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The Alternative to Foreclosure Homes is ... New Construction?

By
Real Estate Agent with Homesmart

 

It is an inevitable starting point for many buyers right now.  Before I can finish saying hello, I am bombarded with requests to see bank-owned and short sale housing.  Frankly, were we to change places, I would most likely do the very same.  I am aware enough of the opportunities this market has created in the foreclosure arena to dedicate a more or less weekly post to bank-owned property spotlights, after all.

However, there are values everywhere right now.  Resale homes have been dragged inexorably closer to the shallow end of the pool by the bank properties, and builders have been forced to sell off their inventory homes at even deeper discounts than usual.  There is no part of the market that isn’t coughing up a bit of water. 

Ah, brand new construction at foreclosure pricing … can it be?

New construction homes in Phoenix  Foreclosure Pricing

In some cases, yes, it can.

Builder spec homes just might provide the alternative to bank-owned property that Phoenix area value hunters seek.  A spec home is either one which the builder constructed without a waiting buyer in the wings or one in which the original buyer bailed out on the transaction after construction commenced.  These homes make great options for buyers who prefer brand new construction, but don’t want the lengthy wait involved in having their new home built from scratch.  A buyer can typically move into a completed spec home within 30 days.  Of course, if construction is complete, the new buyer will not be able to make any cosmetic choices in regards to flooring, cabinetry, etc.  The big discounts, however, are often very persuasive arguments for that sacrifice.

Eager to dump existing inventory in the best of times, builders are even more anxious to get their specs off the books in this market.  As evidenced by the near standstill in new permits being pulled by builders for new projects, it is cut and run time for many.  I am seeing completed spec homes with significant levels of upgrading being advertised for sale well below base price.  In other words, if you signed a contract to build from scratch, you would pay more for a home with absolutely no upgrades than you would for the completed home with cherry cabinets, slab granite countertops, stainless steel appliances, premium culdesac lot, etc.

Another advantage that a builder can offer a prospective buyer right now is tough to beat in-house financing.  Not usually a fan of running my loan through the same guy who is selling me something, any conflict of interest concern tends to melt away when they disclose the cheap rate blocks they have purchased for their customers.  In addition to the low sales prices, I have isolated several builders who are paying up to the maximum allowable buyer closing costs.  A recent client is getting a fixed rate in the 4’s with an additional buydown for the first two years.  At no out of pocket cost.  All he has to show up to closing with is a downpayment.  Not too shabby. *

You have to be careful, however.  As I mentioned in a previous post, there are many struggling builders throughout Maricopa County.  While a little financial pinch works in the buyer’s favor, too much can lead to unfinished subdivisions, mechanic’s liens and other fun stuff.  You want to do your research (or better yet, work with a knowledgeable Realtor ;) to ensure you are not walking into a doomed project.  I recommend national builders with ample working capital and developments that are nearing close-out. 

Ghost towns make poor investments

You don’t want to get stuck in a ghost town.

Bear in mind that you may have to venture a bit further from your desired location if brand new construction is your bent.  Scottsdale is largely landlocked, with only the valuable land in the North remaining open to development.  There is infill construction in central Phoenix, but the majority of new home projects are located in South Phoenix (Baseline corridor), North Phoenix (I-17 corridor) and pushing ever Westward towards LA.  For those in the Southeast Valley (Mesa, Gilbert, Chandler, Tempe, Queen Creek), there are still plenty of options. 

I spent the last week looking at a fair amount of them, as a matter of fact.

I had one of those purported foreclosure buyers who ended up buying a brand new spec home from a quality home builder instead of any of the bank-owned homes in the same price range that needed work, had no available warranty and disclosure information and no special financing incentives. 

The moral of the story is not to rule anything out.  Look less at the property label (bank-owned, resale, new) and more at the property itself.  You just might be surprised at the unexpected bargains that are available to be had across the full color spectrum of the 2009 Real Estate market.

Give me a call if you want to find just the right shade of perfect.

