Factors to consider when choosing between buying an existing house or a newly constructed one

Sales of newly built houses represent only around 11 percent of all home purchases. Still, there are more to-be-built houses available for sale than existing ones. Most buyers are aware of the severe lack of existing houses for sale, which dipped to 1.8 months’ supply in December 2021, according to Redfin real estate brokerage research. That compares to a six-month supply of newly built homes.

More than one-third (34 percent) of all single-family houses for sale in December were new construction, the highest share on record, according to Redfin.

While those statistics may brighten the outlook for buyers frustrated by their inability to find a home, there are several differences between purchasing an existing house and a newly constructed one. One of the biggest: your timeline.

Once you find an existing house and negotiate a contract with the sellers, you can typically close the transaction and move within a month to six weeks. When you buy a new house, it may be six to nine months or longer before you can move. Layton moved into her house in December 2019 — nine months after she signed her contract with Trademark Custom Homes to begin construction. And that was more than a year after she signed the initial agreement to hold a lot for the house.

The timeline for new construction can be delayed further this year because of supply chain disruptions and shortages of materials and labor.

“Building a new home is definitely different now,” says Lind Goodman, president of BSI Builder Services, a new-house marketing and sales division of Allen Tate Realtors, based in Charlotte. “Builders today are delaying presales of their homes because they don’t know how much it will cost to build, and they don’t know how long it will take. It’s more common now for builders to start the home before they sell it.”

Buyers may find themselves on a waiting list for a lot and must be prepared for potential delays until some of the supply-chain issues improve, Goodman says.

“When the housing market isn’t as tight, buyers can sometimes find a new house that’s already finished or one that’s almost complete to speed up the timeline, but that’s pretty much nonexistent right now,” Goodman says.

Buying a new house requires a few different steps than buying an existing one, but the essential path still includes financial preparation, establishing your priorities and searching for a property.

Here’s what you need to know when determining whether to buy an existing or newly constructed house. The information on new construction pertains to “production homes” in a subdivision rather than custom homes built on your lot, which generally require different financing and a longer timeline.

Role of real estate agents in new home purchase

For most buyers, the journey to moving into a house starts with a real estate agent and a lender. While 88 percent of buyers worked with a real estate agent to purchase their home last year, according to the National Association of Realtors, 7 percent purchased directly from a builder or a builder’s agent. Real estate agents can’t typically negotiate with builders on the price of newly built houses because that’s based on supply and demand factors, says Elizabeth Lucchesi,a real estate agent with Long & Foster Real Estate in Alexandria, Va. However, agents can provide advice and insight to buyers about new houses.

“An agent can help you evaluate the quality of the construction and finishes, the flow of the floor plan, whether outlets are installed properly, how much storage space is available and help you visualize the rooms,” Lucchesi says.

The sales professionals at a new-home community represent the builder, so it’s good for buyers to have someone representing them to read the contract and negotiate on upgrades, says Dianne Jensen, a real estate agent with Coldwell Banker Realty in Ellicott City, Md.

“I go with buyers to the model homes and make sure they know what features are included and which ones are optional,” says Jensen. “Sometimes builders will offer a $10,000 upgrade such as a sunroom, but it won’t actually cost that much for them to build so I may be able to negotiate on the buyers’ behalf for another upgrade.”

If you want to work with a buyer’s agent, your agent should come with you to visit model homes and register to receive their commission from the builder.

“Buyers sometimes think they can save money on new construction by not working with a real estate agent, but there’s usually not a discount offered by builders, especially in a tight market,” Goodman says.

Goodman says that buyers should carefully read their contract for the house purchase because there are clauses that allow the contract to be canceled under some circumstances.

“Whether you hire a real estate agent is really about your comfort level as a buyer,” Goodman says.

Financing your new house

Financing options for new houses are the same as for existing ones, including conventional loans, jumbo loans (which are for amounts higher than the conventional loan limits set by Fannie Mae and Freddie Mac) and government-insured loans such as Federal Housing Administration, Department of Veterans Affairs and Agriculture Department mortgages. However, many large builders are affiliated with a mortgage financing company. Builders of all sizes have a list of preferred lenders and title companies for their transactions.

“Builders want buyers to use their lender because they can control more of the process and know their lenders will meet deadlines to close the loan on time,” says Nicole Rueth, a senior vice president and producing branch manager with Fairway Independent Mortgage in Denver. “In some cases, their lending arm generates revenue for them, too. They’ll often offer incentives to buyers to work with their preferred lender such as paying closing costs, offering a credit for optional features or lowering the deposit requirement.”

Buyers are advised to consult at least one other outside lender to compare rates and fees with the offer from the preferred lender, Rueth says.

“In some cases, the builder’s lender will seem like the better deal, but it will come at the cost of a mortgage rate that’s higher by one-fourth of a percent or so for the life of your loan,” Rueth says. “Sometimes another lender will match the value of the builder’s incentive in order to secure your business, so it’s worth shopping around.”

