Let’s talk about the hidden costs of buying a new build home or pre-construction home in a new development. While there are advantages and disadvantages to purchasing a new build home, there are out of pocket expenses when building a house.
As buyers of pre-construction homes, we’ve been around the block a few times and know some of the hidden costs. We also know how you can save money by understanding the new construction upgrades to avoid.
What to do Before and After Purchasing
Understand the Base Price: The base price of your new construction home is not the cost of the model home. The model home that you visit onsite is a fully mastered home which includes upgrades. This is where you will need to distinguish between a builder standard (included) and a builder upgrade (not included in base price).
Know What You Can Afford: You’ll need to sit down and budget for your down payment and monthly payments. It’s advised that you work with a mortgage broker to get the best mortgage rate. Ask your mortgage broker to show you their commission sheet. In order to lower your rate, they may need to sacrifice some basis points which would lower their commission.
Be Critical During the Pre-Move Inspection: A brand new build home is not a home without faults. While inspecting your home, look out for defects if any. This is when you will check-off all the upgrades you purchased. If anything is not as agreed – this is the time to bring it up. You don’t want this to end up as one of the hidden costs of buying a new build home.
Hidden Costs of Buying a New Construction Home
If you’ve made the decision to purchase a new construction home – congrats! You’re one step closer to owning your own new home, and several steps ahead of those looking to get into the market.
While buying a new construction home is an exciting moment in your life, we recommend that you prepare yourself for everything that can come in your way. We’ve purchased three new construction homes and have considerable experience in the real estate market.
We’re going to outline the most common hidden costs of buying a new construction home. While these aren’t all hidden costs, they’re definitely not advertised to the general public on billboards.
A new build home doesn’t come with a finished yard – you’ll likely receive sod. You’ll need to pay for landscaping for your new construction home. The cost of landscaping for your new construction home can vary depending on the size and scale of the project.
The average homeowner spends anywhere from $2500 to $20000 for their landscaping. If you plan on adding a nice walkway and a great looking lawn, it’s going to come with a price tag.
Premium Lot Costs
Depending on the type and site of the property, most home builders will charge a premium lot fee. This fee can range from as low as $2,000 to $50,000. When a builder is developing a community, they’ll realize that some lots will be more desirable by home buyers. These special feature lots will have lot premiums that the buyer pays.
For example, a corner lot with a great view may have a $20k lot premium, which will increase over time. A street in a new development will have multiple corner lots (usually at intersections). As the number of corner lot homes fill up, the premiums can go up.
A Whitby development that started with a $5,000 lot premium in August 2019; finished the project by selling it’s last lot with a premium of $40,000. As you can see, these premiums alone can make up half your down payment on the home!
High Markup Upgrade Costs
A new home buyer walks into a sales office and gets mesmerized by the look of the model home, and goes home to talk about it with their family. After seeing all the lovely features, quartz countertops and high ceilings – they’re so excited they’re getting the model home for the base price of $692,000.
Their mistake? The model home in this example had $210,000 in upgrades, making the home $901,000. A home builder is not only in the business to build, but to sell. They make a considerable amount of money with home upgrades.
It’s why we created the popular list of 13 new construction upgrades to avoid. There is a lot of markup that is built into the home upgrades for pre-construction. So, always ask your builder if they’re offering upgrade credits.
Recommended Read: How Much Did You Spend on Builder Upgrades?
Anytime you make changes to your new build home, you’ll be charged for it. This includes modifications that remove things as well. Planning on removing a wall? It’ll cost you.
If you prefer a particular type of home – such as an open concept home; you should consider the different floor plans offered by builders in your area.
While the changes would mean less labor – it creates the need to make additional plan changes. If there are major structural changes being made, it can lead to extra costs as permit costs.
The windows in your new build home will be naked upon possession of the home. This means they’ll be free of any drapes or blinds. If you’re planning on moving in right after possession, you’ll need blinds or window coverings – or risk being watched by the neighbors.
In general, the builder’s costs for window coverings can be high (as mentioned in the upgrades section). If you’re not planning on purchasing window coverings, drapes and blinds from the home builder – you need to do it on your own.
Fortunately, you’ll save money by working with a professional window blinds company. It may require additional time to get measurements and custom fittings, but you’ll love the extra options available at your blind company.
Did you want window sills? They’ll be an extra cost too!
Appliances and Fixtures
Some home builders will offer free appliances for the home (generally the cost is built into the base price). However, it’s commonly an extra cost for most homeowners. If you need kitchen appliances, washer and dryer – you might want to purchase these on your own.
Large stores such as BestBuy, Leons, The Brick and Brault & Martineau carry a large selection of home appliances. Their prices are affordable, and usually less than the builder. By shopping around on your own, you will also have the ability to pre-select from a wide selection.
You should budget on average $1,500 to $2,000 for large home appliances. You also need to ensure you have the proper electrical outlet in your home for a dryer (likely an upgrade).
Closet organizers, drawers and pot holders are all types of extras. You need to very critical when choosing the options for your home. If the builder is selling you a $350 closet organizer – you need to ask yourself if you can manage to do it on your own for less.
We saved about $15,000 on these extra furnishings around the home. We got them done in the first three months after moving in. It made sense for us, because we were able to spend 12-15 months shopping and comparing prices for these extra furnishings.
The bulk of our home furnishings were bought online and through various stores during sales.
Your lender will generally charge you for an appraisal. The appraisal fee does vary between lenders, but falls between $300 and $500. The appraisal is to ensure that the home is not valued at less than what you purchased it for. If it is, you will be responsible for the difference.
A lender can waive the appraisal fee, but they’ll want something for it. Unless you’re choosing your builder’s preferred lender or already maintain a relationship with the lender – it’s going to be tough to say bye to the fee.
Your mortgage broker will have a list of fees charged by the lender, including their appraisal fee.
Mortgage Insurance Costs
If your down payment is less than 20% of the purchase price of the home – your mortgage will need to be insured by one of the mortgage insurers. The insurance premium is not paid monthly, and it’s not renewed annually.
The mortgage insurance premium is calculated using a tiered calculation and is either deducted from your down payment or paid as a lump sum.
For example, if you’re purchasing a home at $700,000 and you place a $70,000 down payment (10%) – the insurance premium for the mortgage is $19,530. Since most buyers choose to tack this onto their mortgage, the cost is blended in and often “hidden”. However, with rising interest rates in 2023, these mortgage payments are increasing at every rate hike.