The color of money

 

* I always advise speaking with a reputable outside lender to compare programs/costs

 

 

*************************************************************************************

Paul Slaybaugh

Realty Executive

Your Source for Scottsdale AZ Real Estate

(480) 220-2337

 

Comments (23)

Stephanie Edwards-Musa
thredUP.com - The Woodlands, TX
knitwit at thred UP

Hey Paul,  I'm dealing with this right now with some clients actually.  Very good point.  Wish I had thought to write about it.  :)

 

Mar 21, 2009 10:43 AM
Russell Lewis
Realty Austin, Austin Texas Real Estate - Austin, TX
Broker,CLHMS,GRI

Paul what excellent insight. I know that many of us hear the same mantra fro buyers who mistakenly think short salesand foreclosures are STEALS and the media and internet fuel this myth every day. It takes patience and intelligence to help educate buyers so that they can see reality and learn how to actually cut through the BS to purchase a home. Your post is clear and easy to understand and you should send it to every buyer you meet. It applies to every market as far as I can tell.

Have a good weekend, I'm off to SXSW for some more music and less work...

Mar 21, 2009 10:49 AM
Debe Maxwell, CRS
Savvy + Company (704) 491-3310 - Charlotte, NC
The RIGHT CHARLOTTE REALTOR!

Paul:  OH, I am SO with you on that!  I am working with a builder right now to begin that very type of promotion--wouldn't you RATHER have new?  Let the investors with the bucks to back them, take care of the resales and the first timers have a pleasant 1st time homeownership experience!

Happy NEW selling!

Congrats on that little gold star too!

Debe in Charlotte

Mar 21, 2009 10:55 AM
Khash Saghafi NMLS
Liberty Home Mortgage Corporation - Cleveland, OH
Mortgage Loan Officer, Cleveland OH NMLS 1114762

This is an excellent post Paul.  It seems that when I talk to buyers, if they are not buying a foreclosure or getting the home for 1/2 of the asking price, they feel that they are not getting a good deal.  There are so many people with unrealistic expectations out there today that it is amazing.  I just do not think that new construction clicks in their heads, but you are exactly correct with the points that you made.

Mar 21, 2009 11:20 AM
Sheldon Neal
Bergen County, NJ - RE/MAX Real Estate Limited - Maywood, NJ
That British Agent Bergen County NJ

... hmmm ? ... who wrote this post ? ... this is a slightly different style to what we have grown accustomed to see from the Slaybaugh Front Office !!!

... but I absolutely loved it ! ...seriously !

Very outside the box thinking, great explanation and evidence of why we should not 'rule out' any options these days, and maybe you can get a new construction dream home, and not limit to beat up foreclosures that you have to put a ton of money into to make it livable ...

So glad this was featured, this was excellent ...

Mar 21, 2009 12:38 PM
Jorge Muralles Muralles
Muralles Real Estate - Newport, RI
Real Estate Market, Newport RI

Let's not forget,some new construction is also bank owned!!

Mar 21, 2009 12:41 PM
JL Boney, III
Coldwell Banker - Columbia, SC
Columbia, SC Real Estate

I have preached this myself. I see a lot of people that of course want to get a great deal on a bank owned home and they go out looking at homes that are priced at $50,000 and need about $50,000 in repairs. They good just go and get a new home for basically the same amount of money at that point and there would be no need to repair the home.

Mar 21, 2009 02:25 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

JL, amazingly enough, I spent 2 full days looking at bank property with a recent client before finding brand new construction of the same specifications ... at the exact same price point.  I was absolutely floored.  In the developments I located, we aren't just talking about equivalent cost after the rehab expense of an REO, but a virtual match in the purchase price.  Granted, we had to tack on an extra five to ten minutes to my client's commute, but the distance was negligible.  Just some great value in new construction right now if one knows where to look.

 

Mar 21, 2009 02:35 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Jorge, that is true.  The difficulties there incliude lack of recourse for construction defects, suspect warantees, etc.  I'm all for looking at bank-owned new construction, you just have to be careful.

