How to Avoid Pitfalls When Purchasing Newly Constructed Homes

The idea of buying a totally new home and being able to customize the types of finishes, upgrade the floor plan and be the very first person to live there is all very seductive. In fact, such a scenario is probably the first choice of the vast majority of home buyers. But before signing up to the purchase of a newly constructed home, you need to make sure you have done all the research, investigated thoroughly all the contract clauses, know exactly what are the financial obligations you are committing yourself to, and what final result you can expect.

Actions you should DEFINITELY take

1 Make sure you have an agent working for YOU. Some buyers make the mistake of using the builder’s own sales agent as their representative. DO NOT DO THIS. Your builder’s sales rep. is on his pay roll and has you legal responsibility towards you. You need to find someone who is prepared to accept a fiduciary responsibility to YOU alone and who is prepared to negotiate on YOUR behalf.

2 Remember – many builders expect you to come accompanied by your agent when you make your first visit to their sales centre. Check with the builder you are thinking of using BEFORE going there alone.

3 When visiting a model home ask the sales rep how much the home would cost to build exactly as you see it. Most model homes are built with all the optional upgrades included, but you may be quoted the price of the basic model starting prices without all the extras. Know exactly what you are being quoted for and how much the extra options will cost. Always double check the quality and cost of any upgrades by comparing prices for similar materials in retails outlets outside the construction. You need to know that what you are paying to upgrade is actually an improvement on the standard materials or whether it would make more financial sense to wait and make the changes in the future.

4 Think carefully about who is going to build for you. This is going to be an intense relationship and you need to be able to work together closely. Get references and check them out. Really do the research. You need to find out all you can about this builder’s previous constructions, how long this builder has been in business, whether any complaints have been filed against him, etc. Don’t forget that builders of new construction have to register their development with TARION so check out their site (www.tarion.com) and take a look at the JD Power (consumer rating) website too at www.jdpower.com.

5 Even before you move in you need to think seriously ahead to the moment of resale. You have all the enjoyment of the fact that this is a brand new home, but for the person you sell too this will be a pre-existing home. Are you really choosing a good location? Is the workmanship of good enough quality? If in doubt remember that it is usually better to buy a pre-existing home in a desirable location rather than go for a brand new house in a less attractive location.

6 What percentage of the development has already been presold? Builder’s agents are always very good at painting the projects they work for in the rosiest of lights. You need to get down to hard facts and find out what percentage of the development is actually presold (ie reservations that date the project) compared to contracted (ie actually engaged to the construction). Reservations do not always finish up going to contract due to financial, issues, problems with timelines for occupancy or simply because the future buyer changed their mind.

7 Don’t sign ANY contract until your attorney has looked at it. It is quite normal for a developer’s contract to favor the developer rather than you and typically their contracts have little similarity to everyday contracts that are approved by real estate boards. You need to be aware of the full meaning and implications of every clause and the best person to advise you on this is your own attorney who is acting in YOUR interests. Don’t think you can sign and then revise the contract – once you’ve signed it is usually too late to make amendments.

8 Find out all you can about property taxes – don’t rely on the information given to you by the developer’s agent. Make a phone call to the local tax authority and get your own facts straight from the horse’s mouth! The only way to know how much tax is due is after a tax assessor has valued the actual home and developers may underestimate how much may be due in order to make their projects more attractive.

9 NEVER think of buying a new home with getting it professionally inspected first. The operational word here is professionally – don’t rely on any amateur opinion no matter how much they claim to know! Don’t ever think that because the home you’re buying is brand new it must all be fine as the actual standard of workmanship varies enormously between contractors. The advantages of paying for an inspection far outweigh the expense involved and could save you a fortune later if you go ahead and buy and find a lot of problems that could have been fixed prior to the sale. Schedule all inspections at least a week before closing at the same time as your PDI.

10 Ask about the percentages of investor purchased units and owner occupied units within the development. Some developers include clauses that require buyers to live in the property for at least a year before selling on to avoid speculation by ‘flippers’ looking to make a fast buck.

11 Be aware that most developers will want you to pay in advance for any upgrades to your new home. This is in case for any reason you do not follow through with the contract and the developer may then be left with problems selling on unit with the specific finishes you have requested. Every buyer has their own preferences for the types of kitchen cabinetry, floorings, countertops, colour and styles of tile, etc and what you like may not necessarily appear to the next buyer. For the same reason, be prepared to fight if you pull out of the deal and want your money back for the upgrades and changed floor plans that you have already paid for. The developer will argue that he has to return the house to the model state in order to make it attractive for sale and will probably refuse a refund.

12 Understand why most developers insist that upgrades and floor plan changes are paid for in advance.

13 Always get clean copies of floor plans, blueprints and surveys. File these away in a safe place for that moment in the future when you decide to sell or perhaps to make changes to the floor plan. Too many buyers overlook this step in all the excitement of their new home and then later regret not being organized right from the start. Specifically ask your developer to give your copies of the most up to date surveys.

14 Ask specifically about your developer’s length of warranties on the structure itself as well as appliances and finishes. Typically, developers offer seven year warranties on their structural construction and then offer manufacturers’ warranties on windows, appliances, over-head garage doors, furnaces and other fixtures and fittings. But get these facts clear before your construction develops problems or your appliances break down.

15 Start a final check list and always keep it to hand when you visit the property. Plan your final walk-through at least 3 days to a week before closing the sale. This way you can keep close tabs on all those last minute details that need to be finalized and be aware which items have been overlooked. Make sure that both you and your developer sign off on a copy of the check list to show that everything was finished as requested.

16 Check with your developer about any insurance restrictions they may have on limiting your access during the construction process. Try to be proactive and maintain the same level of interest throughout the construction phase. It can be all too easy to get swept away in the bustle and chaos of everyday life and lose focus on the home you are having built. By visiting regularly you can be sure that work is on track and every little detail is being completed as you wished. It is always much easier to correct any errors sooner rather than later.

17 Be aware that home owner association fees are kept deliberately low by developers during the marketing phase of their project to make their units more attractively priced for faster sales. It is quite normal for home owner association fees to increase by more than 25% once the association is actually handed on to the home owners themselves.

18 Be aware that nothing is ever FREE. If your developer is offering free plasma TVs or upgraded appliances it could be a warning sign that sales are not going well for some reason – find out why other buyers are not biting the bait – are there better offers in developments nearby hence the lack of interest in this project?

19 Don’t expect the developer to be willing to negotiate down the cost of your new home. Most developers price their construction on costs plus 20% or more profit, based on an overall formula for the entire project and are unwilling to change this. You may, however, be able to negotiate to replace standard carpets with hardwood floors or upgraded appliances.

20 Be aware that buying into preconstruction ALWAYS comes with risks. It is always cheaper to buy in during the pre-construction phase but you need to be absolutely sure of your developer and investigate fully his track record in terms of completing on time, taking out the necessary building permits, etc.

21 Investigate well in advance the costs of taking out a construction loan. What will happen if your new home is not completed in time – be sure to make contingency plans to cover such eventualities as cost overruns and your possible need for a bridge loan and/or temporary housing. Be sure to research fully the rate-locked expiration dates on temporary and construction loans and mortgages.