Ivy Zelman was in a hurry to buy a brand-new house. She wanted to settle in well before the birth of her first child, due to arrive later this year. So Zelman, a homebuilding industry expert for Credit Suisse First Boston, took a step that–in retrospect–she doesn’t recommend to others. She and her husband, also a finance specialist, hurriedly selected a “spec” property, one a builder constructs on a speculative basis, without an order on the books.
A spec house can be very fancy, like the Zelman’s new 6,000-square-foot colonial. Even so, it may ultimately disappoint discerning buyers because it’s not customized to their tastes. For instance, the Zelmans are unhappy that a wall, which includes a fireplace, breaks the flow between their kitchen and formal dining room. They would prefer a less formal dining room that blends into a spacious, casual kitchen.
Also, the couple doesn’t like the entertainment unit the builder installed on a wall of their master bedroom. That’s because it blocks the view of their forested back yard. In addition, the Zelmans are unimpressed with the $15,000 elevator that came with the house. For that price, the couple would have preferred extra space for a home office or gym.
Although a spec home is designed with a hypothetical buyer in mind, the price on such a property is typically just 1 to 2 percent below that of a comparable semi-custom built home, Ivy Zelman says.
Few new-home buyers have good reason to buy a spec home over one designed with their preferences in mind. “I wouldn’t buy a spec home unless you’re extremely price sensitive or get a great deal because you’re moving into the development at an early stage,” Zelman says.
Here are four suggestions for new-home buyers:
– Be choosy in selecting your dream. Zelman and her husband regret that they rushed into their purchase. Just a few months after moving in, they recently put their colonial property up for sale–too soon to pocket any gain in value.
“We’ll be thrilled to get back what we put into the house,” says Zelman. One reason for caution when buying a brand-new home is that it’s usually more expensive than resale housing in the same community, says David Lereah, chief economist for the National Association of Realtors. The median-priced new home now sells for about $40,000 more than does the median-priced resale property.
– Gauge your leverage in the market where you’re looking. With demand far outstripping supply, buyers in some neighborhoods have had to stand in line to order a new home in recent years. The situation for would-be new-home buyers was more acute in November 1998 than at any time in 40 years, Lereah says.
Since then, however, much of the pent-up demand for new housing has been satisfied and mortgage rates have climbed, pricing more potential buyers out of their dream homes. “Every time the mortgage rate increases by a quarter of a point, 50,000 homebuyers get knocked out of the market,” Lereah says. In many new-home communities, the builder still has the upper hand. But gradually, supply and demand are coming into closer equilibrium, helping buyers. This may enable some purchasers to persuade their builders to include “optional” features without increasing the standard price, Zelman says. Such features could include a fireplace, upgraded flooring or top-of-the-line kitchen cabinets.
– Be an early bird. Are you considering a new home in an area where you would be among the first to move in? If so, think about the realities of being a pioneer. You could get a price break from the builder for being part of the first stage of development. Once the community is a proven success, buyers will pay more.
But being an early bird can also have its annoying aspects, as Zelman and her husband discovered earlier this year when they bought their new colonial in a fledgling suburban development. One major downside could be years of noise as surrounding homes are constructed.
– Take note of the added investment potential of a good location. No home is an island, regardless of the quality of its workmanship or the desirability of its features. Rather, its potential to gain in value is tied to its setting in a community.
“Good schools and transportation are the keys right now to buying in an area that will appreciate,” says Lereah, author of “The Rules for Growing Rich” (Random House, 2000, $25).
Sprawl is another important factor. Well-controlled growth has become so fundamental to property values that the National Association of Realtors is creating a “smart growth index,” to rank areas in terms of the quality of their planning for growth. “Buying your new home in a good location is more important than ever,” Lereah says.
