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Buying a Home from a Builder – Pros and Cons

Buying a Home from a Builder… Pros and Cons2

A real estate team that we have masterminded with posted the following list about buying homes from builders and working with the process on the new and resale sides.  Chuck and his team discussed why someone SHOULD and why someone SHOULDN’T buy from a builder.  Here’s what they came up with:

Why you SHOULD consider buying from a builder:

CHOOSE YOUR FINISHES AND LOT – Buying new from a builder allows you to have complete control of more details than what you would find in a resale home.  Everything from cabinet colour, to hardwood, to bathroom tiles, to the exact place on the street are yours for the choosing.

NO BACK STORY – As the first owner of the home, you won’t need to worry about dirty people or wear and tear that you can find in a resale home.  You are pretty much guaranteed that no “stigmas” exist like murders, suicides or illegal activities.

LOCK IN AT TODAY’S PRICE – Many people have bought a home at today’s price, only to find out that it’s worth more when they move in.  As you’ll see below, however, price increases are not guaranteed, and the consequences of the home being worth less are quite severe.

TIME TO SAVE – Many people will put their deposit down, and then spend the next 12-18 months saving every penny in order to increase their down payment.

NO NEGOTIATION – Some people feel quite comfortable knowing that the posted price is the actual price.  Negotiation for some people can be as comfortable as performing their own root canal.

WATCH IT GROW – Many people feel a tremendous sense of pride in their home being built.  They will drive by often, check on it, sweep the floors, inspect it, and see all the different stages in the process.  To some, this is a joy and a pleasure.

MODERN FINISHES & ENERGY EFFICIENCY – Builders are often offering the latest home decor trends, whether it’s colour choices, floor plans or standard finishes like lights and door knobs.  Depending on the builder, they may offer build options that include energy saving features either as an upgrade or standard with all homes.

FULL LENGTH OF WARRANTY – In Ontario, the TARION New Home Warranty of up to seven years will begin the day you get your keys.  Also, your roof, windows, doors, furnace and air conditioner are all under warranty for the first few years… and you won’t be investing in any of these larger ticket items for years to come.

NO BIDDING WARS – Even though you may have to line up and decide quickly on a particular location, at least you won’t be battling another buyer for the SAME house (in most cases).  Once you have your lot reserved, it’s yours.

BUYING UNDER MARKET VALUE – Do some builders offer homes for less than you can find on the market right now?  At times, this may be the case, but other times you may find the opposite.  Have a good relationship with a Realtor, so that you can ask them what they think of the builder’s offering price compared to the current market.

Why you SHOULDN’T consider buying from a builder:

BUYING OVER MARKET VALUE – Yes, this happens all the time.  We’ve had many clients who have paid a builder $650,000 when a nearly identical home just sold on the resale market for $600,000.  That’s really putting you at a disadvantage when it comes time to sell the property, and you may have to pitch in some or all of the difference… even if it’s worth more when you get the keys.

ADJUSTABLE CLOSING DATES – Most people aren’t aware that builders can legally delay you by 250 days, with a 10-day period in the middle that you can back away if you choose (most don’t).  Some builders try to sneak a clause into the agreement that says if the home is ready earlier than expected, you will be forced to close the deal – make sure your lawyer crosses that one out.  You can really only be assured of your closing date when you cross the 90 days to close marker, and that puts a lot of pressure on to sell your house within that shorter time frame.

OCCUPANCY PERIOD (CONDOS) – Most buyers have no idea that closing is actually a two-step process with new construction condominiums.  You are given occupancy of your unit when it’s completed, often when the area outside of your unit is still in a disastrous state.  At which point you begin to pay the developer a monthly amount comprised of the monthly common expense, interest on the deferred purchase price and an estimate of the monthly realty taxes.  You cannot get a mortgage at this stage, so you are essentially paying a monthly fee pretty close to market value rent while you wait in a state of limbo for anywhere from 3 to 18 months for the development to be registered with the local municipality.  You can rent your unit in this stage to recover some costs, but that can open up a whole new set of problems.

MAINTENANCE FEES (CONDOS) – Oh, so you’re offering high-rise units with the low, low fee of 20 cents per square foot?  That’s wonderful.  Too bad that’s impossible to maintain, and the condo will start developing a deficit that will require the fees to double in the first five years.  Many people get stuck in this situation… sold on low fees that are unsustainable, with a surprise letter in the mail in the first few years of ownership.  Beware and speak to your lawyer.

WHAT IF THE MARKET GOES DOWN?  If the home you bought is worth MORE than you paid on closing, then congratulations!  However, if the home you purchased is worth LESS than what you paid when it’s time to move in, the lender funding your mortgage will only come up with the current appraised value.  So if you paid $500,000 to the builder in January 2015, and when it’s finished in March 2016, it’s only worth $450,000… then YOU are obliged to make up the $50,000 shortfall in cash, since they will only give you a mortgage based on the current value.  If you don’t have those funds available, you will most likely be sued for breach of contract, or you will have to forfeit all of your deposit.

This is “double bad” if you have a home to sell, because now you have TWO homes that are worth less than you expected.

