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Is Building a New Home Right for You? 10 Things to Consider When Deciding to Build a New Home

Updated: Feb 20, 2023

1. Budgeting and Pricing for Building a New Home

2. Selecting the Right Builder

3. Pre-existing Home Design or Customization

4. Financing Options for New Home Construction

5. Construction Schedule

6. Choosing the Right Location

7. Planning for the Future

8. The Right Time to Build

9. Construction Contract Types: Cost-Plus or Lump Sum

10. Advantages of Building New vs. Buying Existing


Building a new home is a significant investment and a dream come true for many people. However, it is important to make sure it is the right choice for you before embarking on the journey, as the home building process can be both exciting and overwhelming. Here are ten things to consider when deciding if building a new home is right for you:



1. Budgeting and Pricing for Building a New Home


Building a new home is a complex process that comes with many emotions and excitements. It is essential to have a clear understanding of your budget and the estimated cost for your new home, so you know what you can afford. Budgeting and pricing are often the most important factors to consider when deciding to build a new home.

  • Budget: It is best to build a home that costs less than your maximum budget. Ideally, you should aim to build a home that costs 80% to 90% of your maximum budget, although this percentage may vary depending on the cost and complexity of your home. Having a control budget that is below your maximum budget allows room for unexpected changes and additions that often arise during the building process. Be sure to communicate your budget to your home designer and builder, so you can work together to design and build a home that fit your budget and needs.

  • Pricing: Estimating the cost of a new home is a complex process that depends on several factors, such as size, location, material costs, labor costs, and more. Due to the variability of all these factors, it is almost impossible to know exactly how much it will cost to build each new home and it is crucial to understand the accuracy of the estimate provided by your builder and where there are risks for overages. This will help you budget for any potential increases, schedule delays, or other factors that may cause the actual construction cost to go up. Customizations and uncertainties in building a new home can lead to increased costs, so it is essential to have an open and honest conversation about the estimate before starting construction. This is your last chance to understand what is and isn't included in the estimated cost for construction. For example, if your builder estimates $1,800 for a freestanding soaking bathtub but you want a freestanding jetted bathtub that costs $5,400, it is important to communicate this during the estimating phase and include as many items as possible in the estimate.


2. Selecting the Right Builder


Selecting the right builder is essential to the success of your new home build. Research and interview several builders to find one who you trust and feel confident will build the home of your dreams. When selecting a builder, consider the following factors:

  • Reputation and Experience: Look for a builder with a good reputation and a proven track record of successful projects. Check their experience in constructing homes similar to what you envision and be prepared to possibly pay more for an experienced builder in high demand.

  • Budget, Estimate, Pricing, and Timeline: Discuss your budget, estimate, and timeline with the builder to make sure they can accommodate your needs. Get a written estimate to avoid any surprises. Ensure that you understand the details of the estimate and all the included and excluded items.

  • Communication, Transparency, and Understanding: Be open and transparent about your needs, wants, and expectations. Ask questions and work with your builder to ensure you have a clear understanding of the building process. Proactive communication on your part will help ensure that you are fully informed throughout the construction process.

  • Quality of Materials, Workmanship, and Construction Process: Look for a builder who uses high-quality materials and is committed to quality workmanship. Ask questions about the builder's construction process and understand their materials selection process.

  • Personal Fit: Choose a builder who you feel comfortable working with. Look for a builder who listens to your needs, is responsive to your questions, and who you feel confident can deliver your dream home within your budget.

  • Warranty and After-sales Service: Consider the builder's warranty and after-sales service. You want to work with a builder who will stand behind their work and be available for any future needs. Make sure the builder uses dependable subcontractors who will be available for warranty work.


3. Pre-existing Home Design or Customization


When building a new home, you have the opportunity to choose a design that suits your lifestyle and needs. Decide if you want to custom-design your home to your specific requirements and preferences, or if you prefer to choose from pre-existing floor plans that your builder may have. Using a pre-existing floor plan can have cost benefits, so discuss this with your builder. Designing a new home is an exciting process, and several key factors must be considered to ensure that the final product meets the needs and desires of the future occupants. Many builders offer in-house design services or can refer you to a new home designer for collaboration. It is important to ask your builder about their involvement in the

design process, as their input can help prevent issues that may arise during construction.



