As market booms, buyers should consider quirks, risk of buying new
Is now a good time to buy a new home? During 2004, plenty of buyers in Chicago thought so. In fact, after a slowdown that hit the market heavily after Sept. 11, 2001 and lasted several years, new housing roared back to life during 2004. Month after month, major new projects came to market, and enough buyers showed up at sales centers to push sales to record levels.
Interest rates, while rising, remain incredibly low by historical standards and have been a factor in boosting sales. Low mortgage rates have stretched consumers’ buying power as renters become buyers and homeowners who have built significant equity during the last decade trade up to bigger and better homes.
The growing popularity of Chicago, especially central neighborhoods from the South Loop to River North to Old Town has helped to reverse the mass exodus of population to the suburbs that afflicted the city for more than five decades. Empty nesters and others both from the suburbs and out of town increasingly see downtown Chicago as the place to live.
These factors were present in 2002 and 2003, but both buyers and developers were a little more cautious in those years. After concentrating on selling out the lingering units at existing developments, builders turned to new projects in 2004 – many of them flashy, large-scale developments – and buyers got excited about the latest offerings.
New developments often experience an early burst of sales activity, especially if they can create a sense of urgency on the part of both conventional buyers and investors. This was certainly the case at the Enterprise Companies’ Museum Park buildings in Central Station, which saw swift sales as new phases opened, and at Lakeshore East, where residents moved into the first condominium highrise and a variety of new homes hit the market. Countless smaller projects also cropped up and opened with a flurry of sales.
Buyers signed contracts or reserved nearly 6,300 new homes in downtown Chicago during 2004, according to housing analyst Appraisal Research Counselors, about double a typical good year based on sales over the last decade. However, a large number of these “sales” are reservations riding on refundable checks of $1,000 to $5,000, and many of these units may wind up back on the block.
Another sobering figure comes from a recent study by the National Association of Realtors. Investment property and vacation homes accounted for more than one-third of residential transactions in the U.S. during 2004, according to the NAR – a much greater percentage than in the past. The new study, based on two surveys, shows that 23 percent of all homes purchased in 2004 were for investment, while another 13 percent were vacation homes.
It’s difficult to say what percentage of sales in Chicago are to investors, but experts say it’s significant, accounting for perhaps nearly one-third of new units sold last year. Consumers wary of the stock market and other investment vehicles have been turning to real estate across the country, leading to fears that prices and demand have been artificially inflated, creating a “housing bubble.”
So, is now a good time to buy a new home?
The answer depends on so many factors, the question is impossible for anyone but an individual buyer to answer. Given the trends underway in the city, it seems unlikely that buyers purchasing new homes here will lose money long-term. However, if you’re buying a home primarily as an investment, the strategy is not without risk. A sudden oversupply of homes, a steep rise in interest rates, a shock to the economy or any of a host of things could quickly cause a price correction in the market. The sorts of stellar returns on home purchases that buyers have been experiencing in Chicago during the last decade are not guaranteed.
The best reason to buy a new home, though it may sound obvious, is that it’s the place you want to live. Even if that’s the case, the process is fraught with pitfalls and unforeseen headaches. Some problems can be created by mortgage companies, Realtors and developers, but many are simply the result of ignorance or unrealistic expectations. When it comes to the quirks of new construction, an educated buyer is more likely to be a happy buyer. Advice from family and friends – tales from the front – may comprise the best advice. Our own brief list of helpful hints follows.
Old vs. new construction
Whether buying new construction is better than buying an older property depends on the buyer. Some buyers insist on a brand new home while others believe the older the better. Still others have definite criteria in mind – a certain style, various amenities – and whether or not they buy new or old is immaterial.
Perhaps the most commonly cited reason for buying new is the lack of maintenance on a new home. The typical face brick and vinyl siding on today’s new homes is much easier to care for than older wood siding or old brick that may need tuck-pointing. The roof on a brand new house should be maintenance-free for years, and it’s under warranty if problems arise. The furnace, hot water heater, all of the major appliances – and potential headaches – are newer and more efficient than what are found in old homes, and they come with their own manufacturer’s warranties.
In some ways, however, older homes may be the better maintenance bargain.
