Just in case you needed one more thing to worry about, a recent article published in the New York Times should have you thinking twice about buying a home in a new subdivision. The article is titled, “Banks Foreclose on Builders With Perfect Records.” The article talks about how banks are starting to do such things as call for extra collateral from builders—even if they have never missed a payment—essentially dooming them to failure. If you have purchased or are planning to purchase a home in a new subdivision that has not yet been completed, this could be horrible news for you.
Builders rely heavily on credit to function, and now that credit is being restricted even for the best borrowers, builders are in serious trouble. According to the New York Times article, already we have seen more than 20,000 builders nationwide go out of business. Before the carnage is finished, the total will likely swell to more than 50,000, according to Ivy Zelman, a housing analyst quoted in the article. That total would represent more than half of all U.S. builders. So why exactly should new home buyers be worried?
When you purchase a home in a new subdivision, part of the purchase price is based on community features and factors. The subdivision might have a nice park for the kids, or just great, overall family appeal. These are things that sell people on wanting to move into that particular neighborhood. The problem in new subdivisions is that typically people buy homes before the community is finished. If the builder were to go out of business, it is possible that the community might not be finished for a long time, if ever. Not only is it possible that early homebuyers might not ever see the clubhouse that they were promised, or that neighborhood park, but they may also be forced to look at partially built, rotting homes for a few years. In case you didn’t connect the dots already, that means that resell values of existing homes in those communities are likely to plummet.
The worst part about this is that these buyers could be completely blindsided. It doesn’t even matter if they went so far as to make sure that the builder looked financially sound and was current on payments to the bank. The banks are so scared about the collapsing real estate market—especially in the sun belt region—that they are prematurely foreclosing on these builders right now. If the banks are prepared to go to these dramatic lengths, regardless of payment history, who knows what they will do next? It seems that as a homebuyer, you can only protect yourself by paying for nothing but what you see. Don’t bother looking at the master plan with the salesperson. Just walk outside, look around and ask yourself whether this house is worth its price, even if nothing else gets finished. If it isn’t: Move on.