New Construction Homes Pros and Cons

[Timmy Chen]

Hi Everyone,

Currently I am looking at a real state development and current they only have demo townhouses homes. They are currently in stage 3 of the development and are offering 10k incentives Builder and 2% Seller(towards buying down the interest or closing cost), home comes with warranty and appliances. 

Once under contract, they will review the buyers customizations and then build. My questions to all the lovely BP folks here, is there anything to be cautious and look out for new construction homes and are they viable to be an investment property?

Any knowledge is most appreciated!  

[Nathan Gesner]

Quote from @Timmy Chen:

You have to analyze the numbers to see if it makes sense. Brand new homes typically don't produce enough income to justify the purchase price, particularly in today's market. You may get a better return putting your money in a CD.

That said, new construction has problems of its own. I just helped someone buy a brand-new home and two months later they are experiencing settling cracks.

Personally, I believe things were built better 50 years ago. I would rather have a 50-year-old home that's renovated than a new build.

[Jay Hinrichs]

Quote from @Nathan Gesner:

Quote from @Timmy Chen:

You have to analyze the numbers to see if it makes sense. Brand new homes typically don't produce enough income to justify the purchase price, particularly in today's market. You may get a better return putting your money in a CD.

That said, new construction has problems of its own. I just helped someone buy a brand-new home and two months later they are experiencing settling cracks.

Personally, I believe things were built better 50 years ago. I would rather have a 50-year-old home that's renovated than a new build.

From my POV..  and as someone who build new homes..  The main thing to check first is builder reputation.. And are they production builders that to provide the product at the cost they do use basically the least expensive materials possible and beat the crap out the subs pricing.

so there is a fine line there you cant pay low price and expect supreme product..
The warranties are only as good as the builders ability to stay in bizzness.. So if your getting a warranty from Lennar or DR horton thats one thing if its a local builder that you really dont know their financial strength you need to take that into consideration.

Nathan,  just as an aside pretty much every new build will settle in the first year and cracks are normal and expected you know just like grout cracks that happen when the house settles.. So my warranty and all builders in Oregon have the one year and I think thats pretty much country wide. WE EXPECT to come in and fix sheetrock settling cracks Grout.. doors that may need a tiny adjustment etc etc.. Now I have had a few homes where the folks never called us back so I have to assume they did not have any cracks or nail pops.. But 90% do and as stated our dry wall contractor is one the hook for those and our touch up paint year one is included in my contract with my painter. Just like if there is a plumbing or electrical issue those subs come back no problem..

Bottom line who is the builder and who are their subs that will determine your after market 1 year warranty care..

I do want to add that I also provide a 2 10 structural warranty policy which I pay for.. those cost about 1200.00 this warrants structure years 2 through 10.  Most builders in my market and for sure the nationals do not provide it.. But we do.  pricing is going to be determined by location for instance I suspect in Texas with its famous soil and foundation issue's it probably more money..  The buyers can purchase if the builder does not want to pay for it.. the builder does have to agree to it and sign the form though.

[Doug Smith]

A couple of things: 

Builders will often (usually) built a big chunk into the price of the house to give "incentives" if they use their preferred lender. That way, they make more off of the loan and they keep the comps up for later sales in the neighborhood. 

Also, they will not usually use the standard real estate contract for the area. They will use their own contract that is heavily, heavily skewed toward the lender and will usually pass many traditional seller fees off onto the buyer. 

If you don't mind, PM me the contact info for the muckity-mucks for the builder. We've got an incredible program where we do things the banks won't do with respect to financing residential developments up to $30K. I would love to chat with them. Good luck to you. 

[Bradley Buxton]

@Timmy Chen

We are seeing some of the best investments for new homes because of the lender rate buy downs. We have investors, non-owner occupied getting 5.99% rates in the Reno, NV area.  The rents are still strong and there has already been good appreciation as the builder runs low on homes they have been raising prices. You can also save in maintenance cost the first few years since everything is now.  

As other responses have said the build quality and builder reputation are important.  I always recommend a home inspection even on new builds. Even better if you can get one before everything is drywalled. 

[Robert Ellis]

Quote from @Jay Hinrichs:

Quote from @Nathan Gesner:

Quote from @Timmy Chen:

You have to analyze the numbers to see if it makes sense. Brand new homes typically don't produce enough income to justify the purchase price, particularly in today's market. You may get a better return putting your money in a CD.

That said, new construction has problems of its own. I just helped someone buy a brand-new home and two months later they are experiencing settling cracks.

Personally, I believe things were built better 50 years ago. I would rather have a 50-year-old home that's renovated than a new build.

From my POV..  and as someone who build new homes..  The main thing to check first is builder reputation.. And are they production builders that to provide the product at the cost they do use basically the least expensive materials possible and beat the crap out the subs pricing.

so there is a fine line there you cant pay low price and expect supreme product..
The warranties are only as good as the builders ability to stay in bizzness.. So if your getting a warranty from Lennar or DR horton thats one thing if its a local builder that you really dont know their financial strength you need to take that into consideration.

Nathan,  just as an aside pretty much every new build will settle in the first year and cracks are normal and expected you know just like grout cracks that happen when the house settles.. So my warranty and all builders in Oregon have the one year and I think thats pretty much country wide. WE EXPECT to come in and fix sheetrock settling cracks Grout.. doors that may need a tiny adjustment etc etc.. Now I have had a few homes where the folks never called us back so I have to assume they did not have any cracks or nail pops.. But 90% do and as stated our dry wall contractor is one the hook for those and our touch up paint year one is included in my contract with my painter. Just like if there is a plumbing or electrical issue those subs come back no problem..

Bottom line who is the builder and who are their subs that will determine your after market 1 year warranty care..

I do want to add that I also provide a 2 10 structural warranty policy which I pay for.. those cost about 1200.00 this warrants structure years 2 through 10.  Most builders in my market and for sure the nationals do not provide it.. But we do.  pricing is going to be determined by location for instance I suspect in Texas with its famous soil and foundation issue's it probably more money..  The buyers can purchase if the builder does not want to pay for it.. the builder does have to agree to it and sign the form though.

 I'll one up you Jay. Start buying warranties so you don't have To deal with the headache. add 0.5% to the purchase price, make it part of your sales process. hedges and shifts the risk. you can get 10 year builder policies underwritten and approved. that's how we do it. anything we can do to lower the risk for ourselves is ideal. I have a lawyer in columbus right now who hates that that's available in the private market but we are the builder we can do whatever we want and we draft our own contracts.