“In general, the quality of new construction overall is below what I expect,” says Tom Corbett, a home inspector whose company name is Tomacor. “We routinely find that contractors and developers skip many of the necessary details when converting or building new. A lot of new construction is maintenance-free in design, but so much of it is inadequately put together that the maintenance fears are eclipsed by the here’s-another-problem reality.”
Stuart Packer of Lincoln Park Associates says there are advantages to both new and old, but he agrees that construction standards were generally higher earlier in the century.
“A used house has withstood the test of time,” Packer says. “Are there going to be inherent things that go on with a house that’s past half a century old? Of course. But you won’t find solid masonry construction today or what was considered solid masonry 40 years ago. Today’s masonry is cinder block with a course of brick veneer only on the face. Materials were cheap years ago, and the older homes are solid brick, with full dimensional lumber, knee walls; sometimes they’re steel reinforced.”
One advantage to buying something built today, however, is that architects and designers have today’s lifestyles in mind when they shape your home. Newer homes generally have more electrical outlets and better energy efficiency. They frequently have more and larger bathrooms and popular design features such as multiple decks and open kitchen / dining areas.
If you decide to buy in a new development, check out other projects by the same developer. Ask him or her for references and the names of previous buyers. The reputations of the architect and general contractor are equally important. In fact, an inexperienced developer with a top-notch architect and contractor is probably a better bet than an experienced developer with a rookie architect and fly-by-night contractor.
A funny thing happens between the time a new home is reserved and when it’s built. It often shrinks substantially. No one is sure where all those square feet developers advertise during the sales pitch disappear to when the studs go up, but one guess is in builders’ pockets.
The excuse for this problem used to be that no standards existed for measuring square footage in new homes. Should builders measure from the outside face of walls, or the inside face, or the mid-point between faces? Should only finished basements be included in square footage or all basements or no basements at all? It’s hard to justify the rationale that spaces outside the home, such as decks and patios, should be included in square footage but some developers have done just that.
A common standard was approved by the American National Standards Institute in 1995, but it has been ignored by many in the industry. One useful exercise in examining brochures and marketing materials for developments is to do your own rough calculations. Developers routinely lie about total square footage – and provide accurate room dimensions. Take the time to multiply room dimensions and add the totals. Realizing that awkward corners and curves and some areas legitimately open to debate may skew your calculations, compare your amount with the developer’s number. If the difference seems significant (your 2,400-square-foot home has shrunk to 1,500 square feet, for example) meet with builders or their sales people to determine exactly what is included in their numbers.
Because of vast disparities in measurement, figuring out the price per square foot is often a misleading tool of comparison between developments, but it may be helpful in other ways. Given the costs of land, construction, materials and other items, it’s generally not possible for developers to sell townhouses for $150 a square foot on the North Side. If your calculations produce that sort of number, make sure that the builder has not stretched the square footage.
Disappearing views, buildings
In many buildings, a major portion of a particular condo’s price can be ascribed to the view, or potential view. Developers understand that buyers are willing to pay more for good views, which are essentially assigned dollar values when builders price their product.
This is why the same two-bedroom 1,200-square-foot condo on the fifth floor with a great view of the building across the alley sells for so much less than the identical unit with a lake view on the 18th floor.
The problem is that views are not forever. Some, in fact, are shockingly short-lived. A number of developments in recent years have sold units, charging premium prices for great views that disappear a year or two after the building’s finished.
How do they disappear? Generally, someone puts another building up an arm’s length away. Some views are protected by things that prevent future building on adjoining sites. The Chicago River, parks, landmark buildings and tracts of new low-rise housing are the types of things you want adjacent to your building in order to protect the views.
Beware of parking lots, vacant sites, storage facilities, warehouses or other old and decrepit buildings next door. Even railroad tracks are scant protection. Some buyers at one development assumed nothing could be built between their new home and the Chicago River because of the railroad tracks in between. Had they looked immediately south, where a developer built a highrise on the air rights over those same tracks, they would have realized how tenuous their great views were.
Like views, buildings also can disappear, or never appear, to be more accurate. Developers who had projects on the drawing board are sometimes reluctant to let go of or postpone them when the market slows down. These builders often will test the waters to see if they can generate enough interest among buyers to make the project a success.
If buyers show up, they can go ahead with the project. If not, they haven’t started construction and can scrap the deal without a significant loss. The loss, however, can be tremendous for buyers who may reserve a unit and stop shopping only to realize six months later the home they’d banked is not getting built.
