If you are in the market for a home, you may be looking into new construction. Sales of new homes have increased in the past 10 years, reaching a record 1,072,000 sales in 2003. But in new home construction, as with any construction project, problems can occur. Construction delays are the most common setback, but other problems, such as unreliable developers, can complicate the process, too. Moreover, you will have to come up with a deposit and could lose it if the developer goes bankrupt before finishing.
It’s important that you prepare by doing some research, asking questions and making sure you get all the answers you need. Use this checklist to help you cover the bases.
- Review your contract closely. Consult with a lawyer to ensure that the terms are reasonable. Is there a clear timeline listed for the construction process? Can the developer change the finishes you’ve chosen without notifying you? Keep in mind that contracts prepared by or for the developer will generally favor its interests, not yours.
- Research the developer. Find out what the company’s track record is with big residential projects. Has it had any disputes? Has it cancelled any projects? What is its reputation with the Better Business Bureau?
- Understand your exit points. Because there are several steps to buying pre-construction, make sure you know the “drop dead” date, or the point after which you can’t back out. This point is often before construction is complete, so make sure you’re comfortable with your commitment to purchase by then.
- If you’re buying a condominium or townhouse, find out what you can about the property manager and review the Covenants, Conditions and Restrictions. Is the maintenance budget reasonable? Are there plans to build a pool or make a major change that could drastically increase your fees?
- If you are buying a house, inspect it before you close. You should consider bringing along a qualified home inspector to make sure that the construction is sound and the home meets your expectations.
- Visit the site regularly. Is construction progressing on schedule? Make sure the developer is comfortable with your visits.
- Know your rights. Find out what your state’s home warranty law can do for you. Some home warranty laws will shelter buyers from major structural flaws in their homes for a specified period of time (usually six to 10 years). However, if the developer goes bankrupt before construction is complete, you generally have little recourse.
- Prepare for construction delays. Developments fall behind schedule for reasons as varied as strikes, material shortages, regulation changes and bad weather. While delays may not be the fault of the developer, it should make a good faith effort to rectify the problems.
Delays can have an effect on:
- the interest rate of your loan. As your closing date approaches, you may want to lock in an interest rate. If a construction delay affects your closing date, find out whether your lender is willing to extend the lock-in period.
- the market value of your home. Check your contract to ensure that you pay the presale price even if your home increases in value before closing. While developers can reserve the right to raise the price, it’s considered unethical.
- your move-in date. A delay in occupancy can affect the money you spend on an interim rental property, the date your children change schools and more. Try to remain flexible about your exact move-in date. Also, make sure that the delay of your occupancy date is reflected in your closing date, and notify your lender of the change. You don’t want to start making mortgage payments before your home is completed.