The average cost of building a new house can range between $119,767 and $451,058, and it could save you up to 15% in comparison to buying an existing home — but what do you know about the new construction homebuying process? Have you weighed all the pros and cons of buying new? Are you even sure new construction is right for you?
We are going to answer all of those questions and walk you through the new construction homebuying process. By the time you’ve finished reading, you’ll have a better understanding of the ins and outs of buying brand new and whether or not this is something you’d like to pursue.
Step-by-step guide to buying a new construction home
We’ll weigh the pros and cons at the end, but let’s start with an overview of the steps involved in the new construction homebuying process.
Step 1: Decide which type of new construction home is best for you
Buying a new construction home can mean anything from choosing a house that is already completed and ready to buy in a brand-new subdivision, to designing a custom-built house on an empty lot you’ve already purchased.
A tract home is a house that is part of a new development. Builders will often purchase a large tract of land on which to create a new neighborhood from scratch. These houses are sometimes referred to as “cookie cutter” homes because they often look quite similar — but the advantages of buying a tract home are that you’ll know exactly what you’re getting, and prices can be especially favorable because builders are working with bulk-buy discounts from material suppliers.
“If you’re buying in a new construction neighborhood — or you have one builder or a few builders that are putting up an entirely new subdivision — then they already have pre-selected floor plans and options, and you as a buyer get to benefit from economies of scale,” says Brian Beatty, a top agent in Charleston, South Carolina, where new construction homes are prevalent.
“If you’re building in a mature neighborhood, you’re just building new construction for yourself. That’s going to be custom, and it’s going to cost more.”
A spec home is one that has been completed by a builder and is ready for move-in. It’s still a brand-new home, and you’ll still be the first to live there — you just won’t have been part of the design process or had input on the materials used.
Spec homes are a great option when you want the never-been-used thrill of a new property, but perhaps do not have several months to wait for a house to be built from scratch.
A custom home is just that — a totally customized property. You’ll have a say every step of the way, from working with the builder to determine the best blueprint for your lot to choosing specific appliances at the very end.
Custom homes are generally the most expensive way to get into new construction, but if you want to build your dream home from the ground up, this is the way to go.
Step 2: Find a buyer’s agent for new construction
Although you do have the option of buying new construction without a real estate agent representing you, it’s recommended that you find a buyer’s agent; Stephen Cooley, a top-selling real estate agent in North Carolina with 31 years of experience, explains why:
“When you walk in a new construction site, that on-site agent that’s working in that model home, they’re friendly and nice — and they do not represent the buyer. They’re representing the builder, and it’s their job to get the builder top dollar and under the best conditions.”
An experienced buyer’s agent, on the other hand, will be working with your best interests in mind. Agents who are familiar with new construction homes will be aware of any quirks or oddities that may arise with contracts, too.
“Local, regional, and national builders all kind of have their own versions of a contract,” advises Beatty.
“For example, if you buy [an existing] house here in Charleston, there’s a South Carolina state-approved contract that you use, and you just fill in the details. But a builder is going to write their own contract; they’re more than likely not going to accept a boilerplate contract.”
A good buyer’s agent will be able to review these contracts with you and make sure you’re not signing off on terms that benefit only the builder and leave you — perhaps literally — out in the cold.
Step 3: Research neighborhoods
Just as if you were buying an existing home, when it comes to buying new construction, you’ll want to do your research when it comes to location. What’s considered important to keep in mind will vary with individual lifestyles, but may include:
- School districts
- Commuting time to work
- Convenience to grocery stores, restaurants, home improvement stores, and so on
- Proximity to recreational spaces like parks, fitness centers, or swimming pools
- Entertainment options (think movie theaters, bowling alleys, or anything else you may enjoy)
Property taxes may also be higher in certain counties than in others, which may be a factor worth considering and is one your real estate agent can help you figure out.
Step 4: Work with a lender that’s familiar with new construction
If you aren’t paying cash for the build of your new home, you’re going to need a home construction loan. Though many lenders can probably provide some type of suitable loan — whether through a lending network or their own means — it’s best to work with a lender who is familiar with the new construction process.
You can ask your real estate agent for a recommendation, or try searching online for “new construction home loan [city, state]” to get started.
New construction home loans are different from typical purchase mortgages because instead of doling out the entire amount of the loan at closing, they serve as a short-term loan that will allow for release advances (called “draws”) throughout the construction timeline.
Once the building is completed, the loan will either be converted into a typical mortgage, or your construction lender will require you to obtain a separate mortgage. Unfortunately, not all lenders offer this type of loan. Builders generally have a list of recommended lenders and may even entice you to use one of those lenders by reducing the price.
