Thinking about building a home in north Idaho?
When inventory is low, building a home seems to be the best option to get exactly what you are looking for in a home. However, the process can be longer and there's a lot more involved. Our goal is to make this process as easy as possible for our clients.
Many home buyers don't think they need a Realtor® to build a new home. However, it's important to understand that the builder and the agent representing the builder is required only to have the builder's best interest in mind. You'll need someone who has your best interest in mind and to guide you through the process.
What types of new construction options are there and how do they work?
1. New Construction Packages or Listings
In this case, you might see a new construction listing online or on the MLS that includes the land and home build with the estimated price. The price listed includes everything, but you may have the option to pick colors, exterior materials, flooring, countertops, fixtures, etc within the guidelines of the builder. The builder has already secured the lot and permits to build, and in some cases the home may already be under construction. If you choose any options outside of the build package, you will be charged additional for those changes.
What type of loan will I need for this type of construction?
If you are not paying cash and choose a mortgage for new construction packages, you will typically give the builder a non-refundable deposit and secure a home loan with a lender. The usual rate in North Idaho is 15%-20% for the down payment. If you have a Realtor, they will open a title and escrow account for you to manage the paperwork and process.
In most cases, the builder will want to see proof of funds or a pre-approval letter within 10 days of signing the contract. The builder secures the construction loan and you will need to secure a typical home loan by the date of closing, which is after the home is built, inspected, and receives a Certificate of Occupancy. On closing day, it is just like any other home purchase where you sign the documents, your lender funds the home, and you can move in.
2. Custom Construction
If you are looking to find your own lot and build a custom home, you will first purchase the lot and find a builder to provide a home plan for you and bid on the construction job. You will want to work with a Realtor® to find the land you want to build on, and then the Realtor will negotiate and manage the process of the home plan with you and the builder along with a final cost.
Note: the land must be paid in full before construction can begin. In some cases, a lender will 'refinance' the land with the construction loan and wrap it all in one package if the land is not yet paid off.
What type of loan will I need for custom construction?
Again, if you are not paying cash, you will need to secure a construction loan with a lender. The builder will require a non-refundable deposit as well between 15% - 20% of total costs to build. Your Realtor® will open a title and escrow account to manage the process and paperwork. The lender will fund the loan once you are approved and then issue draws to the builder throughout the building process.
Rather than the builder being responsible for paying interest each month during construction, the buyer is responsible for these payments, which can be anywhere between 3%-5% of the total cost of the loan.
Once your home is completed, inspected, and receives a Certificate of Occupancy, your lender will roll the construction loan into a home mortgage.
Note: If you want to use cash to pay for your construction, you will want to secure a Realtor® who will create the contracts for you, open an escrow account to manage draws, and record all receipts and transactions, as well as convey your home to real property and record it with the county.
What are the pros and cons of each type?
With a build package, the main benefit is that most of the work has been done for you. It's a good option if you just want a pre-designed home plan and don't plan to make many changes or customizations. The builder pays for the cost of the construction and interest during the build and these costs are rolled into the final cost of your final mortgage or cash buy at closing. The land and home are transferred to you when completed under a mortgage loan or cash, whichever you choose.
With a custom build, you must secure the land before building and it typically must be paid in full with cash or a land loan prior to construction. This option is good if you have the cash to pay for the land, otherwise, you'll need to wait until it is paid in full before building, or secure a refinance with the construction loan. You will be responsible for paying the monthly interest on the construction loan. All in all, the benefit is that you have more control over the process and home design in a custom build.
The other benefit is that you have the option of where you build the home, choosing the ideal lot for you. If you do not want to be located in a development area with a Homeowner's Association (HOA) or CC&Rs, this is the option for you. Most listed build packages are in planned developments and crowded neighborhoods.
In some cases, even a custom home builder might be willing to negotiate wrapping your land and build into a package if they have the ability to purchase the land and secure a construction loan. Your Realtor® can negotiate this for you if you want a custom home build but would rather not go through the construction loan process.
Why should you hire a Realtor® for new construction?
Here are several reasons you'll want to secure a Realtor® before looking for lots and hiring a builder:
- Your Realtor® will negotiate the best price for you and help you find the best lot and builder for your needs.
- Many builders will have 'preferred' lenders, but your Realtor® can help you to shop around for the best rates on a construction loan or home loan and may have recommendations he or she has used in the past.
- Realtors® are skilled at negotiating the best prices on construction with the builder and may already have an established relationship with many builders in the area, lowering the overall cost to you, the buyer.
- Licensed Realtors® know the process of securing land and transferring real property to buyers, understanding that a contract is in place and the builder must meet these requirements under a state real estate contract for new construction. In most cases, an attorney will cost much more than a Realtor® if anything goes haywire. Your Realtor® puts securities in place for you to prevent the likelihood of a lawsuit and negotiates to ensure both parties are happy with the outcome.
- The Realtor® secures a title and escrow account for you, which assists in reviewing contracts and closing on the construction loan properly, and also transfers the real property to the land and records it with the county.
As you can see there are several good reasons you don't want to go out there on your own when considering new construction.