Should I buy in a development or build my own?
This question is fully dependent on your financial circumstances as well as your preferences. If a house in a development doesn't meet your needs then a custom home may be what you want.
Buying in a development is typically easier. Your agent takes you to the model home, you select between home designs and options, possibly negotiate the price, then put down a deposit and sign the contracts. After the home is built, you settle on it then move in. About a month later, you start paying the mortgage.
Building your own custom home can be much more stressful depending on how involved you need to be with the process. For example:
A custom home may cause more stress but the payoff is more control over the complete process. Purchasing in a development is definitely easier and requires less financial power.
- Do you need to purchase the lot first? Will it be purchased with cash or is a mortgage needed?
- Do you have house plans or do you need an architect to put your thoughts into drawings?
- Does the lot have public water and sewer or do you need a well and septic system?
- What services can the builder provide?
- Will the builder pick up the costs while development is being done or do you need to pay as you go?
- The list goes on...
Base Price versus Final Price?
The Base Price, typically the price that lures you into the development, is generally not the price that you will end up paying for the house.
Can you purchase a house for this price? Sometimes. Most of the time, there are Lot Premiums or other charges (for options you can't live without) that will cause the price to be higher.
The Final Cost will be the summation of the following:
- Base Price
- Lot Premium
- Closing Costs
Options - Wow, how did the price get so high?
It is real easy to exceed your price range. When you walk into a model home, remember that the builder has typically installed many upgraded options in that house. It is only natural that you are going to want a lot of those options.
An example was a sign in front of a development that stated that the homes started in the mid $300,000 price range. When the on-site agent was asked how much the model home would cost to replicate the answer was $710,000. Over double the price on the sign out front.
Beware that the price on the sign and the price of what you actually want may vary drastically. After seeing many of these options, you will probably want most if not all of them.
Construction Mortgages - Turn Key versus Draw?
A turn-key mortgage is the easiest. You purchase a brand new home in a development, give the builder a deposit, and then 5 months later after the house is built you settle, move in and start making the mortgage payment.
A Draw type mortgage is used when you are working one-on-one with the builder. You purchase a lot and then hire a builder to build a house on it.
In this situation, you start making a mortgage payment on the lot beginnning from the time of purchase. Then, as the builder completes certain parts of the house, the bank pays the builder (a draw) and ups your mortgage payment. There are typically 5 - 7 draws throughout the process. An example of a draw would be that the builder excavates and pours the foundation. The builder is then paid by the bank for that part of the work (a draw).
The downfall to the Draw method is that you will be paying for the house as it is built. The mortgage payment will start low and then by the end of the process it will be the full payment. Depending on your financial situation, this may cause problems since you may end up paying two mortgages at the same time.
Buyers Agent - The builder pays for me to have agent representation?
For the most part, built into the price of a new house is the commission that a builder expects to pay to an agent that represents the Buyer. Builders believe that most Buyers are working with an agent and therefore offers to pay agents to bring you, the Buyer, into the model home and represent you throughout the complete transaction.
If a Buyer walks into a model home without their agent, the builder may refuse to acknowledge the agent (after all the agent had nothing to do with you walking into the model home) and will refuse to work with the agent. You will have to deal directly with the on-site agent (the builders agent) and your chance for agent representation (paid for by the builder) has been lost.
Incentives, Free Options - Using their mortgage and title company?
Some builders offer very lucrative incentives for purchasing a house. Some examples are $25,000 in free options, no lot premiums...etc.
These incentives are OKAY. Just beware that they generally include the requirement that you use the builders recommended mortgage company and title company. If you have a previous relationship with a mortgage or title represenative you may have to fore-go that relationship in order to receive the incentives.
Deposits and Closing Costs?
When you consider new construction in a development and decide you want to move forward, typically the builder requires a $1000.00 deposit to hold the lot. The $1000.00 deposit usually holds the lot for 10 days. During that time, it is expected that you will meet with the builder's agent and proceed with choosing a floor plan and selecting the options. Every builder I have ever dealt with does not deposit this check but just holds on to it as good faith that you wish to move forward.
Most builders require a 10% deposit. This is not set in stone and it is possible that the house can be purchased with less of a deposit. A typical loan to acquire the deposit money, if you currently own a house, is a Bridge loan. (a Bridge loan allows you to borrow up to 80% of the equity on your current home for 12 months)
The Closing Costs are in addition to the deposit. Closing costs consist of three main components.
- Title Insurance
- 1% Tax
- Municipal, County and School Taxes
The rate for title insurance is governed by the State and is directly related to the purchase price of the house. The 1% tax is based on the purchase price and the other taxes are dependent upon the location of the house and the time of year in which you will take occupation of the property.
There are additional closing costs (recording fees, appraisal fee, notary fees...etc) but the 3 above are the ones that may involve thousands of dollars. If interested, I can provide an "estimate" of closing costs.
Lehigh Valley BuildersI've worked with the following builders in Lehigh Valley: Tuskes, Toll Brother's, Ryan Homes, Harrison Homes, Blue Eagle, THProperties, R&K, Rondel, Spectrum Homes, Omega Homes, Saucon Valley Homes, Zawarski & Sons, Wagner Farms plus many others. If you have any questions contact me.
Copyright 2006, Joe Finnerty