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Why Buy New - Benefits of New Construction

There are many reasons for the popularity of new homes. Only with a new home can you choose the floor plan, colors, appliances, and fixtures you want. You get peace of mind knowing you haven't bought someone else's problem, and if anything goes wrong it is likely covered by an extensive home warranty. And on top of it all, there is just something really cool about being the first and only person to use your new house.


While it used to be the case that new home builders constructed seas of homogeneous boxes that looked like large garages with small homes attached – many of today's new home communities possess the character and variety of an established older neighborhood. And thanks to redevelopment programs, many of these new communities are being built all over the metro area – not just in the far flung suburbs.


With all the positives of buying new construction, why would anyone even consider buying an older home? Must be because the new homes cost so much more than their 10 year old counterparts, right?


Wrong

"One of the most common incorrect assumptions I see first-time new home shoppers making is that new construction is more expensive than resale" says Aric Maurer, a sales counselor for Ryland Homes in Eden Prairie. "If I can spend time with them and show them an apples-to-apples comparison they are usually pretty amazed at how comparable the costs really are."


If that just sounds like good salesmanship to you, think back to the days you spent napping in your economics courses and consider this. Like all commodities, home prices are largely a function of the supply vs. the demand. The lesser the supply or the greater the demand – the higher the price.


While the inventory of resale homes is also pretty substantial – there is an important distinction in pricing strategies between builders and homeowners.

When a builder sets pricing for a community, the pricing is typically related to cost of materials, labor, land, and a profit margin. If the resulting price does not land squarely in the real market value for those homes, the homes will not sell and the interest and marketing costs will quickly erase any profit and turn into loss.


When a homeowner sets the price for their home, the price they select may be influenced by what they owe on the home, the equity needed for them to afford their next home, the perception that their home was built with golden screws, and sometimes based on what those in the industry like to call the "bigger fool" principal. Every time somebody over pays for a house, that selling price becomes the new benchmark price for everyone in the neighborhood who has a comparable home. This is not to suggest that all resale homes are overpriced, many represent a very good value – but taken as a whole, new homes are typically priced closer to their real market value than resale homes.


Death and Taxes

The old saying goes, there are two certainties in life: death and taxes. Perhaps they should add a part 2(b) to that rule: Taxes on a new home are significantly lower in the first 12-24 months than on a similarly valued resale home.

You may have heard this before, but not completely understood why. Here is a quick overview to help you understand the tax benefit of new construction:


The taxes on your home are based on the city, county, school and special district budgetary needs for the coming year. These needs are used to create a market value tax rate which is applied to all of the properties in the county according to the estimated value of the home. The more your home is worth, the more you pay in taxes. That part is a no-brainer.


What many home owners don't realize is that the property taxes for the current year are based on the value of your home in January of the previous year. So your taxes paid in 2008 are based on the estimated value of your home in January of 2007.


To see how this applies to new construction, consider the following scenario:

You sign a purchase agreement for a new home on March 1, 2008. The home is completed and you close on June 30, 2008. Your taxes for the balance of 2008 are based on the value of the home site from January of 2007, which was most likely a pile of dirt.


Come 2008, your taxes are based on the value from January of 2007. Since you didn't start building until March of 2008– once again, your taxes are based on the value of the lot only.


Finally in 2009, you will pay taxes based on the assessed value of the home, but not before you enjoyed 18 months of low "lot-based" taxes. Had you bought an existing home, you would have been paying the fully assessed taxes from day one. This difference can be significant, depending on the ratio between the value of the home and the value of the lot – a savings of $100 - $250 a month is not uncommon.



Murphy's Law

According to Capt. Edward A. Murphy (the namesake of Murphy's law), if something can go wrong it will. According to most homeowners, if something can go wrong it will, but not until after you move in. And all those ‘somethings' going wrong can get really, really expensive. Furnaces, dishwashers, water pipes, and garage door openers all possess an amazing ability to fail at the most inconvenient and infuriating time possible.


For new home buyers, not only is the likelihood of their brand new furnace going on the fritz extremely low, but if something does go wrong, it is a matter of calling the warranty department and not an issue of writing a check. Maurer notes "Many of my homebuyers had such a care-free experience living in their new home that when the time comes for them to move up or move across town, they are only looking at new homes."


Mechanicals and appliances built in the last decade are relatively high in quality and can provide a very long service life as a whole. But once a home reaches even just 8-10 years of age – many of the components in the home are at a point where a costly repair is not to be unexpected. The number of possible gremlins is nearly limitless, but the following list contains some common repairs you may not be thinking about when looking at that home built in 1996. It is easy to see how the cost of unexpected repairs can add up quickly.

Some common repairs you might not think about but should not be surprised to see in a 10 year old home:

  • Furnace hot surface igniter replaced: $120
  • Garage door cables and rollers replaced: $100 per door
  • Door hardware – new lockset installed $100-$400 per door
  • Dishwasher – replace leaking main seal: $80
  • Replace hot water heater $250-$500
  • Washing machine belt or drive motor replaced: $75-$200

    *Cost estimates include both parts and labor.

Home is not where you hang your wallet.


Ultimately, the decision between new and used homes is not purely a financial one. A house needs to have certain intangibles to make it a home - and those are things that are mostly subjective. For one person, the slightly crooked cabinets and leaky faucet are all part of the character that makes a 1920's bungalow feel like home. For another it is the gleaming new hardwood and quartz countertops that put them at ease.


Regardless of what style of house you would like to call home – there is likely a new home that fits the bill.

By Diane Tuman

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