A Glimpse at the New Construction Industry
New Construction has been the lifeblood of the Real Estate industry for the past several years, especially following the 2008 financial crisis. It has helped millions of people recoup the dream of home ownership. Here at Crawford Willis Group, we take a lot of pride in helping people to reach that goal. One way we do this is by finding developable land in order for builders to have the opportunity to create a desirable subdivision that homeowners can be proud to call home. From finding the raw land to assuring the buyer is happy with the end product, new construction is in a category of real estate all on its own. Although there are certain similarities to purchasing a new construction home and an existing property, the differences are important to note. With the understanding that this subject could be a ten-volume book collection, we will keep it nice and short today, hitting some of the highlights of new construction. Let’s talk about financing, spec-homes versus a custom home, and the affects the pandemic has had on new construction real estate.
Financing New Construction
As far as financing goes, there are always different approaches that can be taken. This also depends if you already own land or a lot and are hiring a Custom Home Builder, or you are buying a new construction home that is already built (we call these Speculative (spec) Homes).
Let’s say you own land already; depending on the Builder you hire, some may be willing to get the construction loan for you with a sizable down payment (earnest money). Earnest money or downpayment will be applied to the final purchase price at closing. In this case, you would just get a conventional loan at the time of completion. If for some reason the builder will not carry the loan, the buyer has options such as a Construction-to-permant loan, also known as a single-close loan. This is a one time close loan from a construction loan to a permanent home loan. In other words, you borrow money to pay for the cost to build your home and once the home is completed and a certificate of occupancy is issued, you then change to a permanent loan with a traditional 15 to 30 year fixed rate. At this point, you will be responsible for paying the closing costs. A better option than closing on a construction loan and then turning around and paying additional closing costs on the “perm loan”.
When it comes to purchasing a home in a new construction community with one Builder, most builders will have a “preferred Lender” list. Preferred lenders already have a working relationship with these builders and work diligently to make sure any potential buyers are qualified to purchase the new construction home. In doing so, the builders will usually help offset some of the buyers closing costs if not all closing costs so the builder feels comfortable with the borrower’s ability to purchase once the home is completed. We do suggest shopping multiple Lenders whether they are a “preferred lender” or not to make sure the buyer is getting the best rate for themselves. Sometimes the “savings” have been known to be pushed off on the consumer. Free money is hard to come by from a business standpoint.
When it comes to New Construction and closing dates, it can be a tricky situation as there are so many unknown variables throughout the construction process that can delay the build, such as weather & material delays. You may be asking yourself why this is brought up during financing? Well, let me tell you…when it comes to financing your new construction home, you want to get the best interest rate as you possibly can, and interest rates fluctuate on a daily basis. If your interest rate goes up even a half a point, that will raise the monthly payments significantly. Because of this fluctuation, you want to talk to your lender about Rate Locks. Locking in an interest rate means you’ve come to an agreement with your lender about the terms of your mortgage, including what interest you will pay. When that happens, you’ll agree to lock the rate in for a certain period of time. This is usually 30 or 60 days for traditional home sales, though typically longer for new construction homes. Now, no matter if the market rates go up or down, your rate will stay the same. This is very important when it comes to the timeframe of the construction and the actual closing date. It’s important to stay in close contact with your agent, builder or builder representative as well as your lender to make sure you plan accordingly with the timeframe of the rate lock and closing. If the rate lock expires before the home is completed, you more than likely will have to pay a fee to extend the rate lock or you may end up paying a higher interest rate.
So when looking at purchasing a new construction home, start with finding a local lender to walk you through these steps in finding what’s best for your personal situation. This step will need to be taken care of at the time of contract anyway, so go ahead and get comfortable with the numbers. This will also give you the best plan of attack for your monthly home budget in order to back into a purchase price!
Spec Home vs. Semi-Spec Home vs. Custom Home
Now, what’s the difference between a spec-home and a custom build? Surely if you have been in the market for a home, these terms have graced your ears. For simplicity’s sake, a spec-home is a move-in-ready home built by a licensed builder prior to the buyer purchasing the home. Homebuilders often offer spec-homes as an option for someone who would like a new construction home, however does not have the time to wait the 6-plus months that the building process requires. A custom home on the other hand is often built with the buyer beginning the purchasing process often before the area has even been cleared off for a foundation! It really all comes down to needs, budget, timing and desire to control the details. These options can have their fair share of excitement and frustration.
A full spec-home can definitely eliminate many of the “stressors” that come with building a new construction home. The builder has already taken on such details like lot location, floorplan, finishes, color scheme, and more. Each one of these options can take you weeks or even months to complete and agree to. Oftentimes, even after the decision has been made, a buyer will decide to change their mind and almost always be charged a “change order” fee if the deadline for choices has already been met. Not to mention, the design choices were chosen by the builders interior designer team, so they know what they are doing! The negatives to this are fairly obvious. Without the option to choose these finishes, you are foregoing much of the control to choose every aspect of the home. You still have room for choosing the floorplan and lot location if the floorplan you like is available on multiple lots. Now there IS an option that is somewhere between a spec-home and a custom build.
