Buying New Construction
BUYING NEW CONDOS IN WASHINGTON DC
THE NEW HOME PURCHASE PROCESS IS DIFFERENT
Expert Guidance
PARTNER WITH A NEW CONSTRUCTION EXPERT
The lure of new systems, finishes & fixtures, pristine common spaces and out-of-the-box appliances can be strong. And the purchase process seems simpler than buying a resale home. But is it? Buying new condos in DC isn’t as simple as it appears.
Be sure your agent is expert in new construction. A licensee may have represented other new home buyers without actually understanding development, new home sales, and buyer-related risks.
You’ll want an agent with training and first-hand experience in the building and sales processes. To be really effective, they’ll need to understand construction quality, timetables, construction sequences, sales strategies and potential pitfalls so they can let you know if something is atypical. Knowledge of DC developers, their history and projects is also beneficial.
Ideally, your buyer agent will have actually worked for developers in the past. They’ll then know how to protect your interests and set realistic expectations.
Other agents often contact me for project information and buyer registration for developments I don’t represent. This tells me they don’t have the knowledge they should possess to adequately represent new construction buyers’ interests.
DID YOU KNOW?
Visiting a sales center or registering with a developer’s sales rep without your agent can cancel developers’ comittment to pay your agent’s commission.
Always let your agent make new construction inquiries and appointments for you, and be sure your agent accompanies you on the first appointment at the sales center.
Author | Agent
Skilled Realtor® Susan Isaacs is a 20+ year residential real estate and new construction industry veteran with expertise in buyer and seller representation, investor representation, new home purchases, relocation and exchanges.
Licensed in the District of Columbia and Virginia since 2006.
GCAAR Gold Award 2024
Modern Luxury Top Teams 2024
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Compass is the #1 real estate brokerage in the nation and a leader in real estate technology.
Steps And Instruments
STEPS TO A NEW HOME PURCHASE
Sales Centers & Representatives
Visit sales centers after first researching the project and developer and always accompanied by your agent.
Sales Centers typically offer an overview of the project, a model and/or diagrams of the site, common area layouts and floor plans of individual units.
You’ll attend your first meeting with your agent, who will register you as an interested buyer, obligating the developer to pay some or all of your agent’s compensation should you purchase.
You’ll get a tour of the project if construction has progressed far enough, and discuss pre-construction pricing and potential escalation or tiered pricing, timeframe for delivery, and other pertinent details. If bluebrints and plans are available, we will ask to see them. You’ll see samples of fixtures and finishes, and learn about options and upgrades.
Once you have sufficient information, including floor plans and pricing, you can weigh the benefits and drawbacks, and make a purchase decision.
Reservation Or Contract
Some developers will accept a non-binding hold on a unit prior to finalizing their public offering statement package. This reservation may or may not require a deposit.
More often, developers wait until their documents are in hand to begin selling. Not only does this motivate buyers to make a buying decision quickly, it assures the developer that your decision is binding since you’ll be signing a purchase agreement.
Contracts may be delivered electronically, or the developer may require an in-person meeting for signing. It is preferable to have the development representative review the contract rather than interpreting it yourself. New construction contracts vary by project and developer. They are written by attorneys for the developer, with terms favoring the developer. Since real estate agents are not permitted to interpret legal language, the sales representative–who should possess a thorough understanding of the developer contract–is better equipped to explain it.
Contract And POS Clauses To Note
Take note of these provisions that may appear in your development contract or POS:
Financing Contingency
It has become popular among developers in recent years to eliminate the financing contingency in new construction purchase agreements. This can be dangerous, considering that loss of employment, uncontrollable events (like the Covid pandemic), health issues or anything else that can affect credit and loss of income, can cause your lender to deny your loan. Without a financing contingency, buyers can be held in default and lose their initial deposit.
Disclosure of Association Fees
Association fees will increase. Associations are just a framework before a new building starts to deliver and people move in, so developers typically don’t fully fund them. Monthly fees will escalate significantly once the association is fully established, common areas are being staffed and utilized and services are engaged for cleaning, maintenance, concierge staffing, etc.
Use of lender and title company. Developer conditions for use of their preferred title company are often made in the form of a ‘stick’ instead of a ‘carrot.’ Previously, the norm was for developers to offer a concession for use of their preferred service providers, but now these provisions are tied to a penalty, most often in the form of tax stamp payment, for choosing an ‘outside’ title company. See Lender And Title Company below.
Red Flags
Identify red flags in developer contracts:
- Are EMD funds being held outside of escrow, or with an escrow company owned by the developer?
- Does the contract prohibit any/all access to the property during construction? This includes inspections .
- Is the developer funding a reasonable percentage of association fees?
- Is the developer’s bond in place?
