The Expert Podcast

The new home sales market has been on fire. Subdivisions all over the country have been selling out faster than they can build them. In fact, it’s even gone beyond that—they’re selling houses that aren’t even built yet. There was always some speculative home selling in new home developments, where as a builder started to plat out a street, they would put sample homes on the street and let you pay out and pick what you wanted to buy. But this is an even more speculative market. The number of homes for sale that haven’t even been built yet is at the highest level on record, even higher than the 2005–2006 housing market crash.

Let us know what you’re seeing. If you’re a builder, are you seeing houses offered for sale that aren’t even built yet? If you are a realtor, do you have builder-sellers putting homes on the market and taking contracts? If you’re a buyer, are you looking at these homes?

Here’s the reason why: It’s important to talk about things you should know if you’re buying a not-yet-built house. Many of these homes have escalation clauses, meaning that the price of the build goes up due to lumber costs, labor costs, fixtures, or other factors. Builders can come back at you with a higher price before closing, and it’s all documented in the contract. Even if it’s not in the contract, most of them have an opt-out clause so that if the prices go up, they can just cancel your contract and put the house back on the market for a higher price.

There’s almost no downside for the builder in getting you on contract. At the very least, they have a backup in case the market crashes or if the price doesn’t go up. For the buyer, you are almost the worst-case scenario—they have it sold. In fact, it helps the builder because they can take that signed contract and use it with their lender to get funding to build their next house. You may inadvertently be an asset on the balance sheet for that home builder. Instead of being a liability on their books as an unsold asset, they can show it as a sold asset—almost as good as cash. This allows them to use their credit line or credit facility to start building the next home.

Buying a house that is not completed and doesn’t have a set price is risky. For example, we saw a story in the news the other day where a woman and her family put a contract in for a house at $170,000. After six or eight months, it was supposed to be built, but they kept extending the date—August, November, December of last year, and then January. Finally, in January, they said they had to raise the price by another $10,000 to $180,000. The family agreed to the extra $10,000 in January.

Now, here it is May—almost June—and they got a notice a few days ago that the builder says they have to pay $220,000. The home isn’t even done yet, and the buyer, even if they wanted to, can’t pay the extra $40,000 because their loan is only approved for a certain amount. In fact, the lender appraised the house for an amount that gives them a loan for a specific sum plus their down payment. In order for them to pay the $220,000, they’d have to come out of pocket with the extra $40,000, which they don’t have.

Now, they’re forced into not having a place to live. Their lease on their prior rental home or apartment expired in September of last year when they were supposed to move. Since they didn’t have a house to move into, they went month-to-month. Now, month-to-month rental rates are $500 a month higher than their regular rent would have been. They’re already paying $500 a month more. Over six months, they’re already $3,000 out of pocket. And now, they don’t have a home to move into, so they have to get a new lease, which is going to be higher than it was before.

These speculative new homes often come with significant risks. A lot of times, it’s better to wait for the home to be completed or just buy a resale, so you don’t have to worry about price escalations. Let us know what you think about these new homes being sold prior to completion and the escalations being executed by building companies.