Mar 21, 2009 02:38 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Sheldon, a little straighter forward than my normal offerings?  Not quite so irreverent?  Have to mx it up to keep everyone guessing ;)

Mar 21, 2009 02:39 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Khash, it's a mental hurdle that even many agents have a difficult time overcoming.  In addition to the great list price and financing incentives, I have been able to negotiate an even better deal in some instances.  Unlike years past, builders will haggle a bit these days. 

Mar 21, 2009 02:42 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Debe, that promotion sounds like an excellent one.  I'm all for finding the best deal, but if the best deal also happens to entail new, never before lived in construction with builder warranties and additional financing incentives ... sign me up!  As for the feature, I'd be lying if I said I expected it in the least with this one.  It's always the relatively dry stuff that doesn't do much for the literary streak in me that finds it's way to the dashboard, but I guess it is a Real Estate site ;)

Mar 21, 2009 02:46 PM
William Johnson
Retired - La Jolla, CA
Retired

Hi Paul, Excellent and Congrats again on the star, this is getting to be rather regular. Good for you! Your argument is a very valid one that people need to look at all the possibilities and new construction spec homes and those that remain before closing out the subdivision is a great place to shop around. In California, we even give up to a $10,000 tax credit on new construction and there seems to be so incredible deals out there.

Mar 21, 2009 03:28 PM
Julie Ferenzi
john greene Realtor - Plainfield, IL
Julie Ferenzi

Paul, last year I went to every single short sale and pre-foreclosure house in our market with a first time buyer... she ended up buying a new construction home. 

While the price was great, I'm not sure if it was the price that sold her... or the comparison between the "ick" and the "wow" of the two different types of homes?!

Mar 21, 2009 03:29 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Russell, I would love to join you at SXSW ... I was subjected to screaming children at a funhouse of horror instead.  You speak the truth.  I've been as guilty as others in banging the foreclosure drum to the neglect of other segments of the market because there continue to be some truly amazing bargains out there.  That said, the new builds have emerged as very strong contenders in the value sweepstakes for buyers who don't mind being just a bit less central in location.  Foreclosures continue to offer the most unapproachable value in Scottsdale, central Phoenix and the high end market of Paradise Valley, but in areas where new construction is still ongoing, the banks face some stiff competition.

Stephanie, best of luck with your clients.

Steve, there are a lot of 1/4 finished developments that are collecting dust out there.  I've avoided a few developments that just reeked of desperation.  Sure enough, the builder pulled out and the residents who bought early were left with tumbleweeds and crashing property values for neighbors.

Lenn, I love'em both as well.  In some areas here, it is an apples to oranges comparison, but in the newer communities, there is direct competition between the banks and builders in terms of price point and size.  It's a beautiful thing for a buyer.  I've found value in foreclosed custom homes on the side of a mountain, resale homes that the owner purchased 40 years ago (the equity allowing a price to compete with the banks), estate sale giveaways and new construction.  Rather than telling me what market segment to shop, buyers should simply tell me what kind of house they want.  I'll find the value under one rock or another.

Huiting, that is an usual trend.  Perhaps builders are either sensing light at the end of the tunnel or they just want to grab land while the dirt is cheap.  Locally, our new starts have essentially flatlined.  Only a couple large builders have the working capital to make land grabs and even they are most likely being judicious in terms of development.  I don't foresee too many groundbreakings on new projects in the near future, just close-out on the projects currently underway.

Mar 21, 2009 03:41 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

William, I'm getting a bit embarassed by the attention to be honest, but I thank you.  10K in a buyer's hip pocket is pretty powerful motivation.  It's funny, because all we hear about is the need to incentivize buyers to clear out the foreclosures.  That is a necessary aim, but the pricing will do that all by itself.  I like the incentives offered to buy new construction in your area because that helps keep builders and contractors employed.  Clearing out bank-owned debris is necessary, but so is keeping the labor force employed.  Leave it to California to lead the way on such a measure. I'll be interested to see how that affects your market.

