5.Constructing a New Home

If you decide to construct a new home, there are important things you should know and consider.  Constructing a new home is different from other manufacturing processes in a variety of ways, and the process of purchasing a newly constructed home can also be quite different from that of purchasing an existing home.  Are you seeking to purchase a home in a building or subdivision in which all of the homes are being constructed by one builder?  Or do you have or are you planning to purchase land and hire a builder to build your new home on it?  Either way, when you are building new, there are more ways you can participate in the construction process and help create just the home you’re seeking.  Many homeowners find this perk of customization the most appealing when they are considering new home construction.

Because you are building a new home, you will be  able to personalize it by selecting the fixtures and finishes it will contain.  You will have the opportunity to select things ranging from flooring to paint – interior and exterior – to sinks, bathtubs and much, much more.  . If you’re purchasing a home from a builder-developed subdivision, you’ll likely have selected one of the builder’s several available models and will then work with a designer in the builder’s design center.  There you’ll select all of the fixtures and finishes for your new home, but be aware — the design center is filled with temptations.  It can be easy to select upgraded fixtures and finishes, but it is important to be aware of the impact on the budget of doing so.  Upgrades come with a price and it can be very easy to find yourself well over budget if you’re not careful.  It’s very common for the appeal of upgraded finishes to conflict with the reality of a housing budget.

If you are hiring a builder to build your new home on land you own or purchase, you’ll still need to make the same decisions about colors, fixtures and finishes, but your builder probably won’t have a design center for you to visit to make them.  Instead, you’ll need to work with retailers of the various components to select the items you wish to have in your home.  Most home builders have relationships with retailers of each of the finish and fixture elements that you’ll need to select, so your builder will likely be able to refer you to qualified retailers with whom you can work.

Since new home construction takes a while, you’ll be able to watch the progress and discuss details as needed during the building process. A survey of construction by the U.S. Census Bureau found that single-family new home construction takes approximately 6 months to complete.

The importance of Working with a Reputable Builder or Contractor

Find a Reputable Builder:  Finding a quality builder is vital for successful home construction.  If you are buying a home from a large builder who is developing all or part of a new community or subdivision, finding information about them should be relatively easy.  Many large builders are public companies, so you can easily obtain their financial information from their annual reports.  The internet can provide you with reviews from previous customers, whether on the builder’s website or on Yelp, Google or other review sites.  Pay particular attention to comments that discuss how the builder handled issues that arose during the 1-year post-purchase warranty period provided on new homes.  If after you move in you have an issue that you need the builder to address, you want to have confidence that they will address and resolve it.

If you purchase a new home from a large-scale builder, you will not have to worry about building permits, site approvals, plans and specifications or any of the other zoning and permitting details of your home’s construction.  A large-scale builder will take care of all of that as part of the project they are developing.  The builder will also manage all of the inspections that are required during the building process, including the final inspection, after which — if the home passes — the city or county will issue a certificate of occupancy and you can close on the purchase of your new home.

Find a Reputable Contractor: If you are hiring someone to build your new home on land you either own or are acquiring, finding an excellent contractor is vital for successful home construction. The best way to ensure you get a great contractor is to read reviews thoroughly, take a good look at their completed projects, ask for references and talk to people for whom they’ve built homes in the past.  You will want to find a reputable contractor who has completed jobs in the same style of construction you envision for your home and who is experienced in building homes in the area you wish to live.  Many experienced homebuilders will have plans for homes that they’ve built in the past that might work for the home you wish to build, but you’ll likely need to work with an architect to design the home you desire and create the plans and documents you will need to secure a building permit from your city, county or town.  All building plans and specifications will need to be reviewed and approved by your local building department before the commencement of construction.

Financing Your New Home Construction

Builder Financing: If you are buying a home from a builder who is building an entire community or subdivision, you won’t need to worry about construction financing.  Large builders take on the financing costs of the homes they build, so all you’ll need to do is secure permanent financing (a mortgage) for when your home is complete.  If you are having your home built on land you own or are acquiring, you’ll need to decide whether to finance its construction yourself or find a builder who can do so.

Having the builder finance the construction means that you will not be required to close on your mortgage loan or be required to start making payments until your home is completed.  Any delays in the completion of your new home will be financed by the builder.  Since you are not closing on your new home and creating a mortgage the chances of builder-caused cost overruns that could cause you to run out of construction funds are dramatically reduced.  Having the builder finance the construction of your new home may limit the builders you can do business with.  Not all builders are able or willing to obtain financing to construct your home.  If you secure financing for the construction of your new home, you will likely be able to secure a better price for the home from the builder because they will not be including the cost of the construction financing in the cost of the home.  But obtaining the financing for your home’s construction means that you will be paying those costs directly to your lender during the construction period, so it’s important to keep that in mind while you’re determining your budget.  Your new home will be under construction, and during that time you will need to be able to pay both the payments on the construction loan and the rent or mortgage on the home in which you are living.

Construction Financing: If you are constructing your new home, construction financing is usually obtained from a local bank or mortgage company and provides in phases the funds necessary for the construction of your new home. To qualify for a construction loan, you will need to provide to your lender the specifications and plans of the home you wish to build, information about the builder you intend to hire to build it (your lender must approve your choice of a builder), your personal financial information, the sources of funds you intend to use for the portions of the home’s costs that you will pay from your own funds, and you must authorize them to pull and review your credit report.  If, upon a thorough review of all of your information and that of your builder, your lender approves you for a construction loan, they will set a closing date that lines up with when you and your builder plan to begin construction.

