Want New? A Finished Home Is Your Best Bet!

Today, when it comes to new construction, there is only one way to buy: a finished home, not a pre-sale wherein a home might just be getting started, or is still a vacant lot. Why? you might ask. Consider the following:

1. Nothing is more costly to a homebuilder than an unsold finished house. He is paying interest every day that a house is under construction. The interest rate and fees that builders pay is substantially more than homeowners pay for a mortgage. The meter starts running the day the builder closes on the building lot. But the interest is not accruing on the finished project, only on those monies that the builder has taken from the lender in the form of “draws”. The first draw may take into account the building lot, architectural and engineering fees, building permit and mitigation fees payable to the jurisdictional authorities. The second draw usually would be for clearing, excavation and foundation. As draws are taken from the construction loan the builder is paying interest the growing balance. When the house is done, he is paying interest, sometimes as high as 9.5%, on the finished product until it is sold and closed.

2. Builders do not have the luxury of living in their homes like the average home seller. He HAS to sell, and in this market will price finished homes to get rid of them.

3. If a builder sells a finished home, and doesn’t have too much unsold inventory, his lender will let him start another home. If a builder sells a pre-sale, most lenders in this market are not impressed. The pre-sale will not count as a sale in the lender’s eyes until it is finished and the sale closed, which could take months. A pre-sale offers little relief to most builders that have finished inventory with the interest meter running.

4. Not good: your pre-sale starts out OK, but the builder’s other finished houses are still not selling. Your house is coming along nicely in the middle of 50 vacant lots. The builder’s lender forecloses on the entire plat. Your house construction stops cold. It may take months for the lender to decide who to turn the construction over to, or who to sell it to. Your earnest money deposit, your $30,000 non-refundable deposit, and all of your non-refundable upgrade deposits are gone. The builder had formed an LLC for protection just in case such an event should occur. Your options for recourse are few.

So think twice about picking the perfect house for the perfect lot. It rarely turns out that great. Besides, once most builders have your money, your house gets all of the “B” crews, while the “A” crews continue to work on the unsold spec homes.

Housing Predictions For King County and South Snohomish

Everywhere we go people ask us the same question, “how are things in real estate?” Depending on our energy level at that point in time, our answer might take 10 seconds, or 10 minutes. Sometimes people ask because they are truly interested from a personal standpoint. Sometimes it’s too find out if we are suffering as much as the media says we should be. Sometimes I think folks want to know what Kind of person I am i.e., will I simply throw out a lot of optimistic BS, or am I real and will actually think about how to honestly respond.

After much reflection on our position and experience in the current market, combined with discussions with other agents and brokers that I highly respect, I have come to the following conclusions:

1. There is a current oversupply of new homes. These homes will be discounted and sold by the builders over the next 6 to 10 months.

2. The same builders will generally not be allowed by their respective lenders to start new homes until their current completed standing inventory is sold off as stated in number “1″ above.

3. These same builders that used to get the green light from their lender(s) to start 10 homes at a time will be limited to 3 starts at a time for the foreseeable future. Successive home starts will be dictated by closed sales e.g., “you may start 3 now, but you have to finish and close one sale before you will be financed to start a 4th home.” It used to be that a builder could start a new home as soon as a buyer put down earnest money on an incomplete home (pre-sale). I don’t think it’s going to work like that any more, at least for some time.

4. Due to the foregoing, the supply of new homes will be consumed, and the rate of re-supply constricted, within 12 to 18 months.

5. Builders will have to work hard to keep their vacant lots looking like a happy place with fencing, landscaping, etc., and not looking like abandoned developments.

6. The change in new home supply will have a direct effect, albeit slightly delayed, on the resale home market. It will take 18 to 24 months for upward price pressures to reappear in the resale market, but it will come back……..just about the same time the mortgage industry will have healed from recent and current problems.

7. When asked the question, “how far will the market drop?”, my reply is November, 2006. Appreciation could be readily justified to that point, not beyond. Some folks maybe got a little more than they should have for their home in the first half of 2007, and some maybe paid a little more than they should have. But the difference is no more than will be readily absorbed and smoothed out over the next 5 years.

Thant’s my story and I’m sticking to it……at least for now.