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Buying a New Home vs. a Pre-Owned Home

Buying a new home

Today’s housing market is a challenging one for homebuyers. Supply is limited, interest rates are on the rise and competition is high. Be that as it may, most house hunters are still looking to stretch their dollars as far as possible, which begs one obvious question:

Which is a better investment: a new home or a pre-owned property?

Most opt for the latter option, and with good reason — we tapped a number of experts; they all agree that new construction is almost always more expensive. And even though the National Association of Realtors says we’re currently seeing a slight dip in existing home sales (likely due to low inventory), pre-owned homes still make up over 90% of total homes sold.

The truth is that there are pros and cons to each. Read on for everything you need to know about buying a pre-owned home versus a new one.

Reasons to buy a pre-owned home

You get more for your money. The allure of a shiny new home can be strong — especially when most model homes look like the set of an HGTV show. But keep in mind that swoon-worthy features like uber-modern kitchen backsplashes and lighting fixtures don’t come cheap. The median sale price for new houses is $312,400, according to the U.S. Census Bureau. Meanwhile, the National Association of Realtors reported that the median price for an existing home is $257,900. That’s a difference of over $54,000.

You can make improvements exactly to your taste. When looking at pre-owned homes, you don’t have to opt for a decades-old home that may require pricy foundational repairs or significant renovations. Looking at homes that are structurally sound but may require some cosmetic updates can give you the ability to make those improvements to your taste. “If you’re looking at a pre-owned home that’s 15 years old, the trade-offs in terms of design and modern amenities are actually very minimal,” Nicholas Solis, a San Francisco-based REALTOR, told LendingTree.

You’re more likely in an established neighborhood. It is possible to find new construction that’s around the same price as older homes, but more likely than not, it’ll be in a developing area that may not be in the school district you prefer or near amenities that are important to you, like shopping and entertainment. Vet the neighborhood carefully when buying new.

“If you’re able to find more affordable new construction, you have to ask yourself how far you want to drive for work. What’s the school district like? How far are you from grocery stores and shopping?” Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask, told LendingTree.  “It’s easy to be charmed by a new home and put blinders on, but these are really important things to consider because they’ll affect your quality of life.”

Sophisticated homebuyers look beyond new amenities and fancy upgrades — which, by the way, aren’t guaranteed to add value to the home, especially if you buy early into a new area. Why? Glink says that when you get in early, the value has yet to be proven out in that development.

If you’re buying with resale appreciation in mind, you’re probably better off buying a pre-owned home and then building in value. Glink suggests looking for an older house in an established neighborhood that has room to grow if, say, you want to put in a second floor or bump out the house in the back.

Reasons to buy a new home

Your maintenance costs will likely be lower for a while. Buying a new home means that everything is, well, new. Unlike buying an older home that may require a roof repair or new water heater in the near future, new construction essentially means getting a clean slate.

“With an existing home, we suggest getting a home inspection, roof inspection and pest inspection, at the very least” because the risk for these issues is higher, said Solis. “With a new home, you’ll spend more upfront but your short-term maintenance costs are generally lower.”

That’s not to say you don’t need to have a new house inspected — just because it’s new doesn’t guarantee that it’s been properly built. Glink recommends hiring a private home inspector to take a look several times throughout the process.

“You want to make sure what goes on behind the walls is actually done appropriately,” she said. “This includes having it inspected during construction and afterward.”

If everything is indeed up to code, your short-term maintenance costs will likely be lower than if you’d bought an older home. The average electric furnace, for example, is made to last about 15 to 20 years. If you buy a pre-owned home that’s at the end of that lifespan, it could cost you close to $2,000 to replace and install.

The roof and HVAC system are comparable money pits. Just keep in mind that even with a new home, you can count on eventual repairs — it simply goes hand in hand with homeownership.

“It’s unrealistic to think that houses don’t need work,” added Glink. “My husband and I have been in our current house for 24 years and have already replaced almost all the appliances and made multiple roof repairs.”

New homes might be more energy-efficient. If an older home with a lower price tag turns out to be an energy guzzler, you’ll easily make up the difference on the back end by way of high electric and utility bills. Whether you’re buying new or pre-owned, take a look at the home’s insulation, HVAC systems, windows and appliances to get an accurate bead on what you’re dealing with before making an offer.

If you fall in love with an energy-friendly home, consider looking into an energy-efficient mortgage. This type of financing allows you to borrow more, and at a higher debt-to-income ratio, so that you can afford a more expensive energy-efficient home.

How the homebuying process differs for new homes vs. pre-owned homes

A home in a new development may have a more complicated contract. It’s wise to go through any contract with a fine-toothed comb before signing on the dotted line — but Glink says that a contract for a new home that’s drafted by a developer is even more complex.

“I really recommend using a residential real estate attorney if you’re doing new construction because these contracts are generally very one-sided and protect the developer, not you,” she said. “You have to really understand that when the developer says they’ll give you a 20-year warranty, it may not mean what you think it does.”

Solis agrees, adding that if you go to three different builders, you could very well end up with three substantially different contracts.

If you’re building a home from scratch, you might need a special type of loan. When buying a new home, there are two ways to go: Buying into a new development from a builder or buying an empty lot and building your home from scratch. If you go with the latter, you’ll likely need what’s called a construction loan; short-term financing to cover building expenses. It’s typically doled out in installments throughout the construction process, and while you probably won’t have to make payments during this time, you’ll likely be on the hook for paying the interest.

Once the home is finished, the borrower will then turn around and repay the loan in full, usually in one of two ways — converting your short-term building loan into a long-term mortgage, or taking out what’s called a two-time-close construction loan, which requires taking out a long-term mortgage that’s separate from the short-term construction loan.

“Buying land and building a custom home requires a lot of capital, and most buyers don’t have it,” said Glink.

The main takeaway here is that if you’re dead set on building a customized home from the ground up, be prepared to spend more and jump through additional financial hoops. Buying into a new development from a builder is far less involved, mirroring how you’d apply for any other type of mortgage. Some words of wisdom from Solis: even though a builder may pressure you to use a specific lender, it still pays to shop around for better rates and terms.

Timing is tricky in both cases. The homebuying process, in general, can be tricky for those looking to sell one house and buy another — buyers get outbid, construction gets delayed, closings take longer than expected. Unforeseen roadblocks are the norm, and they may play out differently with a new home versus an older home.

“In my experience, the builder really puts the screws to buyers, compared to how a resale home would work,” said Solis. “The amount of time they’re willing to give you to sell your home is usually very short, and they won’t typically work with you to extend it.”

On the flip side, he says that resale home sellers are often in a similar situation that you’re in, making them more apt to being flexible with regard to timing. This by no means is a guarantee, but it’s certainly worth keeping in mind that the seller is another human being (not a development company).

Either way, it’s wise to have a closing date on the books before vacating your current home. Otherwise, you could find yourself temporarily without a place to live, scrambling to find short-term housing in the interim.

The bottom line

Pre-owned homes are more likely to cost less and be in an established neighborhood, but your maintenance and/or energy costs could very well be lower in a new home — but be ready to pay a premium for a new house that comes with lots of aesthetic bells and whistles. With a new home, you may also be in store for a more involved contract and mortgage process.

“In my area, once we sit down and have a very basic conversation, it’s extremely rare that buyers want to continue with new construction,” said Solis.

 

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