- Is there a scope of work addendum describing specs and materials?
- What are the warranties and guarantees?
- Is the project held in an LLC? If so, is the LLC transparent as to the name of its owner(s)?
Timetable
Consider the projected delivery timetable against the current construction stage. If the project is in the very early stages, and you’re purchasing from plats and plans, for instance, you’re assuming more risk.
Your contract will stipulate that the developer may delay–or even cancel–the project under certain circumstances. Know what those are.
Price Negotiation
Price negotiation is case-by-case, but for larger projects, price is often non-negotiable.
Keep in mind that the price of new construction is higher than that of comparable resale homes because of building costs, including land price, permits, labor, materials and builder profit, as well as the value of new materials, mechanicals and structure. The lifespan of a new home should be greater than the remaining lifespan of a resale home, and require less maintenance and fewer repairs and replacements.
Deposits
You’ll be asked for your deposit at the time of signing. The amount varies by developer and project, but it is typically 20%. Once the rescission period expires, this deposit is nearly always non-refundable.
In cases where selections, upgrades and customizations are offered, you may be asked to pay, in full or in part, the cost of options chosen aside from the base unit. An additional deposit may also be required for parking spaces sold separately.
Selections, Fixtures And Finishes
Developers stipulate that they may make substitutions in fixtures and finishes, change layouts and make other alterations to the common areas and/or units during the pre-construction and early construction phases.
Lender And Title Company
Preferred Lenders
Many developers strike agreements with one or more lenders to provide mortgage services for their projects. You’ll want to check their rates and fees against those in the pre-approvals and worksheets you obtained at the onset of your home search.
Lenders tied to a development project will have all the information necessary to approve a new construction loan on that particular development, but ‘preferred’ lenders don’t always offer the best programs, rates or customer service to buyers. They’re chosen by developer because they have experience with new construction projects, but their loan terms may not be as advantageous than those from a lender of your choosing. Also, you may not experience the same degree of privacy from preferred lenders, who are more likely to share detailed information about your qualifications and loan with the seller developer than would an ‘outside’ lender.
On the positive side, preferred lenders sometimes offer buyer incentives, and sometimes the preferred lender for a development project is the same lender you may have already shortlisted for your purchase.
Preferred Title Company
A preferred title company is used by the developer because that title company has already done the title preparation work on the property and holds all the documentation. Unfortunately, the DC title companies most often chosen by developers are not those that offer the best buyer experiences. There are also concerns around working with a title company affiliated with a property.
Choice of title company is the buyer’s legal right according to RESPA law. But there’s a gray area when it comes to the penalty or reward clause in developer contracts. Read about it from a legal perspective:
Public Offering Statements
According to DC code § 42–1904.04. you’ll receive a copy of the public offering statement (plats and plans) at the time the purchase agreement is signed.
A public offering statement (POS) is a document, or package of documents, that disclose(s) information about a condominium and its units.
“During any period when registration of a condominium is required by this chapter or until the time that all units in the condominium have been initially disposed of to the bona fide purchasers, a declarant may not dispose of any interest in a condominium unit not previously disposed of unless there is delivered to the purchaser a current public offering statement by the time of the disposition.”
See Q&A below for more detail.
Right of Rescission
Code of the District of Columbia § 42–1904.02
Your rescission period for review of the material contained in the contract of sale and POS begins on the date the buyer signs the contract or receives the public offering statement, whichever is later. It is common practice for developers to deliver the contract and POS simultaneously, but it is not required.
“The disposition shall be expressly and without qualification or condition subject to cancellation by the purchaser before conveyance of the unit, within 15 days after the date of execution of the contract for the disposition, or within 15 days after delivery of the current public offering statement, whichever is later. A public offering statement shall not be current unless any necessary amendment is incorporated or attached. If the purchaser elects to cancel, he or she may cancel by notice hand-delivered or sent by United States mail, return receipt requested, to the seller. The cancellation shall be without penalty, and any deposit made by the purchaser shall be promptly refunded in its entirety.”
DC code § 42–1904.02.
Exercising Your Right Of Rescission
Code of the District of Columbia § 42–1904.02
During any period when registration of a condominium is required by this chapter or until the time that all units in the condominium have been initially disposed of to the bona fide purchasers, a declarant may not dispose of any interest in a condominium unit not previously disposed of unless there is delivered to the purchaser a current public offering statement by the time of the disposition.
The disposition shall be expressly and without qualification or condition subject to cancellation by the purchaser before conveyance of the unit, within 15 days after the date of execution of the contract for the disposition, or within 15 days after delivery of the current public offering statement, whichever is later.
A public offering statement shall not be current unless any necessary amendment is incorporated or attached. If the purchaser elects to cancel, he or she may cancel by notice hand-delivered or sent by United States mail, return receipt requested, to the seller. The cancellation shall be without penalty, and any deposit made by the purchaser shall be promptly refunded in its entirety.
