New Construction Bargains: Risks or Rewards?
Many Virginia condo builders have bailed before completion of their projects, voiding thousands of contracts (see: Arlington Condos Trend: Back to Apts). Meanwhile, other builders, including single family home (SFH) builders, decided to plow through the rough market.
Earlier in the year, builders (condos and SFH) were finding buyers were backing out of new construction contracts. Some left 2-7% deposits on the table, some fought for their deposit (ask for specifics). Can you blame them? If a property has dropped $70,000 and you put a deposit for $20,000… um, I know that stinks but why not just leave your deposit on Monday, and go in on Tuesday and buy another one for less?
So now the builder has inventory that they need to move and fast! The liquidation sales are here! And “These prices won’t last!” But are they a good deal? I’ve said before that (No Such Thing As a “Good Deal”) but now I want to specifically look at new construction homes.
The decision is VERY tough for buyers.
You can buy a new place:
- Get a $10k-$100k “savings” on a new construction vs a similar new resale (or off the sticker price) BUT
- Risk further liquidations, dropping your unit value another $50,000+
Or you can buy a resale:
- It might cost $5k-$15k more, BUT
- The lower supply, reduces Supply and Demand risk.
I’ve heard from a source in a new construction project that they were considering hiring an auction house out of Boston to dump the rest of their 30 units, once and for all! So a buyer might get a $50k “deal” today, to find their value dropped $50k the next day.
Supply and demand is crucial, and with new constructions, it can be out of whack.
For example, take my Clarendon Condo (please take it!!) I saw as many as 40 of the 400 units (10%) on the market at one time. That was bad, prices tanked faster than other Arlington condos. Down $150,000 from the top price to the current lowest price.
Meanwhile the new construction Phoenix Condos in Arlington two blocks away has about 180 total units. Only 31 have closed and about 20 are under contract. They still have 130 units to move!
One agent just told me they got a steal of a deal there. They were able to get a deep discount off list from the builder through the sales office: McWilliams Ballard. She was brilliant. She made them show her actual HUD1 statements of other units (since nothing recorded yet on the MLS or tax records) and she went down from there.
But what about the other 130 units? Are they going to sell for the same or more? Probably not.
But her final price was $100,000 UNDER a comparable list price for 2 units in my building!
When she initially asked about my building vs the Phoenix, my first reaction was “All else being equal, I’d rather buy where there is less inventory, so you have less downward risk”
- Sidenote, when I say “all else being equal” I mean after you account for the % off list you can get on the resale, and you adjust for amenities, view, floor, size etc.
I might, if you were ready to buy, go as far as recommending paying $10,000-$20,000 MORE for a unit in a location with less inventory risk (5% at Clarendon 1021 vs 72% at Phoenix)
But the decision gets tougher if that spread is more like $50,000 to $100,000. 
Another example: A Realtor that I highly respect is currently focusing on new construction. She was thrilled that she got $70,000 off list (about 10%) for a home 2 months ago, yet last weekend at a “big sales event” she got another client $125,000 off at the same community!
So her first client effectively LOST $55,000 in 2 months!
What? You want me to: “shut up and tell you what to do”?
- If you decide to buy, make sure your horizon is long enough, otherwise rent (See Video: Don’t Buy).
- Pick exactly when to buy (read Attn. Market Timers! The EXACT…)
- Calculate the difference between this “Sale” unit to the AFTER NEGOTIATED price of the resale. Maybe even put in a few offers into resales and SHOW THEM what their competition is (see “Round Robin” Buying)
- Get copies of HUD1s (closing statements to prove sales prices) and look at subsidy and parking spots (sometimes a $30k spot gets thrown in, make sure you compensate for that)
- Ask about how many they have left, and get proof! (watch out Wilson 1800 in Arlington likes to make you think they are “almost out” until they suddenly “release more”)
- Use a knowledgeable Realtor, you don’t get a better deal going in alone.
- Consider putting into the deal a $30,000 escrow to be given to the buyer if further price reductions occur.
- If it is a preconstruction consider putting a clause to reduce the price if other units sell for less (but watch out, see Lowest Price Guarantee)
- Be patient when negotiating. You can either get a FAST and high deal or a SLOW and low deal. Slow play it.
