A lot of people love new construction homes since they’re quite literally starting with a clean slate. But this mortgage lender warns there are some things you need to look out for.
Pre-owned homes have upsides, but they can be ticking time bombs for potentially costly repairs, have their own lingering quirks from previous residents, and rarely check off all of your dream must-haves.
On the other hand, you know exactly what you’re getting when you invest in building your home since you get to pick everything from the big picture layout down to little details like the shape of your door handles.
And new builds are having a moment.
Normally, newly built homes only make up 10% of the market, but in 2023, the number of newly built single-family homes on the market hit record highs, making up nearly a third of the market, according to Redfin data.
While that’s still only a slice of the market compared to preowned homes, it’s marking a noticeable turn, at least for now, as new builds fill in the gaps left by the shortage of existing homes for sale (since many current homeowners want to preserve their low interest rates).
“New construction is the only option for many buyers,” said Shauna Pendleton, a Redfin real estate agent in Boise, Idaho. “A lot of buyers want to secure a home now because they’re worried prices are going to go back up, and new construction is more plentiful, with perks that are hard to pass up.”
More than half of home builders offer an incentive to sweeten the deal (and sales), like buying down mortgage rates or offering free home upgrades, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
Pendleton has heard of builders offering perks like $15,000 and $25,000 worth of concessions. “That money can cover all of a buyer’s appliances with money left over for a mortgage-rate buydown,” Pendelton said.
But buyer beware, says Theoni, a mortgage lender (@theonithelender).
“I’m not sure who needs to hear this, but if you’re buying a new construction home, you need to know these things,” Theoni said.
Here are five things you need to know if you decide on a new build over a pre-owned home:
1) Avoid in-house lenders
Often times new construction home builders have their own in-house lenders, and to qualify for any perks they may offer (like the ones mentioned above) you have to use their lender.
“But the problem is, these in-house lenders are usually [bad] lenders,” Theoni said.
Theoni explained that since these lenders are getting a consistent stream of new clients from the builders they work with, they don’t really have an incentive to be good lenders.
They don’t have to build and maintain a good reputation like other lenders do.
“They know they’re gonna get business from the builder who’s building the community,” Theoni said. “…They’re really not looking for repeat business so they don’t care about the service and your experience buying that house.
2) The terms may be too good to be true
Even if you’re happy signing with an in-house lender in order to qualify for a perk—like downpayment assistance or a great interest rate—the perk might not be real.
“Usually, it’s kicked into the price that you pay for the home,” Theoni said.
Her viral video has more than half a million views and hundreds of comments.
“I bought new construction home and used their lender in 2022, for the 5k closing costs credit. BUT I ran the docs by other lenders and they all told me to go with it, they couldn’t touch it,” a commenter shared.
3) You’re on your own
Remember the first thing on the list? Well, if you do go with a bad in-house lender, chances are they won’t be very responsive to your questions and might just give you the runaround.
That might be fine if you’re an experienced home buyer, but it could be a big problem for a nervous first-time home buyer.
“I wish your Agent/realtor would explain these things ahead of time!!!!” a person responded in the comments.
4) You might lose your deposit
If you end up hating dealing with the in-house lender and want to back out of that house, the lender likely gets to keep your deposit. So they still end up winning.
“And then someone else is gonna want that house because that’s just low supply, high demand right now,” she said.
“I’m in contract with a new construction home. Yes Service isn’t great but 6% towards closing cost and 5% interest rate, worth the sacrifice,” a viewer chimed in.
“Wrong! Mine went above and beyond for us as first time home owners NEW BUILD and being MILES AWAY everyone has different experiences but I totally disagree,” another viewer responded.
5) It’ll take a while to see a return on your investment
New construction homes usually take longer to appreciate in value, Theoni pointed out.
You’ll likely have to live in your new construction for five to eight years before you start seeing its value go up.
“I suggest if you’re a first-time home buyer or just trying to get into real estate, new construction might not be the best route to go because you might not see that return on investment from the appreciation on the home if you try to sell within two or three years,” Theoni said.
If you do sell shortly after buying you “maybe” will get back what you paid upfront, Theoni said.
And Theoni wanted to clarify:
“I’m not saying that this is every single new construction home and their lenders. I know people that have had a great experience. But I’m gonna say that like 80% of people I talk to … have a terrible experience with the lender.”
The Daily Dot reached out to Theoni for comment via Instagram direct message.
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