4. Financing Options for New Home Construction


When it comes to financing the construction of a new home, there are many options available. These include construction loans, home equity loans, mortgage refinancing, government-sponsored programs, or builder financing. It is essential to do thorough research, evaluate your budget and financial goals, and seek advice from a lender before making a decision. With the right financing, you can turn your dream home into a reality while keeping your financial risks under control. Here are some of the most commonly used financing options:

  • Construction Loan: A type of short-term loan specifically designed for financing home construction. These loans are secured by the land and the home being built and are paid out in stages as the construction progresses. Construction loans typically have higher interest rates compared to traditional mortgages, but offer the advantage of paying only interest on the funds used, which helps in managing cash flow during the building process. Construction loans are typically termed for one year to allow time to build the new home.

  • A construction-to-permanent loan: A type of financing that provides funds for both the construction of a new home and the permanent mortgage. This type of loan is often used by borrowers who are building a custom home and want to have the peace of mind of knowing their financing is in place from start to finish. One of the main benefits of a construction-to- permanent loan is that it allows for a seamless transition from construction to permanent financing, eliminating the need for the borrower to go through the mortgage application process twice. Additionally, this type of loan usually offers a single closing, which can save time and money.

  • Home Equity Loans: Allow you to use the equity in your existing home as collateral to finance the new home build. These loans typically have lower interest rates compared to construction loans and are easier to obtain but come with the risk of losing your existing home in case of non-payment.

  • Mortgage Refinancing: Using the equity in your existing home to finance the new home build, which can be cost-effective than taking out a construction loan or home equity loan. However, it requires sufficient equity in your existing home and may take longer to obtain.

  • Government-Sponsored Programs: Programs like USDA and FHA offer low-interest loans for home construction in specific rural and low-income areas. These programs can make home construction more affordable but come with specific requirements and restrictions, so it is important to thoroughly research your options.

  • Builder Financing: Some builders may offer to finance the construction of your new home through their construction line of credit or another financing method. This option can make the process easier for the customer, but the builder incurs more risk and may require more earnest money from the buyer to mitigate this risk. Also, this type of financing may not be suitable for a custom-built home that caters to the buyer's specific tastes, wants, and needs.



5. Construction Schedule


Constructing a new home takes time and it is important to plan accordingly. On average, according to the National Association of Home Builders, it takes 8.2 months from obtaining authorization to construction completion for building a new single-family home. Before starting the building process, it is advisable to discuss any potential delays with your builder. Ask them about the benefits and drawbacks of building during different times of the year. Seasonal material and labor prices may also affect the cost-effectiveness of your project, so it is helpful to ask your builder about these factors and determine if it may be more cost-effective to wait and build during the slow season. Careful planning and consideration are essential for a successful home-building project. Work with your builder and take the time to understand the process, as well as any potential challenges, before making a final decision on when to start construction.



6. Choosing the Right Location


Choosing the right location for your new home requires careful consideration of various important factors, such as:

  • Proximity to work, school, and amenities: Evaluate the distance of the location to your workplace, your children's school, and any shops or services that you frequently use.

  • Neighborhood safety: Investigate the crime rate and general safety of the neighborhood. Reach out to local police and residents to gain a better understanding of the area.

  • Climate: Evaluate the local climate and how it may impact your daily life. For instance, a location in a high-risk flood zone or prone to natural disasters may not be suitable for you.

  • Future development: Research any future developments planned for the area, such as new roads, schools, or shopping centers, and assess how they may impact your quality of life.

  • Property value: Consider the property value and growth potential in the area. This will help you determine if the location is a good investment for your future.

  • Community: Evaluate the cultural, social, and recreational activities available in the area, as well as the overall feel of the community.


7. Planning for the Future


When building a new home, it is necessary to consider several factors that will influence your future plans and home enjoyment. Consider the following:

  • Family growth and changing needs: If you're planning to start a family or have more children, think about how your new home will accommodate those changes. You may need extra bedrooms, play areas, or storage space.

  • Career and lifestyle changes: Take into account your future career and lifestyle goals. Will you be working from home and need a home office or separate work space? Do you plan to entertain guests frequently and require a large dining room or outdoor entertaining area?


8. The Right Time to Build


There are many factors to consider if deciding when to build a new home. Some of the obvious factors include when interest rates are low, when the housing market is strong, and when contractors are available. However, there are also some less obvious factors that can impact the timing of your home building project.

  • Financial stability: Building a new home is a significant financial investment, and it is important to consider your financial stability before making this commitment. Make sure you have a solid budget in place and consider your future expenses, such as mortgage payments, property taxes, and maintenance costs.

  • Employment stability: Your employment situation can also impact the timing of your home building project. Consider your job stability and whether you expect any changes in the near future, such as a job loss or a career change.

  • Timing of life events: Building a new home can be stressful and time-consuming, so it is important to consider any major life events that may be happening in the near future, such as having a baby, getting married, or caring for an elderly relative.