- Pray
Written by Frank Borges LL0SA- Broker FranklyRealty.com
- 28
- September
- 2007
Good article and especially important right now. I actually heard the commercial on the radio about a builder who is doing an “auction” on their inventory homes. Of course, builder can determine starting bid price, but I’d be interested to follow up with them and see how well it worked.
Another point about new construction is that this is a time of the year where buying from a large, publicly traded company can get you a great “deal” because the end of their fiscal years are coming up. A couple end in October, a lot in November and then a few in December. They are willing to do whatever it takes to move inventory right now because they’ve got to report numbers to the big dogs at corporate. After 3 years working as a new home sales consultant, I can tell you they are a lot less to wheel and deal the day after their fiscal year ends, regardless of the market.
It is mind boggling that you really don’t know the REAL price. Real estate is a crazy market. Thanks.
N
if you are buying cooking cutter to live in as your primary residence for a LONG time (ie 5 years plus) then maybe the price slide isn’t as important and other things balance it out (ie location, amenities, etc) but if you are buying for investment, or short term occupation, RUN… what do you think is going to happen to prices over the next SEVERAL years with so much oversupply in an area with no differentiation in product? Down, down, down…. and not just in the short term, but for years. I typically tell buyers if they are buying as their prime residence, be a LITTLE less concerned about the “deal”, but if you are buying for any other purpose at all, then be very wary of anything where it is a commodity…
You’ve certainly given us lots to consider! I guess it just shows that like any true investment, you need to be in it for the long haul! Thanks for the post.
Kim Dillon,
Frank,
Liked the article. Too bad I didn’t know this prior to my settlement on a new construction.
Regardless, I know for the future and have learned a lot through this entire process and I owe a lot (if not all) of it to you so I just wanted to say thank you. I just wish I didn’t get ripped off like I did but not too much I can do about it now. Thanks again for the good info and talk to you later,
Aaron
What about the detrius of the real estate bust — what happens to the properties that were once scheduled for high-rise condos? Take a look near Clarendon and Rhodes, where a developer bought up houses and and an apartment complex, fenced it in, then left. It’s now rat infested, and holes in the sides of the houses show that either bums are living there or shady people have been breaking in to take whatever they can find in the empty houses. Ditto on Lee Highway near Stuart where a (IMO absolutely horribly ugly instant slum) complex was stopped mid-stream, and the builders left Tyvex wrap exposed, and now being torn off by the wind. I think we need something like Superfund legislation, where additional taxes are placed on sales of houses and successful projects (perhaps just 5 percent of sales prices) to pay for the costs of these eyesore dump sites left behind by the boom. What do you think?
NO NEW TAXES!! Here’s what should happen. The county should seize these half-built complexes and auction them off to the highest bidder, with no reserve price. New developer will figure out what’s the most profitable option.
Frank: Wonder if I could get your take on the Monroe at Virginia Square? Is it a building that you recommend? Many thanks.
Frank,
Good post. I think you should point out that any new product should be worth more than a used product, all else being equal. You mentioned The Phoenix in Clarendon and that they probably have 130 units left. So, let’s say they’ll be there for another 1.5 to 2.5 years selling. If you purchase and settle there today you would have the concern of a developer with a marketing budget and possible willingness to beat out any resale in the same building during that time frame. But, how would owning at 1021 necessarily be better (if you assume for sake of argument that the buildings are exact equals)? If Keating (the developer of The Phoenix) lowers their 2BR to $450,000 a year from now why would anyone buy a 2BR for $500,000 at Clarendon 1021 at the same time?
So, the effect is that the new construction prices (again, holding everything equal, which is never the case in real estate) set the market. If you agree the next logical question is why would anyone want a “used” or resale unit in a building 4 years older vs. a new unit? No matter which building you purchase in, you have the same problem if you have to sell in the next 1.5 to 2.5 years. If you purchase the resale you should also account for the fact that your asset is that much more depreciated (maybe not the land, but the structure – appliances, HVAC, etc.).
Just something to consider. There are definitely risks to buying new construction, but I think the main risk is buying real estate off a floor plan & rendering and putting down 5% for 2+ years while your home is being constructed. That scenario has already played out. If you may need to sell in 2 years or less while the developer is still selling in the community & can’t stand to lose a penny you shouldn’t be buying. But, if you need a nice new place to live we are in a rare time in the market when there is plenty of standing product, rates are good, we continue to generate jobs, etc. Now may be the best time to buy if you have a longer time horizon and desire the benefits of owning.
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