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Home and Construction

posted 02 April 2007

Existing Home or New Construction? Which Makes the Most Sense Today?

By Charles J. Kovaleski
While existing home sales nationally were up slightly earlier this year, recent news from the Commerce Department indicates that sales of newly constructed U.S. housing slowed drastically in February 2007, falling 3.9 percent, or to the lowest level since June 2000.

The figures here in Florida were similarly sluggish, with sales of both existing homes and new homes lagging. This, along with a dismal outlook for median home prices, continues to cast a glare on the state when it comes to the real estate market.

But for buyers, a backlog of unsold new homes in Florida can mean more bargains available on new construction. Because of the increase in inventory, buyers can be more discerning and selective about finishes and features, and can demand more generous “builder incentives” from eager developers.

Sounds good, right? It can be, but the realities of selecting a site, financing construction and securing a reputable builder can be daunting—albeit more cost-effective than it has been in years.

If you are thinking about buying a vacant piece of property with the intention of building a custom home, or are currently working with a developer with a subdivision under construction, consider the following:

Know the costs involved: In most cases, building your own home is more expensive than buying one that has already been built. Construction experts recommend spending no more than 35 percent of the completed home's anticipated market value for a vacant, finished city lot (one with utility hookups, sidewalks and other street improvements), and no more than 25

percent for raw, unfinished land. Contractor fees can run about 15 percent of building costs, which average $120 to $200 per square foot, depending on the quality of the home.

Teardown or raw land? Raw land generally makes more economic sense, but in many desirable areas of Florida, vacant lots are simply not available. If you find a must-have ocean-view lot with an old teardown on it, be sure to factor in the costs of demolishing it. Keep in mind that most banks will lend up to 50 percent on raw-land loans; with approved plans some banks will lend 80 percent of the appraised finished value. The same applies to vacant lots in developing subdivisions. And just like it’s never a good idea to finance a new car through the dealership, pass on the developer’s financing offers—they are rarely in your best interest.

Research the land. Buying vacant land is considered a higher risk than buying developed property, which means it is even more critical to have a thorough title search completed on the property. The search will reveal any problems with easements, liens or other issues that may prevent you from securing a free and clear title. Your real estate attorney can perform the essential title search early in the process, to be sure the land you are planning to buy has a free and clear title before you begin building.

Examine zoning, land use laws and other restrictions. Once you've identified a specific piece of property, make sure you know how the lot is zoned and what is allowable on the land. Depending on the zoning, your dream house may not be permitted—in fact, the zoning will tell you whether or not any kind of structure is allowable. Again, your real estate attorney can research zoning and other restrictions on a piece of raw land. Utilities are also a consideration in a vacant-land purchase: Check to see if the site has municipal water and sewage. If not, you could be looking at thousands of additional dollars in construction costs to drill a well and install a septic system.

Assemble an experienced real estate team. As is the case when buying an existing home, having a team of experienced professionals representing your interests is essential when buying raw property. Using a real estate professional who specializes in land purchases makes things easier, but expect to pay higher commission fees for the extra work and time involved in a land deal. Your team should also include a real estate attorney who specializes in new-home contracts and builder's contracts, especially what the warranty will and won't cover—in most cases, it covers very little.

Choose your builder carefully. Make sure the builder is reputable, and has a portfolio of developments similar to the one you are planning. Do your research: ask friends and family, and visit your builder’s previous projects and talk to the home owners. Consider hiring a general contractor or a project manager to oversee the construction and to deal with your builder. Check with the Better Business Bureau and scroll the Internet to check for negative Web sites created by consumers who feel they were cheated or mistreated by a contractor or developer. See how your builder has resolved problems and has stuck to completion dates. Finally, be certain your real estate attorney reviews any builder contracts before signing.

If you do chose to build your own home, the best advice is to be prepared for uncertainty. Construction rarely is finished on time, so prepare a contingency plan for where you will live when your new house isn't ready on time. Once the home is finished, be ready for imperfections and incomplete jobs. Most new-home contracts require the buyer to close the transaction when the local governmental authority has issued a certificate of occupancy. Anything not completed by the home builder at the time of closing is a "punch list" item, which means to expect construction crews on site correcting the items on the list well after you've moved in.
is president of Attorneys’ Title Insurance Fund, Inc. (The Fund), the leading title insurer in Florida and the sixth largest title insurance company in the country. Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years and supports a network of more than 6,000 attorney agents statewide who practice real estate law. The Fund, based in Orlando, underwrites more than 300,000 title insurance policies for owners and lenders in Florida every year. For more information, visit
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