  • Climate: In certain regions, the weather can impact the home building process, with heavy rain or snow causing delays or damage to the construction site. Consider the climate in your area and whether building during certain times of the year may be more challenging.


9. Construction Contract Types: Cost-Plus or Lump Sum


Typically, there are two main types of home construction contracts: cost-plus and lump sum.

Understanding the differences between these two types of contracts can help you make the best choice for your home-building project.

  • Cost-Plus Contract: A cost-plus contract is a type of agreement where the builder is reimbursed for all direct and indirect expenses incurred during the construction process, with an agreed upon markup or fee added on top. This type of contract gives the homeowner a clear understanding of the cost of construction and provides greater transparency and accountability for the builder. In a cost-plus contract, the homeowner is not exposed to any hidden costs or surprises, as all expenses are itemized and disclosed.

  • Lump Sum Contract: A lump sum contract, on the other hand, is a fixed-price contract where the homeowner agrees to pay a set amount for the entire construction project. This type of contract provides the builder with a set budget and allows for better cost control and planning. The builder is responsible for ensuring that the project is completed within the agreed-upon budget, including all costs associated with materials, labor, and overhead.

Advantages and Disadvantages of Each Contract: Both cost-plus and lump sum contracts have their advantages and disadvantages. Cost-plus contracts can be more flexible, as they allow for changes in scope and unexpected expenses to be easily accommodated. However, they may also result in higher costs, as the builder is reimbursed for all expenses with a markup or fee added. Lump sum contracts provide the homeowner with a clear understanding of the final cost of construction and can help to keep costs under control. However, they can also be less flexible, may cost more and may not accommodate changes in scope or unexpected expenses. If the cost of construction exceeds the agreed upon budget, the homeowner may have to pay additional fees.


Choosing the right construction contract for your new home depends on your specific needs and goals. Consider your budget, the scope of your project, and your willingness to accept risk when making your

decision. Work with your builder to determine which type of contract will best meet your needs and ensure a successful project.



10. Advantages of Building New vs. Buying Existing


When it comes to purchasing a home, many people are faced with the choice between building a new home or buying an existing one. Both options have their pros and cons, but there are several advantages to building a new home that make it a popular choice for many buyers.

  • Customization: One of the biggest advantages to building a new home is the ability to customize the design, layout, and features to meet your specific needs and preferences. You can choose the materials, colors, and finishes that suit your taste, and design the space to meet your lifestyle. Whether you need extra bedrooms for a growing family, an open concept kitchen for entertaining, or a home office for remote work, you can design a home that fits your needs.

  • Energy Efficiency: Another advantage of building a new home is improved energy efficiency. New homes are built to meet current energy efficiency standards, which can save you money on utilities and reduce your carbon footprint. You can choose energy-efficient appliances, HVAC systems, and insulation that meet your needs. In addition, new homes are often better sealed and have more efficient windows, which can reduce heat loss and improve indoor air quality.

  • Improved Safety: New homes are also equipped with the latest safety features, such as smoke detectors, carbon monoxide detectors, and fire-resistant materials. This can provide peace of mind for homeowners and can help protect your family in the event of an emergency.

  • Lower Maintenance: New homes are built with low-maintenance materials, such as fiber cement siding, and with new and up-to-date systems, such as plumbing and electrical, which can reduce future maintenance costs. This can save you time and money in the long run, and can help keep your home in top condition for many years to come.

  • Warranty: Another advantage of building a new home is the warranty. New homes often come with a builder's warranty, which can give you peace of mind and provide protection in the event of any problems or defects. This can provide you with added protection and help you avoid costly repairs in the future.

  • Increased Value: Building a new home can also add value to your investment, as new homes are typically more valuable than older homes. This can be a big advantage if you plan to sell your home in the future, as you can potentially recoup your investment and make a profit.

  • Avoiding Renovation Costs: Finally, building a new home eliminates the need for renovation costs. When buying an existing home, you may have to make renovations or upgrades to make the space meet your needs and preferences. Avoiding these renovation costs allows you to start fresh with a space that is tailored to your requirements.

Building a new home provides many advantages over buying an existing one. Whether you want to customize the design, improve energy efficiency, or enjoy the peace of mind that comes with a warranty, building a new home can provide you with the perfect space for your needs and preferences. So, whether you are a first-time homebuyer or looking for a change, building a new home may be the perfect option for you.


Citations:


National Association of Home Builders (NAHB). (2021). Building construction time slows in

2021. Retrieved from https://www.builderonline.com/building/nahb-building-

construction-time-slows-in-2021_c


Forbes. (n.d.). Construction Loans. Retrieved February 9, 2023, from

https://www.forbes.com/advisor/mortgages/construction-loans/

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