Investors who’ve worked with me long enough know I recommend new construction as a first-choice investment medium. The reasons have always been solid, but even more so in today’s rapidly accelerating market.
1. Brand new with a warranty
The most obvious reason behind investing in new construction is a brand new home with a multi-year warranty, and no need to worry about a new roof, new HVAC, new appliances, or foundation problems for 10yrs or more. Even buying a 3rd-party home warranty on a resale can’t come close to the 1-year bumper-to-bumper, 2-year appliance, and 10-year structural (slab, frame) warranty on new construction. For an investor, this means less risk of something going wrong, a lower maintenance budget, and generally less headache dealing with repairs.
2. No bidding war and more favorable contract terms
New construction is generally a hit-the-ask sort of process. With resales lately going for $50-100k+ over ask and 40+ bidders, the prospect of simply going under contract is enticing. Some builders have gone to a bidding platform recently, given the huge inventory shortage, but I don’t expect this to last or become the new norm.
Builders also use their own contracts drafted by a suite of attorneys. They are some of the driest material you’ll ever get the pleasure of reading, but they also don’t change. Whether you’re in a buyer’s or a seller’s market, the language is fixed. Compare that to the near-zero buyer protection that sellers are asking for these days.
3. A predictable, legalized monopoly
When buying resale, prices are controlled entirely by free market dynamics. While new construction prices will certainly be influenced by the area they are in, current construction costs, etc, these prices are set well in advance of the first house ever built. Developing a new community can cost tens or hundreds of millions of dollars, paid for by investors with a plan that started years before whatever current market we are in. That plan includes early pricing to entice people to come to the community (most people don’t want to live by themselves on a patch of dirt), followed by aggressive price increases as the community builds out, all to hit a profitability goal set out for their investors. Knowing this, a savvy real estate buyer can literally predict the future. We KNOW they are going to raise prices, all we have to do is get in early enough and hang on for the ride.
Depending on the current market, pricing can sometimes scare investors into thinking “this community is too expensive”. However, I like to describe this as a “legalized monopoly”, where the price is what the price is. It doesn’t really matter what everything else is selling for, a developer is making their own market and (legally) controlling the prices in that market. Because developers have to meet their investment goals, they are incentivized to raise prices, or at least hold them in a worst case market. They don’t get paid unless they close. If the buyer walks away or the bank doesn’t approve the appraisal, nobody gets paid. They know this and therefore manage prices in a way that keeps everyone happy, lowering your investment risk. After closing, it’s the investors who then make the market as they control rental rates, set almost entirely by profitability goals based on the cost of the home.
4. You’re buying a contract, not a house
Quite possibly the most incentivizing reason for investing in new construction, is the delayed option period. You pay a little money up front today, for the “right” to buy the property tomorrow. This is very analogous to buying options on the stock market. You get to lock in today’s pricing for 5-12 months, all the while the builder continues to raise prices. By the time you close, you could see $50-100k+ in equity, and you don’t even own the home yet! And if it doesn’t go the way you think, you simply walk away and only lose your earnest money.
Investing is all about letting your money do the most work, with the least risk, for the highest return. Every market type presents its own unique set of challenges, separating winners from losers. While investing in new construction isn’t always the answer for every investor, it can present an edge over resale that spans market dynamics.
And there you have it for today’s investing tip.
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