says it starts in the two hundreds, that might not be a
home that you want to purchase, because it's probably a very bare bones model.
So with that you want to watch for expensive upgrades.
So upgrades are fine, right?
Because if you're looking at a home and you know, a neighborhood that's
starting in the two hundreds, most likely though the average home is
probably going closer to 300,000.
So you just want to be careful that you don't get so far in the process
and then realize, Oh, the home that we actually toured as a lot more
expensive than the $200,000 price tag that we saw on the street.
Okay.
So make sure you're touring several different models that they have.
And also maybe look at touring several different types of builders.
Okay.
You might have one neighborhood that's being developed over here,
but you might also have another development growing across the street.
Even if you know you're wanting to stick in one specific development
or one specific builder, it might be worth it just to explore what's
happening in your local market.
And then finally be patient through this process, because as you're customizing
it, and every lender is different, all of these prefab lenders are
different, but I'm sorry, not lender.
Every builder, every prefab builder is a little bit different.
So, you might get through the customization phase and then
you might have to wait months like six to eight months before
that home actually gets built.
So again, this is where you can talk with that sales rep or with your
realtor, get a realistic idea of what you can expect through the process.
Okay.
So then you have your deposit.
Now, each builder is going to be different, with the
contracts that they have.
But what we first want to understand is is this home a prefab or is it not?
Sometimes the new construction isn't necessarily sold by a builder.
It might be sold by an independent party.
And if so, then they might not have an earnest money requirement, but
most often, if it's sold by a builder, normally in their contract, they
want to have earnest money deposited.
Okay.
Or a builder's deposit.
They're the same thing.
Basically what it's doing is you're putting money up front to say
you're going to follow through with the contract because keep in mind
what's happening with the builder.
The builder is actually the one who is financing the construction of the home.
You're only purchasing the home after it's billed.
So they could go build this home for you.
It's not custom, but you selected options.
And maybe some upgrades that were more expensive for them to put in.
And then if you walk away at the end, they now have this home that they have to
try to sell and find another buyer for.
So that money commits you to that contract with that builder.
And make sure you read in there to see.
Is there an option for you to get out of this, and get your earning
earnest on money back if you need it.
And this is where having a realtor can be helpful because they're going to
help you negotiate and, and figure out the way that, you can protect yourself
if you need to in that contract.
Okay.
So, again, all builders are different, but you're probably going to run into
an earnest money deposit around 5%.
Now this is a lot higher than the average that you see on an existing home purchase.
An existing home purchase is closer to the 1% range.
New construction is going to be closer to the 5% range.
It could be higher or lower depending on the builder.
So now let's talk about the loans you're going to get with this.
A new construction loan is what's called an end loan.
So think of loans in kind of two different categories for right now.
On one side, we have construction loans and the other side, we have end loans
and think of an end loan as, you know, it's the category of the four main
types of loans, Conventional FHA VA, and USDA, a construction loan is going to
be a loan that's going to actually fund the construction during the process.
So it's going to give money to, the contractors to do the work.
Then once the building is complete, then you have a loan that takes over
after the building's actually complete for the rest of the term, which is,
you know, maybe 15, 30 year mortgage.
Okay.
So what we're talking about here is actually an end loan.
So new construction loans you can purchase with any loan that you can
purchase a regular home with, right?
Conventional, FHA, VA, and USDA.
And they're all going to be the exact same rate that you get on an existing home
and the exact same downpayments that you would get on an existing home as well.
So if you're a veteran, you can go 0% down on a new construction home.
If it's in USDA eligible area, you can go 0% down on a new construction home.
So this is fantastic.
You don't have any special constraints with this new construction.
Now, if you're getting an actual construction loan, so maybe you're
working with a custom builder, then you're probably going to be seeing
a larger down payment, closer to 25% to 35% down on a construction loan.
But since the builder actually financed the building of the
home until it was complete and we're just taking an end loan.
We can actually just use a regular loan.
Okay.
So the builder funds the construction.
Now, something you want to keep in mind is the builder
normally has an in-house lender.
