In tight US housing market, some buyers opt to build new homes

Dima Williams

WASHINGTON (THE WASHINGTON POST) – Like many house hunters in Washington, Brian Duss found himself on a long, frustrating search of online listings.

“I was joking with some of my friends that I spent a year swiping on [online brokerage] Redfin like most people swipe on [dating app] Tinder,” said Duss, who works in international development.

His home search lasted two years, during which he lost two existing properties he bid on to all-cash buyers. At last, Duss purchased a condo unit under construction, settling into a period of waiting for its completion.

Building a house or buying early into new developments can be a smart way to bypass challenges such as tight inventories and bidding wars that have become commonplace – particularly in high-demand neighbourhoods – in the existing home market.

But constructing a home can be quite a complicated and gruelling process that in some cases takes years to complete. It requires navigating a whole different series of rules and regulations from a builder, zoning and planning officials and homeowner associations.

ABOVE & BELOW: Becky Higgins’ living room is decorated for the holiday season; and the floating vanity has a white marble countertop. PHOTOS: THE WASHINGTON POST

The Higgins kitchen features a bar, concrete dining table, and booth

“If you’re looking to [build] a place, you just have to know it’s going to take a lot of time,” said Duss, who moved into his new one-bedroom, one-bathroom condo near a Metro station in August.

Duss’ new-build is part of a construction boom in the Washington area and around the country. His property was among the 32,000 units under construction in the District of Columbia during the first seven months of the year, according to real estate data firm Yardi Matrix.

The Washington DC Economic Partnership said it expects that more than 7,600 units will be finished this year.

That tally, according to the partnership, far exceeds the 10-year average of 4,200 units.

It also sets a record for deliveries since 2001, when the organisation began tracking the data.

The number of building permits issued in the Washington region reached 16,500 during the first seven months of 2019, up 2,000 from the same period in 2018, according to the Census Bureau.

Nearly 8,000 of them were for single-family houses, and the rest were multiunit projects.

“There’s tonnes of new construction,” said Amir Taba, a real estate agent with TTR Sotheby’s International Realty. “On every single corner, you see a new building going up.”

During the same time frame, but about 1,000 miles west, Breanne Stewart and her husband looked for a piece of land in Nixa, Missouri, that could get good Internet service. The Stewarts own a digital agency, so connectivity was imperative for the spot where they wanted to build a new house.

“Internet was a pretty big deal,” said Stewart, who runs the Happy Little Mess blog. “Where we landed kind of fits the bill.”

In April 2017, bringing together an architect and a builder the Stewarts knew from before, the construction of their modern 4,500-square-foot farmhouse began.

That month, the Stewarts’ residence was one of more than 12,000 single-family houses started across the Midwest, according to the Census Bureau. In Missouri, 2017 notched a seven-year peak in building permits issued for single-family abodes, before a slight dip the following year.

And despite persistently high material costs and labour shortages, among other stumbling blocks, home construction has strengthened since the Great Recession in many locales across the country.

Dallas-Fort Worth, for instance, issued about 35,000 building permits, second in the country behind only Houston, according to the Census Bureau.

In some cities, building a new home and buying an old one command very similar dollar amounts.

“In one sense, you don’t really know what you’re getting when you’re walking into a home that’s maybe 15 or 20 years old, even when you do an inspection,” said Kimberlee Gee, who worked with Taba to find a new-build condo in DC. “And you deal with things breaking down more quickly.”

Yet, experts say, those embarking on new construction not only should be fully aware of the complications and challenges of the process but should also have strategies to overcome them.

Here’s what you need to know about building a single-family house, a condo or a townhouse:

1. WORK WITH A REAL ESTATE AGENT

Newly built residences emerge on the market at various stages of completion. Someone might buy into a development based only on architectural renderings in a so-called presale deal. Another purchaser might pick a unit only when it is finished. Yet another could collaborate with a builder to erect a custom house.

In any case, however, a real estate agent can help a buyer navigate the process, which differs from acquiring an existing home. While a traditional transaction might take a month, having a home built can stretch for years. Delays are bound to occur – even before construction starts.

Becky Higgins, who runs Project Life, an online scrapbooking site, and her husband, a medical professional, spent four years envisioning and designing their custom home. That time felt even longer, said Higgins, because of a string of rejections from the local planning department.

“It is a very painful part of the process – submitting our plans to the county and then getting red lines and resubmitting them and getting more red lines, and back and forth and back and forth,” said Higgins, who lives in Peoria, Arizona, and documented her home journey on Instagram.

The Higginses, who moved into their new house in June after three years of construction, said they picked an out-of-state design firm that was unfamiliar with the local building codes. That decision, they said, led to some of the problems they encountered.

The Higginses did not rely on a real estate agent. But having one as a partner can help in decisions about what architect, builder and designer to employ as well as in negotiations on various aspects of construction.

“It’s a pretty complex process, there’s a lot of moving parts, there’s a lot of unknown,” Taba said. “It’s always, always, always good to have a buyer’s agent who has sold new construction before.”

