BEWARE of Buying New Construction Homes in Austin!Â
If you’re thinking of buying a new construction home in Austin, Texas. Don’t sign any contract unless you understand the risks involved. Now, I’m not trying to scare you off. In this video, I’ve bought several new construction homes in my life and about 50% of our clients that move to Austin end up going the new construction route. But definitely there are some huge risks involved. So in this video, I’m going to break down what you should be aware of before you go into contract with a new build.
The first thing you need to be aware of who the actual builder is, there are so many builders across Austin, there are some very high end luxury home builders, there’s ones who are known specifically for doing the more lower end starter homes, and everything in between. Now we’ve had the privilege of working with a majority of builders across town. And I can tell you some personal stories, which I won’t share here about ones that were really great, and ones that were just absolutely horrible to work with. But what I can advise you to do is go online and check out the reviews for any of the builders that you’re looking at. And keep in mind that people will always complain about everyone. But if you see a builder that has horribly low reviews from past clients, and consumers and homeowners, then that could be a definite red flag that you may not get the quality of product that you’re hoping for, or it’s just going to be an overall bad experience through the build process.
The second thing to be aware of that goes along with the quality of the builder is do not buy any home that you have not actually experienced and felt in real life. Now to explain this, what I mean is, don’t just go onto a website, especially if you’re buying remotely or from another state or city. And just trust what the builder is saying that “Hey, that looks like a good home” you need to actually come here in person, or have an agent here helping you that can walk through the model and help you really understand like, what the quality of the cabinets looks like, what is the flooring, the baseboards, what is the overall feel of the home and the quality that this builder is putting out. Sometimes they may or may not have a floor plan in the community that you want, that’s the match for the home, they’re going to build you. But you might be able to find that same floor plan in a nearby community around town. So we always recommend that you go to the home that’s closest to yours and inventory home or ideally one in the same floor plan. So that way, you know what you’re getting in the end, and there’s no surprises or disappointments, you also always need to walk the lot where your home is going to be built. Now, I will tell you a story here that was absolutely horrible. I had a client that loved a certain neighborhood just south of Austin, we had looked around in there. And he was hoping for something newer, there was a builder that he liked. But we didn’t have chance to see all of the homes while he was here in town. So after he flew back home, we saw a new inventory home pop up from this builder in that neighborhood. So we reached out to the sales agent. And I asked her specifically, what does the house back up to? Because I can’t tell on the map. Exactly. It just shows some open space. So I just want to make sure is that going to be a green area? Or what is it? So what she told me was she said yes, in fact to green space. So in my mind, I was picturing a park or a walking trail, or maybe you know, just some nice trees and stuff in the background. Now, she put a lot of pressure on my client that evening, you know, sign this contract now, we’ll give you this extra incentive. But I need the signature today at 7pm. And my client didn’t feel comfortable. And I didn’t feel comfortable. Because I told her I said, you know, we need to actually go out and see the lot in person. I’m willing to go out there the next morning and actually film it. But she kept pushing, you know, you got to put your deposit in sign right now. Well, we didn’t do that, thankfully. Because when I came out the next morning to actually film what this lot looked like for my clients, there was a huge utility easement that was behind the home. So there was a little green space like she said, but she failed to mention that were horrible electrical towers going directly behind that house. In fact, if you had sat on the back patio, just so many yards out, you would have seen a giant electrical tower. And here she was pressuring my client who was back home out of state to sign right now and put his deposit down.
So that brings me to warning number three, let’s talk about deposits that are needed to go under contract on a new build. So typically on a normal run residential sale where you’re buying it from a seller, the deposits are about 1% in earnest money. And it’s usually refundable in the standard Texas contract. That’s when you’re dealing with a homeowner and a buyer. But when you deal with the builder, their contracts are written by attorneys who represent them. So the builder contracts are definitely going to favor the builder and not the consumer.
So one thing you have to be aware of is how much earnest money are they requiring? It varies, some are pretty low, and they might be around 1%. Some are 2%, I’ve seen some that were as bad as 7% to 10%. So let’s say one luxury builder for a while was doing 10% deposit on a high end home. So that means if your house was $2 million, you had to put down 200,000 is a down payment upfront as an earnest money deposit. Now, here’s the other huge catch. With a normal contract the Texas resale contract, there’s lots of ways that a buyer can back out and get their earnest money back. But the builders contracts do not let you do that. So they will put clauses in there that oftentimes if it doesn’t appraise at that value, then you the buyer are responsible for paying any gaps. If you decide a month in you change your mind, you don’t get that earnest money back. There’s all kinds of things that just trap you in to losing that earnest deposit. So if it’s a huge amount that you’re putting down, just be aware that you don’t want to put that money down unless you 100% love that home. And there’s no way that you’re going to change your mind or plan to back out. Because once that money is turned into a builder, there’s very, very little chance that you will ever get that back.
