Want New? A Finished Home Is Your Best Bet!

Today, when it comes to new construction, there is only one way to buy: a finished home, not a pre-sale wherein a home might just be getting started, or is still a vacant lot. Why? you might ask. Consider the following:

1. Nothing is more costly to a homebuilder than an unsold finished house. He is paying interest every day that a house is under construction. The interest rate and fees that builders pay is substantially more than homeowners pay for a mortgage. The meter starts running the day the builder closes on the building lot. But the interest is not accruing on the finished project, only on those monies that the builder has taken from the lender in the form of “draws”. The first draw may take into account the building lot, architectural and engineering fees, building permit and mitigation fees payable to the jurisdictional authorities. The second draw usually would be for clearing, excavation and foundation. As draws are taken from the construction loan the builder is paying interest the growing balance. When the house is done, he is paying interest, sometimes as high as 9.5%, on the finished product until it is sold and closed.

2. Builders do not have the luxury of living in their homes like the average home seller. He HAS to sell, and in this market will price finished homes to get rid of them.

3. If a builder sells a finished home, and doesn’t have too much unsold inventory, his lender will let him start another home. If a builder sells a pre-sale, most lenders in this market are not impressed. The pre-sale will not count as a sale in the lender’s eyes until it is finished and the sale closed, which could take months. A pre-sale offers little relief to most builders that have finished inventory with the interest meter running.

4. Not good: your pre-sale starts out OK, but the builder’s other finished houses are still not selling. Your house is coming along nicely in the middle of 50 vacant lots. The builder’s lender forecloses on the entire plat. Your house construction stops cold. It may take months for the lender to decide who to turn the construction over to, or who to sell it to. Your earnest money deposit, your $30,000 non-refundable deposit, and all of your non-refundable upgrade deposits are gone. The builder had formed an LLC for protection just in case such an event should occur. Your options for recourse are few.

So think twice about picking the perfect house for the perfect lot. It rarely turns out that great. Besides, once most builders have your money, your house gets all of the “B” crews, while the “A” crews continue to work on the unsold spec homes.