Your Due Diligence
- Research the project and developer. Be aware that the quality of some builders can vary from project to project–along with price point and margins. Understand that if you seek anecdotal information from project homeowners while the community is still selling, you may get feedback that paints an unrealistically rosy picture since buyers will want to protect their investment.
- Ask the sales rep how many units are being sold per month. Your agent won’t be able to get an accurate count on Bright MLS (DC Metro Area) because it favors developers in its Clear Cooperation Policy. You won’t always get a straight answer from developer reps, either. Sometimes new home sales reps ‘encourage sales’ with less than accurate information on availability and prices.
- Ask ahout the allowed investor ratio in the community and restrictions related to rentals. Low investor ratio is important to your HOA health and future resale value. If the ratio threatens the warrantability of the project or limits financing options for new buyers, a purchase could be a poor investment.
- Research the developer’s previous projects. Are the associations levying special assessments to cure issues? Litigating against the developer? Are the developer’s projects appreciating well or stagnating a few years down the road?
- How long has the project you’re interested in been under construction and selling? Have there been prolonged delays? Why? This may indicate some physical or financial issue that could prove to be a problem.
- Don’t stop at the developer. Does the general contractor have a good reputation? Research then on dc.gov.
Q&A
WHAT YOU WANT TO KNOW
TELL ME MORE ABOUT THE POS
Public Offering Statements (Code of the District of Columbia § 42–1904.04) n addition to items noted earlier on this page, should include:
The characteristics of the condominium and the units offered, including all unusual and material circumstances or features affecting the condominium;
The name and principal address of the developer and the condominium;
Names and addresses of the attorney primarily responsible for the preparation of the condominium documents, the general contractor, if any, all contractors who are primarily responsible for the construction, reconstruction or renovation of the electrical, plumbing or mechanical systems or the roof of the condominium, and the architect and engineer primarily responsible for the design, construction or renovation of the condominium;
A general narrative description of the condominium stating the total number of units in the offering; the total number of units planned to be sold and the number of units to be rented; the total number of units that may be included in the condominium by reason of future expansion or merger of the project by the declarant;
A copy of the condominium instruments, with a brief narrative statement describing each and including:
Projected budget for at least the first year of the condominium’s operation (including projected common expense assessments for each unit);
Provisions for enforcement of liens for assessments;
A statement of the amount, or a statement that there is no amount, included in the projected budget as a reserve for repairs and replacement;
The estimated amount of any initial or special condominium fee due from the purchaser on or before settlement of the purchase contract and the basis of such fees;
A description of any restraints on alienation, including restrictions on the rental of units;
A description of any service not reflected in the proposed budget that the developer provides or expenses the developer will pay that may become, at any subsequent time, a common expense of the unit owners’ association, and the projected common expense assessment attributable to each of those services or expenses for the association and for each type of unit;
Copies of the deed to be delivered to a purchaser to evidence his or her interest in the unit and of the contract of sale that a purchaser is required to sign;
A copy of any management contract, lease of recreational areas, and any other contract or agreement substantially affecting the use or maintenance of, or access to all or any part of the condominium with a brief narrative statement of the effect of each such agreement upon a purchaser, the condominium unit owners and the condominium, and a statement of the relationship, if any, between the developer and the managing agent or firm;
A general statement of:
(A) The status of construction;
(B) The project’s compliance with zoning, site plan and building permit regulations;
(C) Source of financing available and the estimated amount necessary to complete all improvements shown on the plats and plans as “not yet completed” or “not yet begun” which declarant is obligated to complete; and
(D) The projected date of completion of construction or renovation of the major amenities of the condominium;
(9) The significant terms of any encumbrances, easements, liens and matters of title affecting the condominium;
(10) The significant terms of any financing offered by or through the declarant to purchasers of units in the condominium;
(11) The provisions and any significant limitations of any warranties provided by the declarant on the units and the common elements;
(12) A statement that the contract purchaser of a condominium unit may, prior to conveyance, cancel the purchase transaction within 15 days following the date of execution of the contract by the purchaser or the receipt of a current public offering statement, whichever is later.
In case you missed it earlier, here’s a link to POS law:
WHAT ABOUT HOME INSPECTIONS?
Developers try to discourage outside home inspections, and they can throw up a lot of road blocks to the process. Don’t be fooled by the old sales rep’s line: “You’ll have an inspection prior to settlement with our construction supervisor (or an independent company contracted by the developer).” This procedure is not an inspection, it is a walk-through conducted by someone who works for the developer, not you. They’re not invested in finding issues, especially not major ones. In fact, these contractors may be bonused if they report zero issues.