Julie, my guess is a little of both.

Mar 21, 2009 03:49 PM
Anonymous
Edith Schreiber - REALTOR, ABR,e-PRO,CNS,RCC,CNHS

Thanks for the post - I agree with ALL of what you wrote!

Perhaps you, or any of your other respondents, can enlighten me as to how best to handle buyers who are wrongly led to believe (by the less than reputable builders) that, without a Realtor in tow, they can actually get a better "deal".

I was thrown under the bus by a dishonest on site salesperson who stole 2 sales from me. I made the HUGE mistake of letting the prospects know of the community that I knew would be a perfect fit for them, before I had the opportunity to meet them & accompany them.

Their management admitted to me, after months of me pleading with them to do the right thing, that they had not handled the situation properly. They said they WOULD pay me, but in order to do that, they wanted me to trust them, bring more business to them......and they would THEN pay me for the 2 sales their salesperson stole from me....????

Ever since then, I have refused to step foot in their communities.

Any thoughts....suggestions????

Edith Schreiber - Dallas Texas

Mar 22, 2009 12:03 PM
#20
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Wow, Edith.  I'm not really sure what advice I can offer about your dealings with a seemingly duplicitous, or even underhanded, builder other than to simply avoid said builder like the plague in the future.  Not only is the suggestion that the builder will in any way pass along the savings of not having to pay a buyer's agent patently absurd, but a good agent will actually command a better deal for the client on most occasions.  As to the particular builder in question, I would be wary of not only how they do business, but what that says about them in general.  I can't imagine placing my client in the product of a disreputable sales office.  Makes you wonder about the rest of their staff.  How will construction defects and warranted items be handled down the line?  Will they undercut former customers' values at the first sign of a sales slowdown or will they offer creative incentives to help keep neighborhood values intact?  How one conducts oneself during a business transaction is a pretty good indicator of how the client will be treated after the fact.  Cut corners or try to shave costs along the way, and I begin to wonder if you did the same during construction.  Blackballing agents is also a good way to decrease demand as word of their dealings permeates throughout the small world that is the Real Estate community.  All in all, just a lousy way to do business.  I don't know what recourse you would have in this situation, unfortunately, but I would tell your tale to as many local agents as you possibly could.  Some folks just need to realize the full consequence of their actions before they take steps to change for the better.

Mar 22, 2009 02:28 PM
Anonymous
Edith Schreiber - REALTOR, ABR,e-PRO,CNS,RCC,CNHS

Right you are, Paul....by the way, they build in your part of the world, too!

I have taken the liberty of sharing my experience with virtually EVERY real estate professional I have come across since it happened.....and I will continue to do so until such time as they do the right thing.

It shocks me that they remain so blind to the business they have lost, and will continue to lose....I guess if they don't know about the business they have lost, it's easy to act as though it never happened.

They pride themselves in stating that 80-85% of their business comes from Realtors, and how much they "value" them.

After meeting w/the Division President & Vice President, and being told to my face that they knew they had not handled the matter correctly, I was hopeful that we could put the matter to rest. However, it spoke volumes to me when they stated that it would be necessary for me to bring in more sales so that they could attach the previously owed commissions to those sales.....???? HUH????

I have filed a complaint with the Better Business Bureau - I'm sure they thought I would have dropped it by now, but it's simply ALL about doing the right thing.

Thanks....Edith Schreiber (Dallas, Texas)

Mar 22, 2009 02:52 PM
#22
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

One thing that cannot be overlooked is the potential appreciation of new over resale and especially over foreclosures.  The appreciation curve is better by far for new construction. 

I've followed our market for many years and new homes get a "kick" up in value when the builder is finished and resales begin in a new community.  5 years after the new community is "built out" they are usually about 10% higher than similar homes in the area with more age. 

 

Mar 23, 2009 08:17 AM