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Want to Buy a New House? Beware Developers Hawking Empty Subdivisions

Written by Ilyce Glink on September 3, 2010 in Real Estate  |   3 comments

Want to Buy a New House? Beware Developers Hawking Empty Subdivisions If you’ve been dreaming of living in a brand-new home that no one else has ever lived in, you’re in luck. Due to the fallout from the Great Recession, including the bursting of an…

Home buyer considerations of developersWant to Buy a New House? Beware Developers Hawking Empty Subdivisions

If you’ve been dreaming of living in a brand-new home that no one else has ever lived in, you’re in luck.

Due to the fallout from the Great Recession, including the bursting of an enormous housing bubble, rampant foreclosures, and the lowest mortgage interest rates in half a century, there’s never been a better time to buy a new home.

But choosing the right developer and subdivision is extremely important. If you choose a developer who is financially unstable, or a subdivision with problems, you could find much of your new-home investment going right down the drain.

Before you buy a new home, think through the following issues:

  1. Where is the home located? Where you buy your new home is critically important. If you’re buying a new single-family home in a subdivision, you’ll want to choose a great subdivision that is well located and then choose an excellent location within the subdivision for your home. In terms of neighborhoods, think school districts, amenities, shopping, and ease of access. When it comes to lots, choose the one that will have the best chance of maintaining its value and will appreciate going forward. Typically, these are lots with views of mountains, water, or golf course holes.
  2. Is the developer financially sound? These days, big developers might be in good shape financially—or not. Whether you’re buying from a big developer or a small one, you’ll want to check out the builder’s finances and make sure no complaints have been filed with the state agency that regulates builders and developers. Have your attorney open an escrow account that pays out only when the builder reaches certain construction milestones and provides you with signed lien waivers. Insist (in the contract) that the developer or builder keep your funds separate from everyone else’s funds.
  3. How complete is the subdivision? If the subdivision isn’t almost complete, you could have to pony up extra cash to complete some of the hardscape items, such as the clubhouse, tennis courts, or even roads and light fixtures. If only ten home sites have sold out of a thousand, you may want to take a pass and find a different development. Why? You likely won’t be able to sell your new home until the subdivision is complete.
  4. How many foreclosures does the subdivision have? These days, if a subdivision is filled with foreclosures, it’s tough to buy a new home for more money. That’s because the price is being set by the foreclosures, not what the developer wants to get for the property. If the area is littered with foreclosures, and you still want to live in the subdivision, you’ll probably do better financially by purchasing a foreclosure and repainting and recarpeting.

While it’s nice to live in a new home that no one else has ever lived in, the risk these days that you could lose a large portion of your investment looms large. Make sure you know the risks before you sign the contract.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

READ MORE:

Why Mortgage Lenders Pull Your Credit History Twice
How to Save More Money at Home
Is Now the Right Time to Buy a Vacation Home along the Gulf of Mexico?
Want a Principal Reduction Loan Modification? The New Home Affordable Modification Program (HAMP) Rules You’ll Have to Live By

3 comments

  1. Eva Rosenberg, EA says:

    Dear Ilyce,

    Excellent points. Also, bear in mind that when you buy into a subdivision, you have association dues. If the project isn't substantially sold, your association dues may rise dramatically to make up the shortfall.

    Yes, yes, the developer is meant to pay the dues for the unsold lots. But…if they are not financially solid and the sales are taking substantially longer than expected, they may not be able to keep up.

    Another thing to consider is – will you own the land under your home. Or are you just leasing it? Years ago, the folks in Irvine went ballistic when the Irvine Company offered to sell them the land under their homes. Why? At first, they were given an offer of about $10,000 per lot. Most rejected it. Years later, the original low rental rates on the land lease expired – and the land rent went sky high, they demanded to buy their lots. By then, the lots were valued at over $100,000. More than two or three times what they paid for the house in the first place. (though home values did go up, too.)

    Only no one could sell their home – because the new buyer would have to either pay the crippling land rent, or buy the land.

    Avoid these problems by understanding what you get in a subdivision – and what you are not getting.

  2. Ilyce Glink says:

    Eva – Those are terrific points. The business about long-term land leases (very common in the UK and elsewhere in Europe) are virtually unknown here in the states. We imagine that when we buy out house, we're also buying the land underneath it.

    It's interesting that a real estate attorney would be able to help buyers understand what they're signing up for – but attorneys in many states are only hired by the lender (and paid for by the buyer, to whom they owe no fiduciary duty) to assist at the closing and protect the lender.

    I'd really like to see more people hire real estate attorney to assist with their closings, help explain documentation and make sure everything is good.

    Full disclosure: I'm married to a real estate attorney who does both residential and commercial transactions, so I've heard many stories over the years about people whose deals went haywire because no one was protecting their interests.

    Thanks.

  3. mominul says:

    karen remax st-laurent propriétés à vendre gives expert advice on how to stage your house on a budget and sell it faster, especially in a tough real estate market.


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