Your home inspection should be performed by a qualified, licensed general home inspector you hire.
Two inspections, possibly three, are recommended during the process:
- Pre-drywall inspection If you purchase in the early stages of construction, a pre-drywall inspection is valuable. An inspector familiar with new construction can easily see how the home is built and spot inferior or flawed foundations, framing, materials, wiring, plumbing, and so on. Builders are reluctant to allow this inspection, or flatly refuse, usually with the excuse that their insurance carrier will not allow it.
- If a pre-drywall and/or post-drywall inspection is allowed and reveals non-cosmetic issues requiring correction, you should have the right to hire your inspector to return and inspect the corrections before they’re covered by drywall.
- A pre-closing inspection of the finished unit is usually restricted by the developer to the date and time of the final walkthrough.
Getting approval for all but the last is very difficult, sometimes impossible.
All inspection issues should be added to the developer’s punchlist to be addressed prior to final walkthrough. You’ll often find a clause in the developer’s contract that says the developer isn’t required to address them. Your agent should push to have them all remedied.
A final walk-through should take place 7-10 days prior to settlement. This gives the builder time to make punchlist corrections. It’s ideal to have all items completed prior to settlement. Almost all developer contracts state that they may complete punchlist items after closing, but getting corrections made following settlement can be an invasive, delayed process. All your leverage is gone if you’ve closed the transaction, so your agent should push for pre-settlement repairs.
IS THERE A REQUIRED BUILDER WARRANTY IN DC?
The District of Columbia Condominium Act requires developers to provide a minimum 2 year warranty against structural defects for individual units and common elements. The warranty period begins the unit’s settlement date.
Some developers may specify the types of defects that are covered, extend the warranty period, or include other provisions. It’s important to read these clauses carefully.
SHOULD I TRUST DEVELOPER SALES REPS SAY?
About as much as you would trust the person selling you any proudct. Those friendly new home sales reps are licensed agents who represent the developer (seller), and their duty and loyalty are to them, not you.
They’re trained in what to say–and what not to say. And there’s a lot they may not know themselves.
Unfortunately, that can leave new construction buyers in the dark about important factors like timeline, sales requirements, the developer’s commitment to delivering the project as condos, and more.
WHAT SHOULD NEW CONDO BOARDS KNOW?
This is a huge one–and a question few condo buyers ask.
Once you take possession of your new condo, you’ll want to participate in forming the new board. Whether you sit on the board or not, it is essential that new condo owners understand what’s required when owners take over a board, why each step is important, and how the new boards actions–or lack of them–will affect all owners in the future.
Here’s a detailed explainer:
Flips
FLIPS AREN'T NEW HOMES
Don’t confuse ‘flips’ with new construction
With improved, but still inadequate regulatory oversight for permitted and unpermitted residential construction in DC, bad behavior can be commonplace.
There are no qualifications set for flippers. Anyone who purchases a property can decide to flip it, whether they know what they’re doing, or not.
Flippers often hire contractors for their low bids, not their high quality and sterling repuatation. As a result:
- Permits may or may not be pulled
- Permits can be vague regarding scope and work beyond the permit scope is often performed
- DCRA inspections are often ignored when permitted work is completed. Without the inspection(s), you have no way of knowing if the work was performed properly and to code.
- When work is not permitted and inspected so the permit can be closed out by the DOB, the new owner becomes liable for the work. You can be cited, fined and even forced to remove the work–even a garage, ADU, finished basement, deck or room addition.
Additional Risk
Adding to the risk of purchasing a flipped home, are:
- Flip properties are typically held in LLCs to limit liability, so there may be little or no legal recourse if you experience problems.
- Flips are classified as renovations rather than ground-up construction, so they’re subject to spotty regulations rather than the more rigorous building code to which new projects are expected to adhere.
- Buyers of ‘flips’ should have multiple inspections by expert providers. But it is never enough. Inspectors can not see through walls, floors and ceilings. They aren’t able to perform acts that have the potential to cause damage, no matter how slight or cosmetic. General Home Inspectors are not structural engineers, surveyors, master plumbers, master electricians or roofers. And even specialty experts can not adequately assess a home without performing some disallowed invasive acts. Home buyers sometimes decide they don’t want to pay for every inspection allowed them and/or choose inspectors based on price instead of expertise and service types.
- Buyers may not be equipped to adequately assess permitting documentation and inspection results.
Taking every safeguard will not prevent the purchase of bad ‘flips’ and renovations.
Still thinking about purchasing a flipped home? Read these stories, then make up your mind:
Disclaimer
Information provided on this page is posted for educational purposes only. It is not to be construed as technical, legal, tax or financial planning advice. Citations do not constitute endorsements. Always consult experts before making real estate-related decisions.