Building a New Home
Have you ever wondered how new construction works? There are numerous examples and explanations given so having a clear understanding can be difficult. A good way to learn about new construction is to contact a real estate agent or lender who has experience handling new construction loans. They can provide an overview of the process that minimizes confusion.
In general, buyers looking to build should start the process by meeting with a builder and architect. Not all builders or new construction companies build the same way. Two types of builders are tract builders and custom builders.
Tract builder companies have portfolio floor plans buyers can view, which normally differ from company to company. Portfolio floor plans can be restricted in design while others are semi-custom allowing for rearrangement of rooms, options, or finishes. In terms of financing, most tract builders have a set method of payment.
Custom builders are just that. They build homes customized to a client’s preference. Custom builders offer the most flexibility, as buyers are not limited to certain floor plans, finishes, or service vendors. What this means for a homebuyer is that from the beginning, the buyer has more power in deciding their budget potentially giving them a significant amount of equity prior to occupancy and an affordable monthly payment.
Deciding on Land
With either builder type, the buyer must choose what land they wish to build on. In most cases with tract builders, land has been prepared for construction and utilities made available. This convenience is not always available with buying land elsewhere. Acquire the assistant of a realtor to help you with your land search. Buyers may discuss payment up front with the agent but in most cases, the agent will seek compensation from the seller. This makes the agent’s service free to use and helpful to the consumer.
When using a tract builder, the buyer is restricted to using available lots. This causes frustration at times with buyers wanting to live in certain areas or have a certain amount of acreage. Some tract builders may offer to build on a person’s lot but hidden fees and costs can make that approach expensive.
Custom builders are usually not as rigid meaning the buyer needs only to find the lot they are interested in and the process can begin from there.
After deciding on an available lot or vacant lot for sale, financing begins. BuildingAdvidsor.com gives a great explanation on this process. They state:
“The two basic types of construction loans used by homeowners are one-time-close loans, and two-time-close loans. In all construction loans, money is disbursed by the lender based on a pre-established draw schedule, so much money upon completion of the foundation, so much upon completion of the rough frame, and so on. The goal is to only pay for what has been completed, minus retainage, typically 10% of the cost of the project, which is held back until everything is completed properly and the owner is issued a certificate of occupancy (CO).
During the construction phase, payments are interest-only and start out small as you only pay on funds that have been disbursed. When construction is complete, you pay a large balloon payment for the full amount owed. On some loans, no payments are due until the house is completed. Fees on construction loans are typically higher than on mortgages because the risks are greater and banks need to do more work managing the disbursement of funds as work progresses. The faster the work is completed, the less you will pay in interest.”
The buyer’s lender can better explain this process according to their new construction guidelines.
To summarize the building process the buyer needs to:
• Speak with a builder and architect.
• Find land to build on.
• Finance the entire purchase and pay interest only during the construction phase.
Contact me today to get setup with an expert builder and low cost lender for your best investment ever in real estate.
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