Buying New Construction? It Could Cost More This Year

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It's getting more expensive to build a home these days. Here's why.

Buying a new construction home can be an expensive prospect in the best of times. But if you're looking for new construction today, you should be especially prepared to pay up.

Lumber prices have soared more than 180% since last spring, reports the National Association of Home Builders. This increase has caused the listing price of the average new single-family home to go up by $24,386 since April 17, 2020.

Why has lumber skyrocketed?

Lumber is mainstay in the world of construction, but supply chain disruptions and shortages that began wreaking havoc last year have caused the price of lumber to jump. This means that buyers looking for new construction can expect to have that cost passed on to them.

Is new construction worth it?

Buying new construction is generally more expensive than purchasing an existing home because all of the materials involved are new. And usually, to buy a new construction home that's being custom built for you, you'll need to make at least a 20% down payment on your home. For existing homes, you may find a mortgage lender that will accept a lower down payment, but that's generally not the case with new construction.

In addition to paying a higher price for your home and making a bigger down payment, you may incur extra costs with a new construction home. Often, new construction contracts come with an escalation clause that allows a builder to pass unexpected charges onto you, the buyer. For example, say you sign a contract to buy your home for $400,000, but your builder ends up spending a lot more to construct your home than anticipated. Your contract might come with a 10% escalation clause that lets your builder charge you up to $440,000 for that property instead of $400,000.

Of course, when you buy new construction, you get the benefit of being able to design a place to your specifications. Want two ovens in your kitchen? That can be done. Want an oversized master bath with two vanities and an oversized soaking tub? That, too, is an option. When you buy a home that already exists, you may not get everything you want.

But one major drawback with new construction -- aside from delays that could push back your closing date -- is the price tag involved. And with lumber prices soaring, you may find that you'll need to stretch yourself financially to buy a brand new home. And that may not be worth it to you.

Before you buy new construction, it pays to see if there are existing homes at a more affordable price point that suit your needs, taste, and budget. Though housing inventory is limited these days, you never know when a suitable property might pop up in your target neighborhood.

If you do decide to buy new construction, get a good real estate lawyer who can help you negotiate a favorable contract. That could spell the difference between getting stuck with extra costs that are out of your control or having your builder absorb those expenses.

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