Why a New-Construction Home May Cost Less Than You Expect
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For home buyers who struggle to find suitable existing homes for sale, it may be time to look at new construction.
Homeowners continue to hang onto their low-rate mortgages rather than selling, keeping existing homes off the market. Meanwhile, homebuilders have hundreds of thousands of unsold dwellings in their inventories. And many homebuilders are offering incentives to prod buyers into signing purchase contracts: According to the National Association of Home Builders, 57% of builders offered some kind of incentive in February.
Even first-time buyers, who tend to have lower housing budgets than move-up buyers, could benefit from shopping where new houses or condominiums are going up. Believe it or not, a few builders pursue first-timers. D.R. Horton is one; it reported that 65% of homes it sold in 2022 cost less than $400,000.
Understanding how new-construction deals work differently from existing home sales can help you find the savings hiding behind the sticker price.
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Builders prefer incentives to lowering prices
The NAHB says 31% of builders reduced prices in February, by an average of 6%. That's a sign of distress; builders don't like to trim prices.
"You can't just blindly reduce prices," Sheryl Palmer, CEO of Taylor Morrison Home Corporation, said in a recent earnings call with analysts. "I think the more you just reduce prices, the more the consumer expects us to do."
Plus, cutting prices in a housing development can infuriate customers who bought earlier, at higher prices. Using incentives can decrease the total cost of the buyer’s contract while making it appear they paid the same as their neighbors.
Palmer added that customers mostly need "help on monthly payment and help with cash to close." Builders across the industry have landed on that same conclusion, so they're focusing on financial incentives to get homes sold.
According to the NAHB, in November:
29% of builders paid closing costs or fees.
27% offered options or upgrades at no or reduced cost.
26% paid to reduce the buyer's interest rate temporarily.
24% paid to reduce the buyer's interest rate permanently.
Negotiate lower closing costs, such as rate locks
When you get a mortgage, you incur thousands of dollars in fees known as closing costs. But because large homebuilding companies either offer mortgages themselves or are affiliated with their preferred lenders, they can employ creative financing. The builder can pay some of the closing costs while holding the line on the home's price. It's a way to hand you a quiet discount while standing firm on price.
With construction delays rampant, one type of closing cost has become prominent: the fee paid for an extended rate lock. Normally, a lender guarantees your rate for 30 to 60 days free or for a relatively small fee. Lenders often charge to lock a rate for more than 30 or 60 days.
But what if a builder doesn't complete the house on time? In that case, it might extend an expiring rate lock without charging a fee.
Construction delays aren't the only reason for a builder's lender to offer a free or inexpensive extended rate lock. Extensions can help buyers who need to sell their current homes first. Chuck Vander Stelt, a real estate agent in Valparaiso, Indiana, says a builder might offer an extended rate lock to give the buyer time to sell for top dollar.
Look for discounts on upgraded amenities
When you shop for a new house that's under construction, the builder tries to upsell you with customized amenities and fancier materials: a kitchen island, gorgeous tile in the shower, windows that are ultra energy-efficient. Ideally, both sides benefit from upgrades, with the builder making a profit on markups, and the buyer paying less than it would cost to get the work done later as a renovation.
An eager-to-sell builder might throw in such upgrades free or for cheap while holding the line on the home's base price, says Andy Sachs, managing broker for Around Town Real Estate in Newtown, Connecticut.
In exchange for discounts on upgrades, the builder is likely to ask for a bigger deposit, Vander Stelt says, "to really put it out there that this [purchase] is a certainty." After all, if you cancel the purchase after the builder installs your upgrades, the builder might have to cut the price to attract buyers who don't share your taste.
Taylor Morrison executives talked of "deposit strategy" in the company's recent earnings call. "Our teams have done a great job using the deposit as part of the overall negotiations," said Erik Heuser, the company's chief corporate operations officer. "So if we're giving some additional incentives, we've asked for more deposits."
Secure a lower interest rate with a buydown
Paying to reduce the mortgage interest rate, temporarily or permanently, is one of the keenest affordability tools that builders can wield. A lower interest rate translates into lower monthly house payments — something that has remained at the top of buyers' minds since last fall, when the 30-year mortgage climbed above 6%, then stayed there, for the first time since 2008.
"Rate buydowns remain among the top incentives for our customers," said Ryan Marshall, president and CEO of PulteGroup, on a recent earnings call.
With a temporary rate buydown, the builder pays some of the buyer's interest for the first one to three years. The buyer has a discounted monthly payment during that period.
A permanent rate buydown, also known as paying discount points, reduces the interest rate for the mortgage's full term. The rate discount, and therefore the monthly savings, tend to be smaller than on a temporary buydown. But the savings can accrue big-time over the years.
"We do, as an ordinary course, use mortgage rate buydowns, and many of those are for the life of the loan," said Bill Wheat, executive vice president and chief financial officer for D.R. Horton, on a recent earnings call.
Definitely bring along your buyer’s agent
Closing costs, upgrades, rate buydowns — they're complex, and the sales agent for a new housing development knows how to get the best deal for the builder. You'll be overmatched if you negotiate a deal by yourself. Secure the help of an experienced buyer's agent.
"The value that a real estate agent brings is that we can speak in realtor-speak to a builder," Vander Stelt says. "We can talk about what the buyer brings to the table and illustrate the buyer situation in a way that looks more appetizing to a builder."
And it's not going to make the builder mad if an agent represents you.
"Most builders really don't have a problem working with the agents because they're the ones that are gonna be their mouthpieces to the general public about this great development that's being built," Sachs says.
If the developer asks you to register the first time you visit (whether online or in person), make sure to list your agent so they'll collect their commission.
Builders emphasize different types of price breaks, depending on the customers they're trying to attract to each community, how sales are going that week and month and which direction mortgage rates are moving. A diligent real estate agent will know which incentives a builder is offering and how to negotiate for them.
"Having an advocate is a good thing," Sachs says.