Buying a new construction home with a contingent offer: what to know

Shopping for a new home can be a painstaking process. You tour house after house and nothing quite says “dream home.” When you’re searching for an upgrade and you’re not in a rush to move, a better alternative may be to build your own home from scratch or buy a newly constructed one.

Developers are building new homes all over the country, offering intriguing options for home buyers. And just like in other real estate transactions, you can make an offer on a new construction home contingent on your existing home selling. But though you might think builders wouldn’t mind a contingent offer as you navigate buying while selling or another situation — they don’t have to move out into another home, after all — it’s actually a complicated issue.

In this piece, we’ll discuss contingent offers on new construction homes for which there’s no “owner” other than the builder. We’ll explore why certain scenarios make builders more reticent to accept contingent offers, and what you can do to navigate purchasing a new construction home.

What is a contingent offer?

Before we move forward, let’s briefly define a contingent offer. A contingent offer is one that a buyer makes that only becomes official if certain conditions are met. Contingent offers allow buyers to back out of purchases without losing their earnest money deposit if the sale doesn’t go as planned.

Need more information on contingent offers? Go here to learn more about contingent offers and how they work. 

What is a new construction home?

Second, let’s also define a new construction home. As the name suggests, a new construction home is one in which the buyer will be the first person(s) to live in it. New construction homes include already-built ones as well as houses that buyers pay an architect and builder to design and construct from scratch according to the buyer’s specifications.

Already constructed homes are called spec homes, ones in which a buyer can choose from certain pre-determined designed options are semi-custom, while completely original homes are full custom.

Why do contingent offers complicate new construction home purchases?

To answer the core question of this piece, sure, you can buy a new construction home with a contingent offer. But it can complicate things.

Many buyers of new construction homes, in fact, make their offers contingent on being able to sell their existing home. It’s a smart move for buyers to protect their initial investment and avoid having to pay two mortgages they can’t afford.

Of course, for this to work, a builder or developer must accept a contingent offer in the first place. Not all builders will. What is the biggest determining factor of whether a builder will or will not accept a contingent offer? How much you’re customizing your home.

Most new home builders are happy to accommodate contingent offers on spec homes since they’re building many homes along basic, repeatable blueprints. You haven’t given any unique instruction that might turn another potential buyer off. The builder remains confident that even if you don’t come through with an offer, they’ll find another buyer. After all, they’ve developed a few basic floor plans they expect will appeal to the masses.

When you get into customizations, that’s when things get dicey. Many builders finance new builds themselves, so earnest money is important to starting to get a return on investment. Obviously, after making a number of adjustments to a standard floor plan for a specific buyer, the builder won’t want to return their money. They might not be able to find another buyer who loves the changes you’ve made.

In some cases, builders will consider contingencies on semi-custom homes as long as they can insert clauses in the agreement dictating timeframes for selling your previous home and closing on the new one. Failure to meet these agreements will at least ensure the builder keeps your earnest money deposit. Not many people are comfortable losing a down payment on a house, so you must be smart about accepting contingencies to your contingent offer. You may be better off just removing the contingency entirely and waiting until you have an offer on your current house to make an offer on a new construction home. That, or let go of the customizations you want to make.

How do you buy a new construction home?

Now that you know how contingent offers can complicate buying a new construction home, let’s briefly go through the purchase process. Following these steps can help you better analyze whether a contingent offer is worth the trouble or not.

1. Find a real estate agent and builder

You don’t have to use a real estate agent to sell your home or find a new one, but if you’re interested in a new construction home, it’s a good idea. A good real estate agent will look out for your best interest and help you negotiate the best terms for both your new construction home offer and the sale of your current home.

For this process, you’ll want to find an agent with experience in new construction homes. Not all developers build quality homes or negotiate fairly. New build contracts are different from a traditional resale purchase contract. Your agent will help you navigate these differences and ensure you’re getting a home that’s worth the price tag.

Keep in mind: Orchard can assist with buying a new construction home and make the contingencies all but unnecessary. Through this process, Orchard matches you with an experienced Orchard Home Advisor to help you negotiate the best terms for a new construction home while also listing your existing home. Once your new home is ready, they’ll facilitate the sale of your old home so you can avoid showing and contingencies.

Orchard can also help you find reputable builders throughout the United States.

2. Choose your customizations

When you’re shopping for new construction homes, the list prices are typically just the base price. Builders that offer semi-custom homes will add to the purchase price with each customization.

After settling on a builder, they’ll have you in for a design consultation. Some of the choices you may make include the location of the lot in a new community, basic home characteristics like the floor plan, stylistic choices like the paint color and light fixtures, and features like the materials of the flooring and countertops.

With so much to choose from, you can bet not every upgrade is worth the cost or will add value to your home. The best upgrades are on things you can’t change later, like the home’s frame, insulation, foundation, and windows, as well as practical upgrades like energy-efficient windows that will save you money on utilities in the long run. If you do want aesthetic changes, prioritize the kitchen and master bathroom as these are the spaces most likely to make an impact on future buyers.

Avoid spending on fancy light fixtures, appliances, or expensive upgrades like outdoor patios. You can very likely make these changes down the road for cheaper than what the builder will charge.

3. Make an offer and negotiate terms

When it comes time to make an offer, this is when your real estate agent will be invaluable. As we touched on before, builder contracts are different from standard purchase agreements. They outline the terms between the builder (rather than an owner) and the buyer, including what will be built, what you’ll pay, and the completion date. (Most single-family home builds take about seven months, although fully custom homes can take nine months or longer.)

Your real estate agent can help you negotiate a contingent offer if necessary, negotiate the earnest money you’ll put down, or help you get as much flexibility as you need on a timeline. An agent can also help you secure a builder warranty to help cover the cost of anything that breaks or malfunctions after the house is completed.

4. Inspect your new home

When your new home is completed, you can do an inspection on your new home just as you would in a traditional sale. You’ll walk through the home with a home inspector who will draw up a report with their findings. Once you have that, you can discuss any issues and negotiate repairs with the builder.

When you do your final walkthrough, remember to test everything from the appliances to the toilets. If you notice any problems, you should make sure the builder addresses them before moving in.

The inspection phase is especially important if you have a contingent offer on the table. A builder’s failure to make the fixes in a timely manner gives you more time to sell your home but it may also put them in breach of contract.

5. Close and move in

Finally, when you’re satisfied and all contingencies of your offer (if any) have been met, it’s time to sign the final papers, make the final payments, and move in. This process is just like an ordinary sale.

There are a number of perks to buying a new construction home. Still, it’s scary buying a new home while your existing one is still on the market. While most builders will accept contingencies for spec homes, they may complicate matters in custom builds. If you want to make sure you sell your existing home before closing on your new one, Orchard can make the process painless and eliminate the need for complicating contingencies.