Buy Before You Try: Pros and Pitfalls of New Home Presales

On July 11, The Wall Street Journal heralded the "Return of the Sight-Unseen Market" in an article that described the recent resurgence in sales of homes that are yet to be built. Buying "off-plan" can bring many advantages, but it also has drawbacks. So what can you do to improve your chances of a good buy-before-you-try experience?

Advantages of Pre-Sales

1. It may be your only choice. With surging mortgage interest rates and real-estate prices, many buyers are desperate to buy quickly before the cost of homeownership increases any more. However, some local housing markets are starved for buying opportunities. For instance, the Journal says fewer homes were for sale in Manhattan in the second quarter of this year than at any time (except one solitary quarter) this millennium. Where housing inventory is very low, buying a brand-new home may be your best bet.

2. You get your dream home. Are you in the market for a yet-to-be-built $50 million duplex penthouse (and who among us isn't?) with stunning ocean views across the white sands of Miami Beach? Well, there's only one currently available that we know of, and, if you don't snap it up now, someone else may slap a cool $25-million deposit check on the developer's desk. The same applies to less upscale purchases. If you've set your heart on a particular new-build home in a great development, the only way to be sure of getting the design, specification and plot you want may be to buy off-plan.

3. It's a new home! Nobody's lain in the bathtub before you. Yours are the first bare feet to tread on the carpets. You're the one who specified everything -- from the interior colors to the kitchen worktops and appliances. It's new. It's perfect. And it's yours.

Drawbacks of Pre-sales

1. Dodgy developers -- part 1. Back in 2006, a number of Americans fell in love with the yet-to-be-built Trump Ocean Resort development on Mexico's Baja California coast. Some might have been reassured by the Trump name and by The Donald's face on the billboards. But, when the project collapsed, it turned out the real developers had merely licensed the Trump brand, and those who lost deposits became mired in court actions, according to The Huffington Post. The moral of this story? Dig deep to make sure you know from whom you're buying and are sure of their financial stability.

2. Dodgy developers -- part 2. Unlike Mexico, many U.S. states offer some -- though often only limited -- legal protections to those who put down deposits on pre-sale developments. Similarly, you may benefit from title insurance, although such policies don't always pay out as expected. Be very interested in the track record of your developer. Google its name and check it out with the Better Business Bureau. As importantly, research previous developments and go see them if possible. Do they match up to the artist's impressions on the sales brochures? If you're an outgoing sort of person, knock on a door or two and ask residents about their experiences.

3. Know what you're getting into -- part 1. Watch out for "gotcha" clauses in contracts. Some developers try to slip in waivers that allow them to change specifications or even room or plot sizes. Sometimes these may be reasonable and unavoidable, but make sure you're entitled to be consulted first and that you have the right to receive at least the equivalent of what you are paying for.

4. Know what you're getting into -- part 2. You're almost certain to have floor plans and some basic specifications before you hand over your deposit check. But do they provide enough information? You know how long and wide each room is, but what about ceiling heights? Is the central air energy-efficient? Are construction materials and techniques proven? What's the insulation like? Might nearby land be developed, ruining the views you value so much? Don't be afraid to ask -- and require critical information in writing.

5. It's a new home! People -- including you, it seems -- are often prepared to pay a premium for all the advantages of having a new home. But that means you're likely to take a depreciation hit the moment you move in -- just as you do when you drive a new car out of the showroom. Of course, unlike with a new car, you hope your home is going to pick up value quickly, and it may well be worth more by the time you sell. But, depending on the housing market at the time, you could lose out if you try to sell it again within a year or two.

Don't Be Put Off

Every home in the country was once a new one, and many of them were probably sold before they were built. So the chances of your being seriously disappointed by a bad developer are likely slim, especially in today's market where rising house prices make real estate projects inherently more viable.

But, just as you would if you were buying any expensive item from someone you don't know, you need to understand as much as you possibly can about the seller and the product before parting with any money. Carry out the necessary research, and your chances of getting what you want improve dramatically.

Get Home Mortgage Loan offers customized for you today.