New Construction's Hidden Costs Can Burn Buyers

Many homebuyers think that purchasing a brand-new home is smarter than purchasing a "used" home. A new home's maintenance costs should be minimal; its construction materials, systems and appliances should be up-to-code and energy efficient; the floor plan and amenities should meet the needs of modern buyers and the home should be move-in ready. A new construction also has an emotional appeal for buyers who like the idea of living in a home that's completely clean and potentially perfect.

SEE: Mortgage Basics

What many buyers don't realize is that new homes often have numerous hidden costs. If you're considering a new construction, here's what you should look out for to make sure you're spending your money wisely and you don't experience any unpleasant surprises.

Hidden Defects
Just like an older home, a brand-new home can have hidden defects (also called "latent defects") that require expensive repairs. Heavy rains can reveal inadequate waterproofing or grading that leads to leaks or flooding in your home. A weak slab could crack. Siding could fall off. The wood floors could warp. Your toilet could overflow. Electrical wiring could be done incorrectly. Any problem that you might be afraid to find in an older home can also appear in a brand-new home.

To protect yourself, research the builder's reputation and don't skip a thorough inspection by an independent home inspector who is not affiliated with the builder. Ideally, you would have one inspection after the home has been constructed but before all the finishes have been put in, when some problems are easier to identify, and another inspection just before your loan closes and you take possession.

Also, find out what kind of warranty the home comes with and read it carefully before you buy the home. You may have to rely on that warranty if any latent defects pop up, because your homeowners insurance policy may not cover them. Different aspects of the home may be covered for different lengths of time, so make sure you're aware of those limitations and report any problems to the builder as soon as you notice them.

SEE: The Beginner's Guide To Homeowners' Insurance

Missing Necessities
New homes often don't come with everything you need. It's quite common for them to lack fences, decks, window coverings, appliances, landscaping and other essentials.

Each of these missing items can be a major added expense. Before you make an offer, note what's missing and do some research to figure out how much these items will cost. Make sure to factor these purchases into your budget. If you can't afford to pay for them out of pocket, getting the builder to pay your closing costs might free up the cash you need for blinds, sod and a washer and dryer.

If that doesn't work, look for a new home that comes with all the essentials, or consider a property that's almost brand new and is just lived-in enough that the previous owner has installed all the missing necessities.

Pricey Upgrades
The showy model you'll tour will typically have all the upgrades the builder offers, from hardwood floors and granite counters to bay windows and oversized bathrooms. Seeing what you could have can lure you into spending significantly more than the base price that originally attracted you to the community. The price difference between the base model and the model with all the bells and whistles can be tens of thousands of dollars.

Also, if you buy the upgrades through the builder, you might pay an upcharge and have a limited selection compared to doing the upgrades yourself. You also have to consider the future resale value. Choose finishes that will appeal to a wide variety of buyers and pick options that won't make your home over- or under-improved for the area.

Some builders do include upscale features in the standard model and factor them into the base price. Just make sure you know what you're looking at before you tour a home and fall in love with something you can't afford.

Uncertain Future
In a new community, you don't really know what you're buying into. Who will your neighbors be? What will get built on that vacant land? How good will the new school system be? How will these unknowns affect your quality of life and your home's resale value? "New construction" is not a synonym for "low crime," "friendly neighbors" or "excellent education."

It's OK to take a chance on these unknowns--just realize that you're taking a chance. Conditions can change in established neighborhoods, too, but a well-established area might give you a better idea about what life will be like in your new home.

Lack of Representation
When you buy a new construction, you shouldn't walk into the sales office unarmed. The builder's sales agent represents the builder--not you--and any financing the builder may have arranged will not necessarily be the best available financing. Get your own agent and your own lender to make sure you get the best price on the home and the lowest interest rate and fees on your mortgage.

Conclusion
Don't make any assumptions about what you'll be getting if you buy a new home. Buying a new home can be more expensive and come with many more uncertainties than you bargained for. However, if you prepare for the experience, you'll know how to watch out for your best interests and spend your money wisely.



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