Buying a New Construction Home: How the Process Works

Buying a home from a builder is a different process from buying a resale home. The steps, the paperwork and even who is looking out for you all work a little differently. I spent years representing a builder, and I’ve also represented many buyers in new construction purchases, so I’ve seen the process from both sides of the table. Here’s what buyers should know before they start.

Involve Your Agent From the First Visit

If you plan to work with a real estate agent, tell the builder at your very first visit. Ideally, your agent comes with you. At a minimum, bring your agent’s business card and make sure your agent’s name goes on the builder’s registration paperwork.

This matters more than ever. Most buyers now work with an agent under a signed buyer representation agreement. If your agent isn’t registered with the builder from the start, the builder may not be able or willing to pay the agent’s commission. Depending on your agreement, that commission could become your responsibility.

Know Who Represents Whom

The friendly sales representative in the model home works for the builder and represents the builder’s interests. A buyer’s agent represents yours. Depending on the market, there may or may not be much room to negotiate with a builder. Either way, a good agent knows the common pitfalls in a new construction transaction and can help you avoid them.

An agent who is experienced with new construction can walk you through the full transaction and advocate for you at the meetings you’ll have with the builder throughout the build.

Research the Builder

In recent years, several builders, including some fairly large ones, have gone bankrupt. Before you commit, look into the builder’s track record, how long they’ve been in business, and how their completed communities have held up.

A builder in financial trouble can leave unpaid subcontractors and suppliers, who may file liens against the property. Make sure your title work checks for liens, and that any outstanding liens are released before you close.

Choosing Your Lot

Not every lot is equal. Before you commit, compare the available sites and research what’s around them. Look for possible encroachments from gas infrastructure, easements and similar issues that could affect how you use the property. It’s also worth verifying the school attendance zone and checking property tax rates, including any special districts, with the appropriate local offices.

Understanding Builder Incentives and Lenders

Builders often offer incentives such as help with closing costs, upgrade credits or interest rate buydowns. These incentives are frequently tied to using the builder’s preferred lender. Sometimes that’s the best deal available, and sometimes a different lender would work better for you. Compare the actual numbers before deciding which incentive and which lender make the most sense.

Be Careful With Contingencies

Many builders will accept a contingent offer up to the drywall stage. Before you sign, ask the builder where that cutoff falls, and exactly what would be refunded and what would be forfeited if the contract fails.

Contingencies can be treacherous with new construction. Builders typically want to be paid in advance for at least a portion of the upgrades you choose, and those payments are generally not refunded if the contract fails. So if a contingency falls through, such as financing or the sale of your current home, you could lose real money even though the purchase never closes.

Watch Out for Over-Improving

It’s easy to get carried away in the design center. Upgrades add up quickly, and the appraisal may not support the final contract price. That risk is a big reason builders usually require upgrades to be paid in advance. Choose upgrades with that in mind.

Get Everything in Writing

Every promise made at the sales office must be addressed in the contract documents. Every change to the contract after signing must be made through a written change order. If it isn’t in writing, don’t count on it.

The Redline Meeting

The redline meeting is where you sit down with the builder and go over your plans in detail. This is the time to think ahead about how you’ll actually live in the home. For example:

• Where you want outlets located, such as for a TV, desk or kitchen island
• Adding flexible conduit, often called smurf tube, so you can run cables for electronics later without opening walls
• Other details that are much easier and cheaper to settle before construction begins

Changes made on paper cost far less than changes made after the walls are up.

Inspections During Construction

A new home still benefits from an independent inspection. Arrange inspections at key points during construction. At a very minimum, get a pre-drywall inspection. It’s the last chance to see the framing, wiring, plumbing and other systems before the walls are closed up and those items are hidden from view. A second inspection of the finished home, just before closing, helps you build a complete punch list for the final walkthrough. Some builders may discourage outside inspections, saying they’ll only address code violations. Even so, it’s worth knowing the true condition of your home.

Setting Realistic Expectations

A few things surprise many first-time new construction buyers:

• Timelines often slip. Weather, supply delays and scheduling can push back your completion date.
• The builder’s contract favors the builder. It’s written heavily in the builder’s favor, and builders generally won’t negotiate its wording. Read it carefully so you understand what you’re agreeing to.
• The model home sets the standard. The condition you’re expected to accept at the final walkthrough is generally tied to the quality shown in the builder’s model home.

The Final Walkthrough

Before closing, you’ll walk through the finished home with the builder. Take your time. Note anything that needs to be corrected on a punch list, and confirm those items are completed before you close.

After Closing: The Builder’s Warranty

Most builders provide a warranty on the new home. Read it so you know what’s covered, for how long, and how to submit repair requests. Keep a running list of issues as you settle in, and report them in writing.

Schedule an independent inspection just before the one-year mark. Many items are covered only during the first year, and this inspection can catch problems while the builder is still responsible for fixing them.

The Bottom Line

If you want representation during the build process, involve your agent early, before your first visit to the builder, and choose an agent who has real experience with new construction.

If you’re considering building a new home, I’m glad to help with every step outlined here. Feel free to reach out.