Jensen says that while buyers and sellers usually split transfer taxes and some other closing costs for existing home transactions, buyers usually pay all the closing costs for new construction. That makes a builder’s offer to pay those costs even more enticing.

You need a preapproval letter for a mortgage from the builder’s preferred lender or another lender before you can sign a contract to buy a home. Some builders require an approval from their lender even if you don’t finalize your financing with that lender, Rueth says.

In addition, you need cash for an earnest-money deposit, which typically accompanies an offer letter for an existing home, too. Some builders want a deposit of about $1,000 to hold a lot for a buyer for a few days while they secure a loan preapproval, says Jensen. You may also need to pay a premium for lots that are larger, have a better view or a more desirable location within the community, she says.

Goodman says that earnest-money deposits with builders vary from $3,000 to $5,000 to up to 5 or 10 percent of the total cost depending on the price of the house and market conditions.

That can be a significant difference in cash needs because earnest-money deposits on existing homes are generally 2 to 3 percent of the home price, Lucchesi says.

“With new construction, you usually only have 15 to 30 days, depending on the contract, to get your earnest money back,” Rueth says. “With an existing home, you usually have more time to get your deposit returned under the contract conditions.”

While borrowers purchasing an existing home can generally lock in their mortgage rate to guarantee that interest rate for a month or longer without incurring an extra expense, locking in your rate can be more complicated with new homes because of the long construction timeline.

“You can lock in a mortgage rate as long as a year, but it will cost a lot more than if you lock it in for 30 to 60 days,” says Rueth. “It’s a gamble because you don’t know what rates will be like when your home is finished and you want to make sure you can still afford the payments, but you don’t want to spend too much money, either.”

Rueth says her mortgage company usually locks in the rate when there’s some certainty about the completion date for a house.

While you’re waiting for your house to be built, Rueth recommends saving more money, paying down debt and paying all your bills on time to maintain or improve your credit score. Your lender will recheck your finances just before the closing.

“Don’t buy any major consumer goods or a new car because that could hurt your credit score and trigger a higher mortgage rate or keep you from qualifying for the home,” Rueth says.

Pick a builder, a lot and a floor plan

Shopping for a new house can start online, just as it does for existing ones. You can search builder websites for information, virtual tours and floor plans to narrow your priorities.

Before choosing a builder, a lot and the floor plan, Layton recommends asking questions about community amenities, plans and maintenance.

“You need to know what’s included in the homeowner association fee and whether the community will plow the roads and maintain the grounds,” Layton says.

Some new communities require buyers to pay extra fees to build infrastructure such as roads and to bring in utilities, says Jensen, so buyers should ask about the potential for those fees.

Layton also says it’s important to find a builder you can trust.

“To check on the quality of a builder, you can drive through their existing communities and ask homeowners to share their experience with the builder,” Lucchesi says. “You can look at their awards and read reviews, but it’s smart to take those with a grain of salt because people often complain online more than they compliment a business.”

All builders must construct houses to meet the building code adopted by their jurisdiction, which also requires multiple inspections at various points of the construction process, says Goodman.

Newly built houses include warranties on workmanship and structural soundness, Lucchesi says. Materials such as windows, roofs, appliances and heating and air conditioning systems come with their own warranties, too, which is a benefit of new construction. Goodman recommends checking on extended warranties that some builders may offer.

“Another way to evaluate a builder is to look at their construction site and their model homes to see if they are well-maintained and clean,” says Lucchesi. “Once your home is under contract, you can hire an independent home inspector at different phases of building to check on the quality of the construction and that any mistakes are corrected.”

Choose your options

For Layton, customizing her home was a prime driver for buying new construction. The base price of her home was $460,000 and she added more than $100,000 in optional features such as a second floor and an elevator.

While Layton’s builder allowed for customization, many builders offer a package of choices either by color and finish or by quality level or both. Many builders have a design board that includes cabinets, counters, floors, backsplashes and paint colors that are priced according to the level of quality, says Goodman.

“You often get the best value from those design boards because the builders negotiate with suppliers for those items,” Goodman says.

Some builders have a design center with myriad options for personalization.

“You may have to bring more cash to the builder to pay for upgrades,” says Rueth. “It depends on the builder and the cost of the upgrades, but sometimes you’ll have to pay for those upgrades while your home is built because it could be harder for the builder to sell if you back out of the contract.”

For many buyers, the joy of purchasing new construction is the ability to personalize every feature, but Lucchesi says they should keep their budget and future resale value in mind.

“If you’re on a budget, it makes sense to spend money on things that are difficult to change later,” says Lucchesi. “You can also spend more on items where it’s easier to see the quality and less on other items, like the idea of wearing a shirt from [a discount retailer] with a belt from Gucci.”

While not all builders offer structural options to buyers, those are the best places to spend money initially, Goodman says. It can be costly or impossible to add a covered porch or sunroom later.

If you can wait for a new house to be built, that may be your best option in a market with few available existing homes.