When considering a new home, many buyers are drawn to the appeal of a brand-new house. Builders often create beautiful, shiny new communities in more affordable, outlying areas. While the low entry price and pristine condition are attractive, there are significant risks to be aware of, especially if your time horizon for ownership is short.
Competing with the Builder
One of the biggest challenges for a new homeowner is that you may find yourself in direct competition with the builder if you need to sell your home within a few years of buying it. Builders are large-scale operations with the ability to offer discounts and absorb losses to sell their remaining inventory. As an individual homeowner, especially if you have minimal equity, you don’t have this luxury. If you put down a small down payment, you have very little financial cushion before you are “underwater” on your mortgage, meaning you owe more than the home is worth.
The Risk of Being Caught Upside Down
If a life-changing event requires you to sell your home a couple of years after moving in, you could be in a difficult financial position. You might still be competing with new construction homes being offered by the builder at a discount, which can drive down the value of your property. For this reason, it is often recommended that you plan to stay in your new home for a minimum of five years. This gives you time to build equity and allows the new construction phase of the neighborhood to progress, reducing the direct competition from the builder.
Price Points and Long-Term Value
The ideal time to buy in a new construction neighborhood is often at the very beginning, as you get in at the initial price point before any increases. However, if you purchase later in the development cycle, you might be at a higher price point than earlier buyers, and you could be competing with the builder for a decade or more, as some of these mega-developments can take that long to build out completely. Therefore, a longer-term perspective, typically a five-year-plus price horizon, is crucial for those investing in new construction.