2. KNOW WHAT YOU SIGN

Builders’ contracts “have every protection in the world for the seller,” said Margie Halem, senior vice president of the Margie Halem Group at real estate brokerage Compass. “There’s no protection for a buyer. You have to write things in.

“There are clauses that give the builders X amount of days to deliver,” she added. “But there are things that you need to write in there. What happens if the builder doesn’t deliver? Is there a penalty? Is he giving money back to the buyer? Those are things that you can write in when you have an agent who knows what they’re doing.”

Contracts also dictate what a home would look like. While dwellings in planned developments may not permit much customisation, depending on the stage of construction, buyers might be able to select layouts, colours and appliances, for example. Upgrading from the builder’s standard plan, though, will mean additional charges.

But when it comes to custom projects, where builders heed clients’ preferences, the aesthetic and structural features of houses should emerge through a blend of professional advice and personal desires.

“Take the time picking out design aspects,” said Stewart, whose new home was finished about a year ago. “Don’t succumb to what a contractor may tell you that they think is best, because they won’t be the ones living in the home.”

3. FIGURE OUT THE FINANCES

Most real estate transactions begin with securing the financing. Buying new construction is no different.

What varies is the profile of lenders. National banks and mortgage brokerages often eschew loans for “future property,” as no physical collateral stands to back them. Thus, it is mostly their local counterparts that extend mortgages for new homes based on thorough design plans and value estimates. In some cases, this peculiarity benefits buyers.

“My local lender gave me a better rate than [national online mortgage company] Quicken offered, which was actually kind of a surprise,” Duss said.

Moreover, developers appear to gravitate toward local lenders, often designating a preferred one, whose use earns buyers monetary rewards such as cash credit for closing costs. The setup also promotes efficiency.

The affiliated lender “already knows about the project,” Taba said. “They already have all the documents about the project. It’s just a smoother transaction.”

The convenience may not, though, produce the lowest interest rates – so it’s best to shop around.

4. CUSTOM HOMES

While residences in planned developments draw conventional mortgages, custom homes, the type that an owner “commissions,” require construction loans. Construction loans cover the expense of building a private single-family house through a series of draws, or money disbursed for distinct construction phases such as foundation work.

Construction loans command interest rates that are up to a quarter-percentage-point higher than those of regular mortgages, said Sonu Mittal, head of mortgage retail lending at Citizens Bank. They also often come with higher benchmarks for qualifying credit history, capacity (the ability to repay) and collateral.

The loans last only until the end of the build, or about a year, during which time a borrower pays only accrued interest. So construction loans carry greater risk. Unforeseen circumstances may thwart building – the creation of collateral – or dent the debtor’s credit score.

Because of that, some lenders would require two qualification rounds or loan closes – when a client takes out a construction loan and when, as the house reaches completion, the loan morphs into a regular mortgage. That practice, though, is shifting.

“It depends on what the offerings are, and based on the customers’ qualification, but you will notice that five years ago, there wasn’t that much competition on construction loans,” Mittal said. “However, now a lot more lenders are offering construction loans, and pretty much everybody is starting to do one-time closes.”

5. CONDUCT HOME INSPECTIONS

When Gee, an attorney who lived in Upper Marlboro, Maryland, bought her new-build condo in DC with Taba’s help, she didn’t think the unit needed an inspection.

Although she conceded “that was kind of foolish of me,” her initial rationale was anything but rare.

“In our industry, 95 per cent of people buying [an existing] home get an inspection,” said Todd Engle of Good Eye Home Inspections. “But not on new construction. It is the reverse – five per cent do get it inspected while the rest assume it will be in perfect condition, and no home is perfect.”

As in other transactional facets, new-build residences involve slightly different inspections than existing homes.

Unlike existing homes, newly constructed ones can undergo pre-drywall inspections, which scrutinise major systems such as plumbing and electrical before walls sheath pipes and wires.

Ideally, an inspection would follow each construction milestone – laying a foundation, framing, applying exterior finishes. But for a buyer, this is often costly and inconvenient. Still, local jurisdictions dispatch inspectors to assess work that requires permits.

In bustling new-construction markets like DC, however, those so-called code inspectors are in such great demand that governments often authorise third-party individuals – often engineers and architects – to inspect on their behalf.

And while that shortens the wait time for mandatory code inspections and could foster a sense of security for buyers, it also can cause trouble.

“There are drive-by inspections or situations where third-party inspectors never set foot on the property,” said Matthew Hix of Marietta Inspections. “So, unfortunately, in many areas of the country and in Washington, DC, especially, [independent] home inspectors become the inspector of last resort.”

And they often uncover all sorts of issues – from inoperable windows to inadequate insulation.

A builder’s warranty may cover those for up to a year.

In that span, at no cost to the homeowner, the developer would correct flaws uncovered during a post-sale inspection.

In the District of Columbia, new condominiums carry an even longer warranty period of two years for structural defects in both individual units and common spaces.

This government-mandated guarantee also includes a five-year statute of limitations to sue a builder who refuses to make repairs.

But despite the complexities that accompany a new build – be it a custom residence, a unit in a downtown high-rise or a house in a suburban development – Higgins of Project Life offered a simple principle to heed: “Begin with the end in mind. The end result is a home.”