When building a new home there are many different risks and benefits to consider. The two main factors that we will explore in this article are:
- Future Market Value
- Warranty Protections
First, let’s define the difference between a Tract Home Builder and a Custom Home Build.
A tract builder usually has a plot of land in which they are creating a subdivision. They typically are offering a selection of house plans. You can also select from a pre-determined set of finishes. You can’t do anything you want – you must stick within the builders’ guidelines.
A custom build could be set up in several different ways. You the owner could be the general contractor in which they hire trades to complete their build. Or they could work with a home builder who does this for them. This type of build means substantially more freedom to choose layouts and finishes, but also means you may have an overwhelming number of selections to make as well as more opportunities to run into issues because it isn’t a well-oiled building machine.
Future Market Value
With the current residential market that we find ourselves in, the risk of building a home is apparent. Since the average residential home has gone down by 206K in Ottawa over the last several months and there are individuals who purchased new homes a year or more ago, they would have purchased the home with an inflated notion of what their current house would be worth when they sold it, as well as the value of their new home when they are to take possession. Since the price of the new build is agreed upon when the contract is drawn and the shovel hasn’t even hit the dirt yet, it can mean there is a longer period for fluctuation to happen and inevitably it means risk. This is also true the other way around though. If the market goes up by 200k, now you have a home that is worth more upon possession and you may be able to get way more money out of the sale of your current home.
If the market has gone down, there are other risks besides the value of multiple properties going down. You may also have issues with financing as the bank may be willing to lend less than initially agreed upon. This means it could be up to the purchaser to bridge the gap.
We highly recommend reaching out to a professional REALTOR® like one of our team members to minimize risk during your new home transaction. There are several ways in which we can help!
- Ensure the contract with the builder includes an assignment clause (which means that you can assign your contractual obligations over to another party before you close on the transaction). Sometimes builders try to avoid these because of perceived future competition with their inventory – but sometimes mutually beneficial agreements can be made.
- Ensuring that your home sells for the highest possible dollar given the current market conditions.
- Put you in touch with a wide array of professionals in every field ensuring that your transaction is as low risk as possible, and no avoidable errors are made.
Tarion Warranty Protections
When a Tract builder is building a home, they are required to get a license from Tarion which is the Ontario warranty program for new builders. If you are building a custom home however and you are the general contractor, you can choose to not put a Tarion warranty on your own house. At the time, a home builder may want to avoid the cost since they will be living in the home themselves. But what if circumstances change and the individual ends up not wanting to live in the home and they decide to sell? Well, this can make things more difficult! It is a red flag when you are selling a house without a Tarion Warranty. A buyer would have 0 protection if something went wrong. If an individual does choose to go ahead with a transaction like this, it means they should have some sort of extra financial compensation through the process. This is another reason that working with a professional REALTOR® is paramount when purchasing a new construction home. An individual without professional advise may not know how to protect themselves or negotiate for a favorable outcome, in turn making the situation much riskier.
To find out what a Tarion Warranty protects against, please visit Tarion.com
For more valuable real estate related tips, you can check out the REAL Collective Podcast on iTunes, Spotify or YouTube.