Most construction loans are a year or less in duration, are interest-only and will permit either 4 or 5 “draws,” the industry term used to refer to an advance of funds from the lender to the borrower and builder.  Allowable uses for the funds provided by a construction loan include all of the costs associated with building a new home – material, labor, permits, water and sewage connections, fees, etc.

Construction loans are structured in this way both to make sure that the funds allocated for construction are sufficient to complete the entire project and to make sure that the home actually is constructed as planned.  Lenders would not be comfortable advancing the entire amount necessary to build the house before the construction has even begun, so they use this draw process.

When your home is complete, you can either refinance your construction loan into a new, fully amortizing mortgage or, if your construction lender structured your loan as what is called a “one-time closing,” you can modify your construction loan into a fully amortizing mortgage.

Legal Obligations: A standard legal purchase agreement for building a new home will include such categories as standard features, optional selections like color choices, a proposed warranty (final to be included with closing), homeowner association documents if applicable, and buyer’s checklist. It’s extremely important to note that any agreement you come to between you and your builder needs to be in writing, as verbal commitments are generally not accepted and legally have no obligation to be honored.

Will My Home’s Construction Experience Delays? Delays are often a fact of life when constructing a new home.  The delivery date of a newly constructed home can be delayed due to many factors with the most prominent being weather. If the roof isn’t yet in place and inclement weather occurs like rain, snow or freezing temperatures, home construction can come to a halt across an entire geographic region. Trade contractors will be scheduled in advance to ensure the building process runs as smoothly as possible, but sometimes tradespeople finish the task before their allotted time slot and there will be a pause before the next contractor is scheduled to start. So while it may occasionally seem as if nothing is happening on your home’s building progress, it’s all part of the normal building process when coordinating skilled contractors from different trades. There can also be a delay in progress while your home is waiting to be inspected by the building department, or because of labor strikes and/or construction material shortages. The construction sequence of your new home generally follows this order: foundation; framing; roofing; exterior, and interior.

Resale Value: Even though you may intend to live in your newly constructed home for the rest of your life, there may also come a time when you’ll want to sell. If you can keep the thought of building your home with resale in mind – adding extra bedrooms, storage or a den/workspace along with keeping an adaptable open-plan concept, or reducing your energy footprint by incorporating energy-efficient features such as smart lighting or a building envelope, and you’ll be ahead of other homeowners when it comes to maximizing your resale opportunity.

Construction vs. Selection

Custom-tailored just for you. Constructing your own home can offer several benefits including the satisfaction of being able to customize both the style of your home and all of its details from the flooring, paint colors and energy-efficient features to the fixtures, finishes and appliances. A new home will generally be free of repairs as everything within the home is newly built. You won’t have to compete with other buyers to purchase a home as you’re constructing it yourself. If you’re having your home built on land you own or are acquiring, and be certain that local zoning regulations permit the construction of the home you wish to build.  You’ll need to hire an architect, a builder, obtain all necessary permits, a landscaper and generally exercise a generous amount of patience throughout the construction process, which can easily take up to seven months or more, according to the US Census Bureau. Customizable options you’ll be able to choose for your new home build will include but not be limited to the following and available upgrades for each:

  • Appliances
  • Cabinets and Countertops – both kitchen and bathrooms
  • Electrical fixtures
  • Fireplace surrounds
  • Flooring
  • Plumbing Fixtures
  • Roofing
  • Siding
  • Cabinet and door hardware
  • Interior and exterior paint color

It’s important to note that once selections have been made and construction begins, your power to make changes along the way may be limited. Some builders require submission of a change order request, along with a non-refundable fee and payment of any difference in cost between the old and new selections before they will permit a change to be made.  And once the contract is signed, the builder has the right to refuse changes you may request.  Builders want happy customers, so most will do what they can to work with you, but it’s absolutely optimal for you to be happy with your selections from the get-go.

Your newly constructed home will come with warranty coverage such as a:

  • One year limited warranty on workmanship (foundation, load-bearing walls, roof framing, etc.)
  • Two years for system protection (electrical panels, fixtures, wiring, etc.)
  • Limited 10-year warranty on structural components (concrete, deflection of beam foundations)

A Model Home: There is sometimes a way to combine the best of both worlds – a newly constructed home whose construction you do not have to wait to be completed.  Builders who are creating new neighborhoods or subdivisions often build model homes to show prospective buyers of homes in the neighborhood what the completed homes will look like.  Frequently, it is inside one of these model homes that the builder will put its design center, which is the place buyers go to select the fixtures and finishes for the new home the builder is building for them.  When most of the neighborhood or subdivision has been completed, the builder will place these model homes on the market to be sold.  An advantage for those who purchase them is that the model homes usually contain the highest-end finishes available from the builder, as the builder uses the model homes to entice buyers to upgrade the finishes of their own homes.  While the design scheme may or may not line up completely with your taste, buying a model home can be a great way to get into a neighborhood you like with higher-end finishes than you might have chosen or afforded and yet at a price that fits your budget.

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