You Should Be Scared when Buying New Construction.

You Should Be Scared when Buying New Construction.

Bob and Terri,
just a note of caution as you are contemplating the purchase of a “yet to be constructed home” from a builder. The new construction contracts in our area are very long often 50+ pages, and they are written  in the favor of the builder. Also…The new home rep …no matter how nice…works for the builder…not you.
I am writing this email to you since the contractual process that you went through when you bought your last re-sale home is quite different than the legal process of buying a home that is yet to be built. Below are some of the issues that are different in the process of re-sale vs. pre-built construction.
In order to start construction, you will be required to make a deposit of $25,000 as compared to the $7000-$8000 earnest money deposit you would make in this area when contracting on a $650,000 re-sale home.
 Obviously, you will need to sell your current property in order to move in to the new place. The builder has told you verbally that the property will be ready in 4 months. He will not contractually give you a specific date for settlement as would be the case should you purchase a re-sale home,… so that you cannot be contractually sure that you will have a finished place to move into. If your new place is not ready when he says, you will need to plan for temporary housing and storage of your goods. The builder is not contractually liable for your inconvenience or expense caused by his delay. That is the biggest buyer concern when buying a piece of ground and a floor plan…it is common that these delays can and do go on for months. I will tell you again…there is zero contractual protection for you as a buyer against this possibility.
Steve and Jan Bachman RE/MAX
The scariest part of the new construction contract in Northern Virginia is the afore mentioned clause in the agreement that says that the builders have 18-24 months to deliver the house…(I have yet to have a new home rep point this out to our clients voluntarily). When this contract clause is pointed out by us….verbally the rep will say that the builder will never let that happen… but I have never seen that clause removed.
Here is the key clause in every new home contract around here:
 “Seller will not be liable to Buyer for any damage by reason of delays caused by an Event of Force Majeure or otherwise.  In the event of a delay caused by an Event of Force Majeure, Seller will have the right to: (i) Terminate this Agreement; or (ii) extend the time for Settlement; provided, that if Settlement has not occurred, or cannot occur, (A) within Eighteen (18) months from the Effective Date hereof because of an Event of Force Majeure, or (B) within Twenty-Four (24) months from the Effective Date hereof for any other reason, either Party will have the right to Terminate this Agreement“..
I have never seen a new home rep voluntarily point this out. It is the biggest bone of contention and the largest cause of buyer distress. I totally understand why the builder wants this clause… BUT you my friends are not legally protected from builder delays. All you have is the builder’s verbal, non contractual promises.  This is your biggest concern…everything else is relatively minor..
 Be aware that a small builder may have limited financial resources…and you will not know this. He may be working on the construction of just your property and a couple of others. A small glitch…and he goes under. Happens every day.Jan and Steve Bachman RE/MAX He can create a new LLC or corporation and be back in business under another name in a month. Do your homework in checking their background. Also, delays can be substantial if the builder and county inspectors cannot agree on some items of the plan…I have frequently seen 3 month delays getting county approval…you are not contractually protected from this time delay and only have the builder’s word that he can resolve them.
Be aware, also that when you pick your options like counter-tops, cabinets and appliances… the builder generally reserves the right to substitute ” like kind” if they cannot get what you asked for. They try to get you something you like but again… you cannot void the contract if they substitute your appliances with something you do not like.
I do not want to deter you away from buying a new build if that is what you want…they are GREAT…but you need to be aware of the possible areas of concern that lie ahead. Most builders are terrific and will do their best to make you happy and get the property delivered on time…that is when they get paid.
But …I wanted to make it clear that contractually…the builder has all the protections and you have few… other than his word and reputation.  Jan and I have represented many buyers of new construction and we will be with you to the end of the process to assist and advise… and part of our advice is what I just wrote 🙂
Steve Bachman

How much house can I afford?

When answering this question, consider that there is a difference between the purchase price you can qualify for and the purchase price you can afford to pay. Most lenders, good lenders, will not qualify you for a loan that requires you to spend more than about 1/3 of your monthly income on your home loan. To asses this, lenders will, of course, review your monthly income, but they will also look at yourdebt-to-income ratio. This figure is arrived at by adding up all of your monthly debt obligations – including the mortgage you are considering, the taxes and insurance on the property, and any other contractual obligations that you have, such as car payments, credit card payments and student loans – and dividing the total by your monthly gross income.

Most lenders will allow you a total debt-to-income ratio of 36 percent or less. This is because studies of personal finance have shown that this is the most financially stable position (besides being debt-free) for a person. After all, besides paying off debt, your monthly income still has to put food in your month and clothes on your back. Then there’s health care, entertainment and incidental costs.

Now, unless you were paying close attention and have some knowledge of finance terminology, things seem good so far. Not quite. Notice that the debt-to-income ratio uses your gross income, not your net income. Your gross income is the amount your employer pays you, but your net income is the amount that actually goes into your bank account to be used for paying debt and bills and other expenses. Depending on your tax elections and other paycheck deductions such as health insurance and retirement deductions, your net income can be as much 20% less than your gross income. When you consider that, suddenly, the ideal 36% debt-to-income ratio becomes almost 60%. That’s where the trouble begins.

Ideally, you should be spending about 25% of your gross income on your home and 10% on other debt. Now, how many people do you know who only have debt equal to 10% of their net income? Not many, I’d wager. Well, that’s the same problem mortgage lenders face. But they’ve got to stay in business somehow, so not only do they use misleading figures to determine whether they’ll lend you money, but they also are increasingly lending to people who have higher than a 36% debt-to-income ratio.

So, what’s the moral of this story? Mortgage lenders are not your friends; they are not looking out for your financial interests; they are only looking to make as much as quickly and easily as possible. Given that, how do you look out for your own financial interests? How do you figure out how much house you actually can afford? Easy: figure your debt-to-income ratio using your net income.