And since they have a partnership, you normally can actually get
incentives from that lender.
Sometimes it's incentives in closing cost credit.
So maybe the builder or the lender pays a portion of your closing
costs and the incentives might be.
In terms of, discounts that you get on the home or add ons that you get on the home.
So for instance, I've seen, if somebody uses the preferred lender
that, you know, they would get like a $4,000 add on, in a kitchen.
So you get incentives.
And this is where you want to talk to your sales rep or your realtor about hey, can
we explore what options we have available, when we work with these two together.
Okay.
So, I know that anytime we've tried to go up and compete with a loan against a
builder, or with a builder's preferred lender, it's incredibly difficult.
They have a relationship that's a lot tighter.
And since they, often are kind of owned by parent companies, they can,
do elements of some revenue sharing, which allows them to cut down on
some of their margins a little bit.
So.
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So you went ahead and you got representation.
You customized things, you put your earnest money down, and now the
building is actually going to start.
And again, this is not a custom built home, but probably the
building isn't completed yet.
All right.
So a general contractor is going to be working on actually,
putting your home together.
And, again, at the end, I'm going to link a video from my friend,
Scott, who just went through purchasing a new construction home.
And one of his biggest pieces of advice is to develop a good relationship
with the general contractor.
The general contractor is going to be the one who's out there,
overviewing the build for you.
So they're going to be finding any problems and correcting that for you.
So establish good rapport with them.
Connect with them in the beginning.
Just let them know that you're there and, you'd love to be a
little bit part of the process.
Obviously don't annoy them.
Don't, you know, always follow up with them every week, but
stay in good touch with them.
Keep good communication.
And most likely you'll actually be able to visit the site.
And it might be worth going out to the construction site you know, once
or two times just to explore how everything is coming along, because
you're most likely going to be eager to move into that home very soon.
Now, tax assessment, this is a huge thing that people do not realize
when they purchase new construction.
All right.
So when you pay property taxes, you're paying based on the
assessed value of the home.
All right.
So if somebody came out and they assessed the value, and then you pay
taxes based on the assessed value.
So this only happens normally once a year, your home gets reassessed.
So keep in mind that home, when it was last assessed was, most
likely just a plot of land.
So it's value is very low.
And so there aren't a lot of taxes requiring to be paid on it.
Now.
When that home is built and he gets reassessed, that assessed
value is going to skyrocket.
All right.
And now you're going to have a larger tax bill due.
So where this trips up people is, they'll close on their loan and
see the monthly payment without having the new tax value in there.
And there's no way really for you to, you know, for a lender to put
in and collect escrows of what they think your taxes are going to be.
They're going to go off the assessed value.
So keep that in mind.
What might be beneficial for you to do is to, maybe talk to people
who are already in that development who have been there for awhile.
Talk to the sales rep, get an idea of what taxes are going to be, because
you're not going to be able to estimate them on your own and your lender won't
be able to estimate them before you.
What you'll have to do is be prepared for when that bill comes due.
Because the last thing that you want is to expect, Hey, our taxes were only,
you know, 30 bucks a month, but in reality, they're closer to $400 a month,
$500 a month because your assessed value went up after it got reassessed,
because it went from a plot of land to now land with a new home on top of it.
All right.
So cross out that section, and then finally, what we want to do
is we want to manage expectations.
So when you purchase a new home, it doesn't mean that
it's going to be perfect.
All right.
Even a new custom built home that's a million dollars is going to
have things that's wrong with it.
So you need to have those expectations.
So this is where it's really helpful to hold on to anything
that the builder gives you about any warranty that you might have.
And it might be really good to have to go with a warranty option if they give
it to you, even though it's a new home, you want a warranty to cover things if it
wasn't installed correctly, or there are just some things that need patched up.
Okay.
So, if you want to hear, some firsthand experience of someone who's actually
gone through new construction recently, this video over here is going to be
a video from my friend Scott, and he just went through this with his family.
He's going to cover some of the ins and outs for you from
his firsthand experience.