However, before signing with any lender, do your research! Make sure they have a good reputation, decent rates, excellent customer service, and that you understand how their construction loan product works from beginning to end.
You may also encounter something called a bridge loan. These are typically used by investors who are acting quickly to buy land for development, but they can also be used by individuals who know they will be building a home in the near future to “bridge” the gap between your previous home and your new home. A bridge loan may be helpful if, for example, you’ve found a lot you’d like to buy and will figure out the details of your new construction home later.
Finally, builders — if they aren’t working from a list of their own preferred lenders, as mentioned above — may have the capacity to offer their own financing. Builder financing may only fund the construction portion and the home will likely require refinancing after construction is complete — so, again, do your research to find out which option will be best for your finances and lifestyle.
Step 5: Research prospective builders
Naturally, you do not necessarily want to use the builder who has the cheapest rates because the saying “you get what you pay for” exists for a reason. Yes, builders are required to adhere to local building codes, but there’s more to choosing a builder than that!
Research the builder’s reputation with the Better Business Bureau or the state attorney general to see if they have any complaints filed against them. You can do this on websites like Google My Business, Angie’s List, Yelp, and Facebook.
When you’re looking at the builder’s reviews and social media profiles, Cooley suggests buyers pay attention to how the builder communicates with someone who bought their home after closing. A good builder who stands behind their work will reach out to buyers and remedy any problems that may arise.
Moreover, don’t be afraid to actually have a conversation with your potential builder. Ask about their previous developments, ask if there are common issues with building a home in your area (anything from weather conditions to material accessibility can be a major factor), and ask if they have any vacant or model properties you can walk through. In short, be proactive!
Your agent, too, can help you determine if there are specific questions or concerns you should address before committing to a particular builder.
Step 6: Research the builder’s developments
There are two ways you could choose where your home will be built.
You could look for a reputable builder with designs that you like and buy a plot of land in one of their developments.
You also have the option of purchasing a piece of land in an area you like and look for a reputable builder who could build a house on that plot.
When you’re driving through a developer’s neighborhood, get out and walk around. Ask the people you meet about the area and their experience with the developer.
You’ll also want to understand the situation surrounding a possible homeowner’s association (HOA). While not a guarantee, most new construction neighborhoods will have some type of HOA in place to keep common areas maintained and ensure a cohesive aesthetic.
HOA dues — which can be billed monthly, quarterly, or annually depending on how the association is set up — will have an impact on your homeownership budget, so it’s important to understand what you’re getting into. Moreover, HOAs often regulate what you can and cannot do with your home’s exterior, lawn, and driveway, so ask the developer (or your agent) for a copy of the governing documents for a full overview.
Step 7: Understand the purchase agreement
This is where your agent’s guidance will really come in handy!
While there may be less room for negotiation when it comes to the new construction homebuying process, you can (and should!) still gain as much clarity as you can around what happens if unforeseen issues arise during building.
If price increases are possible along the way — such as when desired materials, fixtures, or appliances are unavailable — when and how will you be advised? What is your recourse if you don’t agree to the proposed replacements?
Materials and labor shortages are both a real concern in 2021 stretching into 2022, according to Ben Neely of Riverbend Homes, a high-end homebuilder in the Austin and Texas Hill Country areas.
“Where we build, labor is in such high demand that the process is taking up to 40% longer than it did two years ago,” Neely explains. “There are delays on almost everything because of supply chains, but the worst are windows, garage doors, and metal roofing materials.
“All three are several months out from the time you order, so we have to schedule accordingly.”
Neely also warns that prices have risen in accordance with demand — Economics 101! — and his company is paying 30% to 40% more for “every single component that goes into a house than we did pre-pandemic.”
All this to say, it’s more important than ever to work with a trustworthy builder who doesn’t shy away from dialogue with buyers.
“Go into it with patience, and you’ll have a good experience,” says Neely. “Every builder, big and small, is in the same boat.
“Relatively speaking, it’s a good time to build because interest rates are at historic lows, but understand that it may take upward of a year to get into your house from the time you break ground.”
Step 8: Choose your home’s style
When you’re choosing the style of your home, we recommend planning into the future and choosing a house style that will fit your evolving lifestyle.
Most builders will have a few different model homes or floor plans you choose from. You’ll be able to select the square footage, how many levels the house has, and the number of bedrooms and bathrooms.
You’ll probably have more than one pre-construction meeting with your builder to discuss options and upgrades, but the initial sit-down to determine floor plan and core elements of your home is perhaps the most important.
