Buying New Construction...How Do I Begin?
by: Sheldon Salnick
The prospect of shopping for a new construction residence can be
quite daunting, but the rewards of owning a brand new home out-weight
the disadvantages if you know the potential pitfalls. The following
are important considerations: Overall Dollar Budget, Location, Cost
Per Square Foot, Finishes, Upgrades, Parking and Delivery Date.
Overall Dollar Budget
To establish a budget for purchasing a home, you should speak with
a mortgage professional prior to looking for property. In terms of
your budget, keep in mind that parking is usually not included in
the purchase price that is quoted by the developer. In addition,
in today's market the list price of the unit is typically not negotiable.
The best way to establish a budget is to determine how much money
you will need as a down payment and how much money you will need
as a down payment and how much you feel comfortable spending, based
on your gross income, for monthly payments. Remember that the real
estate taxes are generally included in your monthly mortgage payment
and should be calculated at a minimum of 2% of the purchase price.
If your down payment is less than 20% of the
purchase price, your lender will require that you purchase private
mortgage insurance
(PMI) – this charge will also be included in your monthly payment.
Also factored into your monthly expenses are your assessments, both
for the unit itself and a separate assessment for parking. And finally,
add your monthly mortgage payment.
Location
Generally speaking, the higher the density of the area, the more
costly the condominium or townhouse will be. Then checking out locations,
you may want to consider less developed areas of the city. Such areas
are typically less expensive than those in more developed areas.
Note, that as density increases with new development, it is highly
likely that your property will gain in value, resulting in a higher
return on your investment.
Cost Per Square Foot
When purchasing new construction, the favored method of comparing
value is cost per square foot. This is the method used by developers
to initially price their developments. With the cost per square foot
in mind, you will be able to compare different properties on an equal
basis and determine whether you are purchasing at a favorable price.
Also to be considered when looking at the cost per square foot price
is whether the developer has included such items as granite counter
tops, marble bathrooms, and black or stainless appliances as standard
features. In Chicago, prices per square foot range from $225 to as
much as $1000 per square foot in the Gold Coast.
Finishes
You will need to carefully examine which finishes and appliances
the developer has included in the base price versus which are considered
upgrades. Note that the more expensive finishes such as granite and
marble are not usually included in the base price of a one-bedroom
unit.
Be sure to get a detailed list of specifications in writing from
the developer, indicating the brand and model number of each appliance.
Don't be confused by the finishes and appliances that are shown in
the models you see- they may not be the same as those included in
the quoted price. Models are typically finished with granite and
marble, undermount sinks and hardwood floor laid diagonally but such
features may not be considered standard, particularly in smaller
or less expensive units.
Upgrades
As you can imagine, the cost of upgrades can vary considerably.
Developers commonly charge their cost plus a 20% mark-up for upgrades;
others may charge even more. Try to determine the costs when you
and your realtor are writing up the initial offer. By determining
all costs during the contract period you reduce the chance that upgrade
costs will exceed your budget.
If you keep in mind that many new construction
units are not ready for occupancy for a year or two, you will understand
the importance
of having all upgrade costs in writing as part of the initial contract – at
today's prices rather than at costs calculated at inflated prices
one or two years later.
Parking
One of the essential elements of resale value is parking. In a loft
conversion or a high-rise building, parking can vary from approximately
$25,000 to as much as $60,000 depending upon the level of luxury
of the building and the availability of parking in the area.
Since parking spaces have dramatically increased in value, you should
seriously consider purchasing a space whether or not you currently
own a car. Without parking, the later sale of a unit may be more
difficult than that of a comparable unit for which parking is included
in the price.
Delivery Date
Although your contract will specify a delivery date, provisions
in the contract will often allow the developer to deliver your unit
much later than the specified date without penalty. If this is an
important issue to you, you should keep in constant contact with
your Realtor during the construction process as delivery dates can
be delayed for as long as a year and, in rare occasions, even beyond
that. You should also speak with your attorney and incorporate terms
into the contract so that your interests are protected in the event
this should occur.
Working With A Realtor
Purchasing a new construction residence can
be a rewarding experience and a wise investment. But there are
definitely nuances involved
in purchasing new construction, including the track record of the
developer, the number of "flippers" purchasing in the project,
and the percentage of sold units.
You will be best served by using a Realtor who is familiar with
new construction market, the various developers and their product.
With your Realtor at hand to answer all your questions, your interests
will be represented and protected in all communication with the developer.
If you rely on a real estate professional, you will spare yourself
a great deal of the aggrevation associated with purchasing a new
construction home and, best of all, this representation will be at
no cost to you - the developer pays your Realtor's commission.
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