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Some homebuilders are cutting corners as demand heats up

Sewage backups, windows that won’t shut, and missing tiles. These are issues that a homebuyer may expect from a previously owned house.

But they’re also cropping up on new construction, according to interviews with several real estate professionals, as builders appear to rush to meet increased demand and close deals as soon as possible.

For buyers, those mistakes could derail the mortgage process and, if not caught during an inspection, they could cost buyers thousands of dollars down the road.

“Most buyers assume that a brand new home is perfect,” Matthew Steger, certified inspector with WIN Home Inspections in Lancaster, Penn., told Yahoo Finance. “And obviously, the suggestion is to get a professional home inspection done because you'd be surprised what the builders miss and what the township or city or county code and compliance inspectors miss.”

A construction worker works on the frame of a new home being built in a housing development on the west edge of town, in Las Vegas. (Julie Jacobson, AP Photo)
A construction worker works on the frame of a new home being built in a housing development on the west edge of town, in Las Vegas. (Julie Jacobson, AP Photo) (ASSOCIATED PRESS)

‘Drains that don’t drain’

As the spring buying season approaches its peak, homebuyers faced with few choices on the resale market turned to new builds, which represented a third of all for-sale inventory, up from the typical 12.7%.

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Sales of newly built single-family homes increased in April, hitting the highest level since March 2022. Builders also sped up the development of new homes, with housing starts and permits for single-family homes both increasing month over month in April.

But speed may help create potential conditions where things slip through the cracks. Just ask Jason Sharon, owner of Home Loans Inc. in South Carolina.

“Just last week, the ventilation fan for the bathroom was vented to the attic space and not outside of the home,” Sharon told Yahoo Finance. “The week before, a builder did not have the appliances installed, so they had to take appliances out of a different home to install into the home I was financing in order to close. Last month, a builder called me to get a waiver for a bathroom missing tile – obviously that didn’t fly.”

Monte Miner, a real estate agent with Ironwood Fine Properties, said one builder site in Phoenix was rife with problems, particularly with its drainage system that plagued several units.

“You can get drains that don’t drain,” Miner told Yahoo Finance, noting that buyers should get a sewer scope done to make sure the toilet is properly connected to the sewer.

“That’s a big deal,” he said. “Otherwise, you could get backups and it could cause real damage to your house.”

‘Major cutting corners’

In this aerial view, completed and under construction new homes at a site in Trappe, Maryland, on October 28, 2022. - New home sales in the US dipped in September, official data showed on October 26, 2022, as worsening affordability nudges ownership further out of reach for many. Sales soared during the coronavirus pandemic as Americans snapped up homes on the back of bargain mortgage rates, but the sector has cooled with the US Federal Reserve hiking lending rates as it fights to bring down surging inflation. (Photo by Jim WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
In this aerial view, completed and under construction new homes at a site in Trappe, Maryland, on October 28, 2022. (Photo by JIM WATSON/AFP via Getty Images) (JIM WATSON via Getty Images)

Sean Dycus, a real estate agent at MainStreet Properties, is seeing similar problems, also in South Carolina.

“Just went through with two new build clients — major cutting corners,” Dycus told Yahoo Finance. “Bad foundation, cabinets falling off the wall, roof leaks, AC problems, the list goes on.”

In Pennsylvania, several new building sites have had their share of problems, Steger said. For instance, improperly installed bedroom wall insulation or lack of fiberglass in the attic, which could result in higher utility bills.

“The past three years or so, probably have been more new construction inspections than I’ve done in the prior 18 years,” Steger told Yahoo Finance. “There’s one development in my area. I think I've done 87 homes there in the past three years and I find the exact same flaws in every single one of those homes.”

If a buyer doesn’t get a new home inspection or an inspector misses an issue, that could be costly for the buyer. Steger said structural issues or missing insulation can run several thousand dollars to fix. If a buyer does find out about an issue, some builders may offer concessions. But buyers shouldn’t be afraid to make demands, experts said.

“They made fixes, some before close, some after,” Dycus said. “Offered concessions, but buyers were so nervous.”

‘Get paid within hours of getting the certificate of occupancy’

Workers lay a foundation at a new home construction site in Trappe, Maryland, on October 28, 2022. - New home sales in the US dipped in September, official data showed on October 26, 2022, as worsening affordability nudges ownership further out of reach for many. Sales soared during the coronavirus pandemic as Americans snapped up homes on the back of bargain mortgage rates, but the sector has cooled with the US Federal Reserve hiking lending rates as it fights to bring down surging inflation. (Photo by Jim WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
Workers lay a foundation at a new home construction site in Trappe, Maryland, on October 28, 2022. (Photo by JIM WATSON/AFP via Getty Images) (JIM WATSON via Getty Images)

Higher costs of construction, material supply disruptions, and tightening credit conditions on construction loans brought on by recent banking failures have pressured new construction. A request for comment from the National Association of Home Builders was not returned.

There is also a deficit of 400,000 workers in the industry, which has resulted in construction delays and higher homebuilding costs – a growing concern for the industry, NAHB Chairman Alicia Huey shared with lawmakers at Capitol Hill this week.

More than 700 builders, remodelers, and associates related to residential construction also marched on Capitol Hill on June 7 to call attention to the nation’s affordability crisis and challenges in homebuilding.

“[The] problem is there are subcontractors that are spread thin between all builders and do sloppy work,” Dycus said. “Then some builders are bad with construction management.”

According to Sharon, some of the mishaps in new construction could be driven by profit margin pressure from shareholders. Most builders take a construction loan to build a home, so every day that loan stays active, it costs the builder more interest.

“My gut tells me it is [them] trying to get the time from contract to closing down,” Sharon said, noting the issues seem to pop up more at end-of-month and end-of-quarter closings.

“They want to sell a house and get paid within hours of getting the certificate of occupancy issued by the city,” he added. “I didn’t see that pressure in previous markets.”

Gabriella Cruz is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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