Ask developers how many units they’ve sold and how many their lenders require them to “pre-sell” before construction can get underway. Do not settle for the number of “reservations,” which require little commitment on the part of shoppers, but ask instead about the number of actual contracts that have been signed so far. This may give you at least one sign as to the odds a project will be completed.
Inspecting the inspectors
The first advice of home inspectors is, understandably, hire a home inspector. Granting that this might not be the most objective tip, it’s also a fairly smart one. A home inspection can cost less than $500 depending on your unit, a bargain considering the cost of new homes today. The investment often pays for itself in problems that are avoided or discovered, saving headaches and major expense later, and sometimes resulting in a renegotiation of price.Â
The first advice of home inspectors is, understandably, hire a home inspector. Granting that this might not be the most objective tip, it’s also a fairly smart one. A home inspection can cost less than $500 depending on your unit, a bargain considering the cost of new homes today. The investment often pays for itself in problems that are avoided or discovered, saving headaches and major expense later, and sometimes resulting in a renegotiation of price.Home inspectors will check everything from crawl space to attic, wiring to windows, and give you a detailed assessment of your new house or condo.
Inspectors generally want the buyer present when they do the inspection and consider the process an education for the consumer. The most important part of the inspection on new construction is coming up with a “punch list,” a series of items for the developer to fix. These pesky things may range from a missed spot on the paint job to a serious structural concern.
On new construction, some home inspectors recommend an inspection in two or three stages. This costs more money but may be worth it. Tom Corbett, of Tomacor, likes to inspect new construction three times: just after the concrete has been poured, just before the drywall goes up and for the final punch list. Each phase of such an inspection might cost $200 to $300 depending on the inspection company, but Corbett says it results in a much more thorough evaluation.
“You let your developer know that you’re interested and he knows he’s not dealing with a fool, but someone who will insist on quality control standards,” Corbett says. “Shoddy workmanship is almost always covered with a layer drywall. We get a profile of the developer to give the buyer if we get in before the drywall. The expense is in the details – whether the plumbing is insulated against the studs, whether holes drilled in the framing and floor are insulated against fire, whether the building is framed in a way that provides enough strength.”
Investigating the reputation of your builder is perhaps the most important element of buying a new home, but inspecting the inspector can be equally important. Increased competition has led many inspectors to turn for business to real estate agents, who have a financial interest in seeing a deal through. In this scenario, a home inspector who gets referrals from a real estate broker may go easy on the developer or overlook problems for fear of wrecking the process – and his next referral.
Ask about your home inspector’s relationship with the brokerage community as well as his experience and qualifications.
Timing and negotiation key
In buying new construction, it’s often best to be early or late. The two times developers tend to offer deals are during “presales,” before construction has started, and during “closeouts,” when only a few units remain.
In one way, the presale period is the best time to buy. Developers generally must rack up a certain number of presales to show lenders the project is viable so that the cash can begin flowing. To encourage sales early on and create momentum, developers tend to offer units at lower price points. If the development is well conceived and the market healthy, prices will be gradually stepped up anyway as the project rolls along. It’s quite possible to save 10 percent or more on your home by buying at this juncture.
The downside to buying early is that the risk is greater – the project may be delayed repeatedly, or never get built – and the delivery time is farther out. It’s always a little nerve-wracking to be the first one at the party, taking quick sips of your drink, nibbling a little too self-consciously at the veggie tray and trying not to look awkward. Still, if other guests soon arrive, and that seems to happen much more often than not, youhave had your pick of the prime spots and saved a bundle.
Of course, arriving fashionably late has converse benefits. You have plenty of people to keep you company, the risk is lower and you may actually be able to see and touch your unit – no small comfort when you’re plunking down hundreds of thousands of dollars for it. Odds are that prices have already been raised, perhaps several times, but if you’re late enough developers will be anxious to unload those last few units.
“(Developers) tend to be unyielding in terms of price points, but given the timing of where their project is you may be able to negotiate upgrades, so you negotiate differently with builders,” says one broker.
“We can negotiate things like prepaid assessments or maybe a free basement. One person called me to negotiate her deal, and I had upgrades thrown in, including a free deck and fireplace. We got about 60 percent of what we asked for.”