If there’s a model home available to walk through, remember that this home is a showcase piece and will nearly always have the most swank upgrades available. If you see something you like and you’re unsure of whether that particular material or fixture is the standard option, be sure to ask for clarification.
Step 9: Choose standard items
After you choose the style of the home, you’ll get to pick out the finishing touches from the builder’s selection of standard options. This means you’ll be able to select the basics, such as paint color, flooring, countertops, cabinetry, light fixtures, appliances, and tiling.
Keep in mind that the standard option typically means the cheapest option. For example, paint colors will usually be on a neutral spectrum (shades of white, beige, and gray). Flooring will usually consist of builder-grade carpeting (which is not plush) or laminate selections, and light fixtures aren’t going to be anything special.
A lot of items that are in the design center do not offer 100% return value in a resale. For example, builders might have an extreme high-end cabinet line and rare granite that’s more expensive, but they do not equate to resale based on what the other homes sell for in the neighborhood. If the other homes don’t have these upgrades, you’re probably not going to get that return.
- Stephen Cooley Real Estate AgentCloseStephen Cooley Real Estate Agent at Stephen Cooley Real Estate Group
- Years of Experience 33
- Transactions 4208
- Average Price Point $221k
- Single Family Homes 3705
Step 10: Choose upgrades
If you aren’t fond of any of the standard options, or if you want to move into a home that shows a little bit of your personality, you can look at the various upgrades your builder offers. However, keep in mind that these upgrades are going to increase the sticker price on your home. So you have to be mindful about what you’re choosing.
This is where your buyer’s agent will become helpful. As you tour the design center and come across an upgrade you like, ask your agent if the upgrade is worth the investment and whether you’re likely to see a return when you sell the house.
“A lot of items that are in the design center do not offer 100% return value in a resale. For example, builders might have an extreme high-end cabinet line and rare granite that’s more expensive, but they do not equate to resale based on what the other homes sell for in the neighborhood. If the other homes don’t have these upgrades, you’re probably not going to get that return,” Cooley explains.
He also suggests reaching out to vendors directly because you can get these upgrades after closing for much less than what the builder would charge. It’ll be even cheaper if you’re handy and can install the updates yourself!
This being said, upgrading a kitchen (or bathroom) is not an especially easy project and — let’s be honest — do you really want to move into a brand-new home and already feel like your kitchen needs renovating? In some cases, it may be worth the splurge to get the materials and appliances you really want from the outset.
Remember that value is relative, and unless you’re planning on turning around and reselling your new construction home within a few months of completion, what you will enjoy most about your home is arguably more important than its potential resale value to a stranger years down the road.
On the other hand, minor upgrades like specialty paint colors and light fixtures can be taken care of with relative ease after move-in. Be honest with yourself about what you’re realistically able and willing to do on your own.
Step 11: Figuring out your living situation between homes
The new construction homebuying process presents buyers with the unique problem of figuring out where they’ll live in between houses. It can take six months — or more — for a house to be built, and timelines aren’t set in stone.
If you wait to sell your current home until the last minute, there’s no guarantee it’ll sell by the time your new house is complete. No one wants to be stuck with a double mortgage!
If you can sell your house, you’ll probably need to arrange temporary housing and storage for your belongings. Your buyer’s agent will be able to advise you when the optimal time would be to put your house on the market to minimize the wait, but looking into short-term lease options (or talking to friends or family members who may be able to accommodate you for a few weeks between homes) is probably not something that should be left until the last minute.
Step 12: Have your new home inspected
One would assume that if you’re buying brand new, it’s going to be problem-free, right? Wrong! Even if you hired the best builder in your area with the best reputation, there could still be some issues. That’s why it’s crucial to have a buyer’s agent who’s familiar with new construction homes — because they’ll know a home inspector who understands the process.
“One mistake buyers make with new construction homes is that they just assume the home is going to be perfect and, because of that, they don’t get an inspection,” says Beatty.
“It’s really important that buyers get inspections on new construction homes.”
Whether there are simple cosmetic oversights or significant issues with something not being built to code requirements, you’ll want to protect yourself with a home inspection.
Any problems or concerns will go on a punch list (a list of tasks that need to be completed before the project is officially finished), and once the builder completes the punch list, it’s equally important to have an inspector come back out and revisit your home to ensure all is well.
Step 13: Sign and review the warranty documents
Warranties are a big part of the new construction homebuying process, and it’s important to know which type of warranty you will have. Builders generally offer one of two types of warranties:
- Implied warranties will cover workmanship defects that will have a significant impact on the home’s livability, habitability, and safety. These warranties typically have a 10-year liability period, and they tend to use vague language.
