Should you buy a house that’s still under construction?

February 01, 2023

Get the pros and cons of building your home — and learn how to protect yourself and your investment.

 

People want homes, and they want them now. Problem is, there’s not enough to go around.

The National Association of Realtors (NAR) reports that the U.S. faces an “acute” shortage of available housing. And that’s challenging buyers across the country as they look for residential properties as diverse as condos, castles and everything in between.

Fueled by low interest rates and pent-up demand, buyers are encountering a tight home supply, soaring prices and listings that come and go in a whirlwind. Peter Murray, a real estate agent in Frederick, Maryland1, has witnessed the fast-and-furious selling pace, seeing 20 to 30 offers come in for the same property. And further south, at Cinnamon Shore beach community in Port Aransas, Texas, demand is so high that buyers are willing to contract home sites and wait six months or more to close and start construction.

In response to market conditions, developers nationwide are building a spate of new properties, which buyers are snapping up. In early 2021, a quarter of all single-family home sales were new construction.

Edwin “Tucker” Boynton of Newtown Square, Pennsylvania, understands the lure of new construction. A few years back, he and his significant other bought into a new development after shopping for existing homes for almost a year and a half.

When initially house hunting, he discovered that “most of the older homes needed updates.” So, he opted to get something new where he was able to influence the design, adding a deck, creating an open-concept living room space and converting the planned first-floor study into a bedroom. Boynton is happy with the outcome. But he says it took a lot of oversight, with frequent visits to check in on workers such as the crews who did electrical work or installed the kitchen backsplash. “We went almost every day,” he says. 

 

How new construction differs from existing homes

Buying a new construction home differs from a traditional home in many ways. Among the most obvious and potentially unnerving: you’re plunking down money on a place that doesn’t yet exist.

In addition, the “seller” is typically the builder or the builder’s construction company rather than a homeowner reselling an existing home. If you close after the newly built home is complete, you’ll likely have a traditional mortgage loan at settlement, says Murray. If you go to contract for a home in which the builder has yet to start construction, you may pay cash or finance the land purchase first and then take out a separate construction loan to finance building costs, with the bank doling out funds as construction proceeds stage by stage until it is complete.

 

The benefits of new construction

Joey Sheehan, Boynton’s Realtor points to the biggest benefit of new construction: You get a brand-new home.

And at the same time, you can save the time of shuttling from pre-existing home showing to pre-existing home showing looking for the ideal residence — and mitigate the potential disappointment of being continually outbid on your dream home. As Real Estate agency, Peter Murray notes: “It’s a brutal buyers’ market.”

In competitive markets or at a popular, master-planned community, you may get into a bidding war for an ideal site, say, a corner lot. For instance, when the Cinnamon Shore community released a new phase of home sites, a flurry of competing bids came in, with the highest bidders securing the most coveted coastal land.

Yet once you get the lot, you should be able to plan the construction around a desired move-in date and have a say in the home’s design.

 

The potential pitfalls of building your home

As with any new purchase, troubles can arise. There’s a chance of shoddy or incomplete construction, as well as potential delays if certain materials become hard to come by.

“If you’re not buying from a really good builder, the odds of problems cropping up increase substantially,” Sheehan says. “It’s quite important who is doing the work.”

On a transaction for a $1.6 million home she facilitated, the builder put in just one heating, ventilation and air conditioning (HVAC) system instead of the two specified. She saw another contractor try to get away with a $30,000 stucco job that should have cost $100,000.

And the home could be left unfinished. Another of Sheehan’s clients had to sue in small claims court to get the builder to complete the job.

With new construction — and all those tempting-upgrades — it’s possible to go outside your budget.

 

How to mitigate risk

Early homework will pay off. Ask friends and family if they know about the builder you plan to go with, check review sites and do your research on the builders.

As you progress, maintain open communication with your builder, as well as a record of your verbal and written conversations.