HIDDEN FEES & HIGHER CLOSING COSTS – On a resale transaction, you normally have a lawyer fee, Land Transfer Tax and some other minor costs such as the taxes on the mortgage insurance premium or an appraisal.  With new homes, you can encounter many extra fees, including extra development fees from the town (have your lawyer cap these so the builder pays the extra), utility hookups, tree planting charges, driveway deposits, and even though you get a warranty, you will pay for it as a closing cost.  Not to mention new homes may be subject to additional HST, and if you need to sell it right after you close because your life changed while it was being built, you may even be subject to capital gains or income tax consequences (speak to an accountant about this).

MORE EXTRA COSTS – In addition to the above, expect to pay for a fence ($1,500+), air conditioner ($2,000-4,000), appliances ($3,000-8,000) and window coverings ($25-300 per window), just to name a few.  It’s not unusual to see $10,000 (or more) of these expenses in the first year or two, just to make a home liveable – unless of course you like the paper blinds some builders use.  Also, if you purchase upgrades from the builder, they’re often set at a premium.  As an example, hardwood floors and granite counters are often double the regular price when you buy them from the builder.  Ravine lots and pie-shaped lots are often auctioned at an inflated price due to scarcity.  If you DON’T want that closet, they’ll charge you extra.  If you DO want the closet, they’ll charge you extra.  Whereas when you buy a resale home, many of these extras are already in the house, and you can get them for pennies on the dollar.

AFTER SALE REPAIRS – Often you will have pages of deficiencies in a new home that need to be repaired once you’re given the keys.  Chasing the builder, being available and living in an unfinished state can be stressful and a huge waste of your time and energy.  Provided the builder meets standard building code, there’s really not much recourse for a buyer if they’re not happy with the quality of the home.

COMPLICATED AGREEMENT – A builder’s standard purchase agreement is often dozens of pages long, with many clauses that are not in a buyer’s best interest.  Make sure you have a “condition” in the agreement for your lawyer to review everything.  If the builder won’t allow that to happen, it’s a big red flag.

WHAT’S THE NEIGHBOURHOOD GOING TO BE LIKE?  When you buy a home from a builder, those sketches of people walking by holding hands, with no other homes as far as the eye can see look good… but what will the neighbourhood REALLY be like?  Who will be my neighbours?  Will the homes be aesthetically pleasing?  What about the empty land around the development area?  What will be built nearby?  Many buyers don’t ask these questions… and it can lead to problems down the line.  And if the builder’s sales rep says that they don’t know which side of the road the sidewalk will be on… they’re lying or incompetent, because it’s already part of the subdivision plan before you ever buy the home.  One of our team members was promised a quiet, dead end street, only to find out years later that they would open it up and it would become a major through-street.

LIVE IN DIRT – In the first year or so, you won’t have a yard.  Your car will be filthy, and most likely you will have a flat tire or two.  Your home will be full of dust that appears out of thin air, and there may be noise from surrounding homes which are still not finished.  This is temporary, but often stressful for a new owner.

I SAY JUMP, YOU SAY HOW HIGH – From making you line up and camp overnight, to pressure tactics like raising the prices by $10,000 if you don’t decide by tomorrow, some builders must sit on the sidelines and laugh while saying, “Look what else I can make these guys do…”  This is the 2015 reality… but there will come a day when builders will come begging for business.  When the United States experienced their housing recession, some builders were even offering 2-for-1 sales – buy one house, get one free!  But for now, be prepared to play their game.

HIGHER DENSITY – In Milton, the older neighbourhoods (pre-1999) have a density of about seven homes per acre (an acre is about the size of a football field).  The homes built between the years 2000-2005 are approximately twelve homes per acre, and as we drift closer to the present, we’re seeing density levels at 14-16 homes per acre… which will only continue to increase as the province has mandated under the Places to Grow Act.  Mark Twain once said, “Buy land, they aren’t making any more of it”, and nowhere is this more true than modern day development.  The lots will get smaller, and the trend is to fit more and more people per acre as time marches on.

SCHOOLS AND AMENITIES – If you have a school-aged child, there’s a good chance that they will jump around to a few different schools before landing in their permanent school.  The homes are often built before the schools and amenities, so be prepared for some transition pains and boundary changes.

YOU’RE BUYING A SHEET OF PAPER – Most people aren’t very good at looking at a two-dimensional floor plan and imagining what it will look like in real-life.  Take a guess about the size of the room you’re in now, and then measure it.  How close were you?  We have had many clients over the years who get the keys to their home and walk in, only to find out it isn’t at ALL what they were expecting.  Also, many people aren’t aware of things like higher doors, 9-foot ceilings, hardwood stairs, extended windows and smart upgrades that will add to their enjoyment for years to come, with a small population who choose awful colours that will hurt their ability to re-sell the home.  Don’t be afraid to call a designer or real estate agent, who you can probably hire by the hour to give you some added perspective.

THEY DON’T WORK FOR YOU – The builder’s sales reps do NOT work for the buyer, they work for the builder.  They’re not obliged to tell you all the facts, unless specifically asked.  Even then, we have overheard flat-out lies and false statements in builder sales centres over the years that make us cringe.  Be an educated buyer, and enlist the help of good professionals who can provide protection and guidance.  Can you have your own representation from a real estate professional?  In most cases the answer is YES, but the Realtor needs to be the first point of contact.  If you walk into the sales centre on your own, or if you register online, you may be foregoing your chance to allow your agent to get paid to help you (at no additional cost to you).


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