A semi-custom home many times gives you the best of both worlds. This option is especially attractive for someone who has a great vision for what they want, but does not want to spend the time or the money on a full custom. Typically a home builder will have a library of floor plans and designs they are familiar with and can source the labor and materials at an economical advantage. From this list of homes, the consumer can select a floor plan that best fits their needs, and then from there work with the homebuilder to customize the home’s selections, materials and finishes. This process will vary from builder to builder, with some providing the buyer with “packages”. These packages usually consist of floor color, cabinet color, style of tile for the wet areas, paint colors and countertops throughout the home. Many find comfort in allowing a professional interior designer to make these choices as a “package” so to have every aspect to match, but still have the autonomy of what those “packages” may look like.
Now for a custom home. This process can start with finding raw land, hiring an architect to design the floor plan, and selecting every single detail about the home’s construction, layout and finishes. Finishes include things like lightswitch plates, color of doorknobs, cabinet pulls, bedroom colors, HVAC system, exterior materials, roof color and much more. With a custom home, some builders will allow for a certain amount of “allowances” for each aspect of the home. As an example, the builder will calculate how much the typical cabinet will cost in the build estimate and contract price. If you decide to upgrade that cost, the builder will allow for a certain amount of that overage to be financed, but require the buyer to cover the remaining balance out of pocket cash during the construction process.
So with each option on the table, which one fits your needs? Hopefully the information above can help you get started! Obviously things like budget, timeline and vision will be your biggest factors in making this decision. Pro-tip, if you are a first time home buyer, the custom option may not be the best option for you. In the many years of working in the real estate and new construction industry, we have seen that most of the buyer’s who decide to build a “full-custom” have lived in many houses throughout their life and have a strong grasp on what they definitely need, want, and would like in a home.
Pandemic Effects (nobody knows whether its “affect” or “effect”)
So, what happens to new construction when a pandemic hits? This question would be much harder to answer and even harder to justify asking if it weren’t for the most recent virus, COVID-19. With the pandemic hitting in 2020, the real estate industry was in the middle of a complete buying frenzy. This was evident in both the resale market as well as the new construction market as a whole. Obviously different markets are going to react differently based on location, population and risk. As for the more populated cities, they saw a bit of a growth decline due to the consumers being more cognisant of distancing themselves from their neighbors and shying away from shared common areas. With that being said, the more suburban and rural communities saw a boost in population. With a boost in population comes a boost in new construction. At least for a small period of time.
With any pandemic there will be issues, outside of the pandemic itself. One of those issues during COVID-19 became labor shortages and material costs. Lumber soared over 300% during the early stages of the pandemic. Luckily we are starting to see a fairly steady decline of those prices, however still elevated. The interesting side of this boom is that raw timber barely saw a bump in value at all. Most of the spike came from the mill. The mill is where the round trees are brought to be cut into rectangular boards. During the early stages, many mills were being shut down. This was due to both health reasons as well as the assumption that the demand for lumber would plummet. It did not. Not only did the interest rates falling entice buyers to leave their cramped homes (that they were stuck in all day with family) for more space, but it also motivated many DIY homeowners to repair fencing, decks and build treehouses. All of these activities demand lumber. According to the National Association of Home Builders, single-family home construction jumped 12% last year, and remodeling activity climbed 7%. Meanwhile, domestic sawmill output rose just 3.3%.
With the dooming increase in construction costs, many builders were faced with a decision. Do we continue to build and produce a product at a higher price point which will inevitably be passed to the consumer, or do we strategically plan for the downturn while still moving forward? A lot of the builders decided on the latter, especially pertaining to the spec home product. (For those who were in the middle of a custom build, those expenses just got a little heavier.) So the strategic play that many contractors decided on was to get permits, pour the concrete slabs…….and wait. One of the deciding factors for this was to try and protect their potential homeowners. If a buyer was to purchase a home at a remarkably higher price, then when the lumber came back down to Earth the professional builder would never really be able to come back down to a competitive price point. The reason being, for those who purchased during the surge, any equity they earned on down payment or market trends would be completely diminished. Builders are trying to protect their customers.
Unfortunately, lumber is not the end of the story. There have been shortages on the appliances, window, gutters, LVP flooring and more. I don’t know about you, but I like my houses to have windows and floors. These shortages haven’t necessarily caused a direct price increase, but they have resulted in delays. As a result the estimated time of completion has been drastically altered. For years, the construction process on a spec home was understood to be 4-6 months from contract to the closing table. In this market at this time, the agents selling new construction homes are giving buyers a new expectation, 8-10 months.
Like I said earlier, the information about new construction real estate is endless. This article was meant to provide a prospective buyer a glimpse into the jargon, moving parts and trends that we are seeing in today’s new construction market. We may follow this up with a more in depth look at some of the more detailed aspects of construction and purchasing. Let us know what you would like to hear about! All in all, this can be a very exciting aspect of home ownership. Most importantly, if you have any questions about the market or the process…….just ask one of our agents!!!