“Make sure that what’s on the specs is actually getting done,” Sheehan says.

Once the home is complete, Sheehan recommends a rigorous home inspection and final walkthrough during which you create a punch list for incomplete items. At settlement, put a significant amount of money into escrow until that list gets finished.

 

Additional resources:

Have more questions about buying a home that’s still under construction? Reach out to a mortgage loan officer in your area. They can help in your homebuying journey.

Hear first-hand stories from homebuyers who successfully found their dream residences.

1U.S. Bank is not affiliated with the organizations mentioned in this publication unless otherwise notated.

Related content

10 ways to increase your home’s curb appeal

DIY home projects 101: tips from a first-timer

Is it the right time to refinance your mortgage?

6 questions to ask before buying a new home

Should you buy a house that’s still under construction?

5 things to avoid that can devalue your home

What is a home equity line of credit (HELOC) and what can it be used for?

What is a mortgage?

What you need to know about renting

8 steps to take before you buy a home

Military homeownership: Your guide to resources, financing and more

What is refinancing a mortgage?

Are professional movers worth the cost?

Building a dream home that fits your life

What to know when buying a home with your significant other

Mortgage basics: How does your credit score impact the homebuying experience?

Mortgage basics: 3 key steps in the homebuying process

Mortgage basics: How much house can you afford?

Mortgage basics: Buying or renting – What’s right for you?

Mortgage basics: Prequalification or pre-approval – What do I need?

How you can take advantage of low mortgage rates

Mortgage basics: Finding the right home loan for you

Quiz: How prepared are you to buy a home?

Home buying myths: Realities of owning a home

Uncover the cost: Home renovation

Mortgage basics: What is refinancing, and is it right for you?

Tips for realtors to help clients get their homeownership goals back on track

How I did it: Bought a home without a 20 percent down payment

5 ways to maximize your garage sale profits 

Putting home ownership within reach for a diverse workforce

What’s the difference between Fannie Mae and Freddie Mac?

How jumbo loans can help home buyers and your builder business

Simple steps to be ready for a natural disaster

Checklist: financial recovery after a natural disaster

Pros and cons of a personal line credit

3 tips for saving money when moving to a new home

What’s a subordination agreement, and why does it matter?

Checklist: 10 things to look for when touring a home

How to sell and buy a home at the same time

Mortgages after retirement: Here’s what to know

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Home improvements with the best ROI

Overcoming high interest rates: Getting your homeownership goals back on track

How we did it: Converted to solar power

PCS moving checklist for military spouses and families

For today's homebuyers, time and money are everything

Crypto + Homebuying: Impacts on the real estate market

How I did it: Bought my dream home using equity

Buying a home Q&A: What made three homeowners fall in love with their new home

House Hacks: How buying an investment property worked as my first home

Managing the impacts of appraisal gaps in a hot housing market

How I did it: Built living spaces to support my family

Spring cleaning checklist for your home: 5 budget-boosting tasks

Saving for a down payment: Where should I keep my money?

Your guide to breaking the rental cycle

Checklist: 6 to-dos for after a move

What are conforming loan limits and why are they increasing

Uncover the cost: Building a home

The lowdown on 6 myths about buying a home

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Money Moments: Tips for selling your home

Money Moments: How to finance a home addition

How I did it: My house remodel

First-time homebuyer’s guide to getting a mortgage

Dear Money Mentor: When should I refinance a mortgage?

Beyond the mortgage: Other costs for homeowners

10 questions to ask when hiring a contractor

What is an escrow account? Do I have one?

These small home improvement projects offer big returns on investment

Should you get a home equity loan or a home equity line of credit?

Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Is a home equity line of credit (HELOC) right for you?

How to use your home equity to finance home improvements

How does a home equity line of credit (HELOC) work?

Home equity: Small ways to improve the value of your home

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

10 uses for a home equity loan

Improving your credit score: Truth and myths revealed

What types of credit scores qualify for a mortgage?

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.