- Express warranties clearly define the problems the builder is responsible for fixing. This warranty will state the length of the warranty and how the homeowner should dispute issues.
A buyer’s agent who is knowledgeable in new construction homes will play an invaluable role during this period because they will be able to answer any questions you may have.
Step 14: Final walkthrough
Your final walkthrough is exactly what it sounds like: It’s the last time you’ll walk through the home before officially taking the keys and signing off its completion.
By this point, inspections, repairs, and re-inspections should be fully completed — and it’s in your own best interest not to take possession of the house until all punch list items are resolved and you have no lingering concerns.
During the final walkthrough, be sure that there are no residual paint splatters, left-behind construction materials, or any other signs of a job not-quite-completed.
Do, however, be forgiving of everyday dust and other signs of recent human activity. Unless your purchase documents specified that a professional cleaning will take place prior to your move-in, your builder isn’t on the hook for things like vacuuming, mopping, or polishing your countertops.
Step 15: Closing time!
At last, it’s time to close on your new construction home, and the process is complete!
Your agent and lender will guide you through any action items on your part in the lead-up to closing day. Be ready to answer your phone, respond to emails, and gather necessary paperwork to maximize efficiency.
New construction pros and cons
Now that we’ve reviewed the steps involved in the new construction homebuying process, let’s summarize with a quick review of the pros and cons.
Pros of new construction
1. Everything is brand-new
A big perk of buying new construction is that no one has touched a single thing in the house — aside from the contractors, of course. The house is built with modern materials, new appliances and fixtures are installed, and the surfaces are in pristine condition. Because everything is brand new, you’re less likely to be burdened with surprise repairs.
“New homes come with the latest trends, and they are typically maintenance-free for the first 10 years,” says Cooley. “If there’s a problem in the first year, most builders offer a toll-free number where you get someone who represents the builder to fix the home.”
New construction also means the house and everything in it will be more energy-efficient. There will be modern windows installed in the home, better insulation, more efficient heating and cooling, and even appliances that use less electricity and water.
2. New construction means the building is built to today’s standards
People marvel at the craftsmanship and detail of older homes… but remove the sheetrock to inspect the electrical work, or crawl under the house to inspect the plumbing, and you’re likely to find some issues. Sadly, the problems you find are going to be pretty costly — at least a few thousand dollars per repair.
Even if there aren’t any significant problems, before you can buy the house, a home inspector will require the sellers to bring the house up to code. Worse yet, you could be purchasing a renovated house with unpermitted work, which can open up a whole new can of worms.
New construction eliminates that possibility because builders are required to follow today’s energy and code requirements.
3. You can personalize the house to suit your tastes
When you buy an existing home, you should expect to spend a pretty penny to renovate the kitchen (Home Depot estimates a “minor” remodel averages $24,0000, and a “major” remodel averages $69,000). Maybe you want to replace the flooring throughout the house because you wish for mahogany bamboo instead of carpeting and laminate.
Any work you do to turn an existing home into your home is going to cost you. New construction allows you to choose the finishes that you want, therefore eliminating the added cost you’d have to pay to renovate.
Cons of new construction
1. You have to vet the builders
As with everything else in this world, if you want to be sure that you’re hiring someone who is going to do their job and do it well, you need to vet the people that you’ll be working with.
If you don’t do your research, you could wind up with a newly constructed house that is riddled with problems, code violations, and more, so do your research on any builders you interview. Better yet, work with an experienced agent who can help guide you through the process.
2. Personalization can get expensive
As you’re looking through a model home, you have to keep in mind that it’s going to have the best features, fixtures, and appliances the builder has to offer.
“Buyers have to remember that the design center is a profit center for the vendors; builders and buyers can get very carried away when visiting the center because they’re adding things to the base price,” explains Cooley.
3. Move-in date isn’t guaranteed
On average, building a home from start to finish will take approximately six months, but many variables can hold up production, such as material shortage, bad weather, or issues with the crew. All of these can stall your move-in date, which is problematic if you’re counting on moving within a particular timeframe.
To build or not to build?
Ultimately, the only person who can decide whether a new construction home is the best fit for your budget and lifestyle is — unsurprisingly — you. There may be a few more hoops to jump through and certainly a longer wait until you’re able to move in, but if you like that “new car” smell, imagine the scent of a new home!
With a little research, a lot of patience, and a great real estate agent in your corner — you’ve got this.
Header Image Source: (Unsplash.com/Avel Chuklanov)