The Hidden Financial Risk of Buying a Home in a New Development

Shutterstock Buying a house in a new subdivision can be exciting. You’re often the first person to live in your home, and it likely will have many of the latest features and amenities. But there’s a danger too — one I know only too well.

In 2009, my wife and I bought a new home in a new neighborhood. Today, with the developer still building more houses in the subdivision, we’re finding that we can’t easily sell it — at least, not without losing $20,000 or more in equity.

We’ve learned the hard way that it’s incredibly tough to compete with the developer who built your house, especially when the firm is still building more models nearby.

Here are a few things that you should consider before you make such a purchase.

Homes Are Still Being Built

In my neighborhood, the same builder who sold to us is developing all 80 of the remaining available lots. So why would anyone purchase my home when he or she could buy a brand new one? What do I have to offer that the builder does not? Two new homes for sale have identical floor plans to mine.

This means I’ll have to lower my price considerably to attract potential buyers. Beyond that, I’ll likely have to pay closing costs, upgrade amenities, offer a home warranty, or agree to some combination of these things to entice a buyer to purchase a 5-year-old home instead of a new one.

I could try to lure buyers with upgrades like granite countertops or incredible landscaping, but there is also a danger in having the most expensive house in the neighborhood. It’s often impossible to recoup your costs for those types of upgrades in today’s real estate market. I’d have to take a loss on most of them. So, even if I sold the home for close the price I bought it for, I’d still be losing money.

Do You Even Have the Right to Sell?

You may be shocked to learn that, even though you own it, you might not have the legal right to sell your home in a new subdivision for several years. Many homebuilders are adding clauses to contracts that force you to wait — similar to an employer’s non-compete clause

“The first thing a seller needs to do is check any contract terms they had with the builder — many have a clause prohibiting sale during a certain period except in hardship cases,” says Katie Wethman, a licensed Realtor with the Wethman Group in McLean, Va.

Always consider when you could potentially need or want to sell the home you’re buying — preferably before you’re in the lawyer’s office closing on the purchase. It’s almost like playing chess. You’ve got to think a few moves ahead and ensure that there aren’t clauses in your purchase contract that will prevent you from selling when you want. For that matter, it’s worth looking for other hidden issues as well. Don’t just sign a boilerplate contract without understanding what it means to you.

Comparison Shopping: Not So Simple

A new neighborhood is in many ways a closed environment. It’ll be hard to get accurate sales comparison data because there has been so little turnover yet.

Of course, you and your real estate broker can (and will) try to compare similar homes in other neighborhoods. But comparable home sales in your neighborhood are the best indicator of what you can expect your home to resell for. You may have to wait years before you start to see some resales in your new neighborhood and learn what similar houses to yours go for on the open market.

Can You Beat the Builder at His Own Game?

Everyone trying to sell a home must strive to display it in the best possible light, but that is doubly true when you are selling a home in a new subdivision. You’ll have to showcase any upgrades you have made. You must have perfect landscaping. You’ll need to accentuate any way that your home stands out from the builders’ new homes on the market. And you should probably spend the money to stage your home.

“A seller in this situation needs to spend extra time making sure the house is in pristine condition. Even normal wear and tear on a house is going to make it seem ‘dirty’ compared to a new construction home,” says Wethman.

Sellers of pre-existing homes may be able to make their homes feel warmer if they choose the right colors and have it appropriately staged. A builder may have to show a less-inviting model home, or even one not quite finished.

If a buyer could move into your home quickly, with a very short escrow period, highlight that. Many builders need time to get new homes ready for people to move in.

Beware of the Fire Sale as Homebuilders Finish

You will have an especially tough job of selling if you’re trying to do so at the same time as your homebuilder starts slashing prices to finish the subdivision and move on to the next project.

“Upon starting a subdivision, [developers] have to place hundreds of thousands of dollars or more in escrow with the governing body. This ensures completion of everything from final grades of roads to planned trees and parks,” says Jerry Grodesky, managing broker at Farm and Lake Houses Real Estate in southern Illinois. “It is no surprise when they discount the remaining lots or homes in a ‘fire sale,’ which undermines the established pricing structure of the neighborhood,” he says.

The builder receives a large financial windfall when the government returns escrow money — yet another reason why a company may slash prices on the last few homes in a new neighborhood to finish. Cutting prices ultimately hurts existing home values and comparable sales figures.

Websites like Zillow (Z) and Trulia (TRLA), by the way, can provide you with a wealth of knowledge on home pricing trends and comparable sales figures. But that works both ways. Buyers typically conduct a lot of research before purchasing, and bargain for the best possible price. It’s still a buyers’ market in America, and this often adds to the nightmare for sellers in a new subdivision.

My wife and I have decided to wait to sell our home, in the hopes that prices will increase over the next few years, and that the developer will finish the neighborhood. In the meantime, since we had to move away for new jobs, we’ve become accidental landlords. We’re losing $300 month renting out our home, but that’s better than losing a lot more by selling at the wrong time.

Have you ever tried to sell a home in a new subdivision? What have been some of your struggles? Was it worse than selling a home in a built up, established neighborhood? Hank Coleman is a financial planner and the publisher of the popular personal finance blog Money Q&A, where he answers readers’ tough money questions. Follow him on Twitter @MoneyQandA.

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