Now, the fourth thing to watch out for are escalation clauses. So let me explain this, this was more of a problem again, back in 2020, and 2021, where we’re having, you know, prices going way up at a rapid pace. And then building times were taking a whole lot longer was harder to get supplies and materials in. So escalation clauses mean that the builder can change the sales price of the contract once you’ve already signed it. And we actually had a client that had to back out and they lost $7,000 in earnest money, because the builder kept wanting to raise their contract price, in their case $140,000 Because it didn’t get built in a certain timeframe. Now fortunately, for our buyers, we ended up getting them a different deal, that was a much better deal. So they kind of recovered some of those costs. But escalation clauses are a huge problem. Some builders still have them, especially if you’re building from scratch, because they don’t know if the cost of lumber is gonna go up, or if just home values in general are gonna go up. So they put those clauses in there to protect themselves, that if they see prices increase, they’re gonna raise your price.
Now, the fifth thing to be aware of is just the quality of the construction itself. Now on any new build doesn’t matter which builder, humans make mistakes, there will never be such a thing as a perfect house. So we always encourage our buyers to do inspections throughout the process. If you’re building from scratch, you can definitely hire an inspector to come and inspect it while it’s being framed. And they just put in the electrical and plumbing, just to make sure that nothing is wrong on the inside. We’ve had one client that paid specifically for more expensive insulation, and the builder put in a cheaper quality one, we would have never known if we hadn’t gone out and checked it in an inspector checked it to realize that that was the cheaper insulation, it would have been covered over and sheet rocked, and they would have never known. Now at the end of the build process, you also want to do a final inspection. And this is where the inspector will go and check everything in the home. And again, you want to make sure that all those issues are resolved. Now some people might reason Hey, I’ll save 400 bucks not do the inspection because you know, it’s brand new, and we just passed all of the inspections to get the certificate of occupancy. Yeah, so you’re probably, you know, safe enough with the fact that it is newer construction, it’s less likely to have problems than an old house, but she’s still never know. And in our opinion, it is much easier to get the inspection done first before you move in and then try to deal with the builders warranty. Sometimes warranty issues can take a long time to get corrected or in some cases the builder might say nah, that’s not really covered by our warranty. So always just know to get an inspection up front. So again, you can move in having peace of mind that this new house is past any bad issues, and it’s safe for you to move in.
Some other things beware of are delays Now, in any construction timeframe, they might say normal build is around eight or nine months or so, during 2020 and 2021. There were crazy delays, I actually had one client who was delayed almost a full year, two years from when they started their home and pick their lot to when it actually closed. Everything went wrong during that time, it was hard to get permits hard to get lumber hard to get workers to come out to the home. Now we’ll say in 2023, it’s been a lot smoother, and we’re back down to normal build times. But there’s always delays. So if you have a tight date that you have to move in on, always estimate that it could be a month later, a month and a half later, you got to factor in weather conditions. You know, if anything goes wrong, flooring gets delayed, some shipment of material gets delayed, is going to push your closing date back.
So when you’re building new, just be aware that you do have to have a little more flexibility on when you’re planning to close along those same lines, you also need to be flexible when it comes to picking some of the finishes in the house. Now a lot of builders because it was such an issue with getting materials during 2020 and 2021, they quit allowing buyers to pick their own design options. So instead, most of the builders that we see are already picking out the floors, the counters, the cabinets, that way, there’s no dispute about what you’re getting. And it’s just pre planned and pre ordered. And that’s what you get, but some builders are still allowing you to go into the design center and pick your own options, which can be a lot of fun. But just be aware that sometimes those things get canceled, they get discontinued. And I’ve had it happen several times last year where our clients were so disappointed because they fell in love with a certain flooring and a certain cabinet color. And they found out six months in, they don’t make that anymore. We’ll see in the end, though they were happy, they found other alternatives that were very similar. Maybe it was just a different manufacturer, or maybe it was just a newer version of the color. And so in the end, they were actually happier with what they got. But don’t be overwhelmed. If they tell you that that one design that you picked out no longer exist, they will find you some other alternative.
So the last thing you got to be aware of is knowing your own negotiating power as a buyer, every builder is completely different. But there are ways that you can get in there and still negotiate the price. So if you go in and work with the builders directly, they will just tell you, here’s the sales prices, they might have certain incentives going on. But usually we’re able to get in there and push a little harder to get our clients a better deal. This last week, we got two clients under contract on new construction homes, one of them got $75,000 off the sales price, another one got $60,000 off the sales price. So those are huge amounts that we were able to negotiate down. Now some builders won’t negotiate on the price, but you might be able to ask for closing costs. Some were doing up to 6% in closing costs to help people pay down their rates, others are offering lower fixed rates, even then you still might be able to ask for incentives, that’s the third way you can negotiate is if you’re gonna go build a house from scratch, you might be able to say we want 20,000 in design options, or we want a free appliance package where we get a refrigerator, washer and dryer. So there’s all kinds of things you can ask for. It really depends on the situation and the builder on what they’re going to allow you to get. But just know that you do have power to go in there and you don’t just have to pay the full sticker price in most cases. And that’s why it’s so important to work with agents that actually sell new construction on a frequent basis.
As I mentioned earlier, about 50% of our clients end up building new homes. So we’re very familiar through the process. And we always want our clients along the way what to expect. If you have questions about building new versus buying a resale home please message us.
