Like many first-time buyers, Raju Patel started his home search on the Internet.
Unlike most first-time buyers, Patel, 29, went far beyond checking out subdivision Web sites and directions on MapQuest.
An information technology consultant by profession, Patel used his computer to research home builders and their reputations, learn about new materials and bone up on home construction.
And to narrow his shopping options, he used the computer to calculate commute time from promising developments to Chicago’s downtown.
“I like my Web and I did a lot of research,” says Patel, who in March moved with his wife Hiral, 25, into a two-story house in Pulte Homes’ Auburn Lakes development in southwest suburban Plainfield.
Research is always a key component in buying a new home, but it may be especially important for first-time buyers who are heading into uncharted budgetary territory.
“It used to be that anybody could buy a car. Now anybody can buy a home,” says Greg Ford, division sales manager of Centex Homes, with 14 metro-area developments including Valley Lakes in north suburban Round Lake.
While figures are hard to pin down, Ford says “I think we definitely are seeing younger buyers” and those buyers reflect a “healthy diverse mix” of the area’s races and ethnic groups.
Ford credits the recent low interest rates on home mortgages, as does Dan Urben, vice-president of sales and marketing for the Chicago division of Lennar, builder of Summit Fields in Aurora and Summit Enclave in DeKalb.
“The interest rates have been a major force. It has truly loosened up the financial market as far as putting together creative ways for people to be able to afford a home,” Urben says.
But if the good news about low interest rates and creative financing is that more people can afford a home–and more new homes are being purchased than ever before–there also is bad news in an era of 100 percent and 103 percent financing.
Namely, “if you don’t know how to budget your money,” problems can occur, Ford says.
Despite the potential for problems, first-time buyers are prized by many national and local builders who hope the first-time buyer will come back again when ready to step up to a more expensive home.
The competition among builders is fierce and each builder adopts a different strategy to woo first-time buyers.
Urben says first-time buyers usually are “juggling wants versus needs.
“The biggest miscalculation” many first-time buyers make is “base price versus the final price,” he said, referring to the upgrade choices most builders offer on items ranging from flooring to added rooms.
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To simplify pricing for buyers, Lennar has an Everything’s Included (EI) program where common choices such as carpeting are preselected and such extras as refrigerator, washer and dryer are included in the price of the home.
Choices are eliminated, and the builder says construction costs are trimmed with the saving passed along to buyers.
Centex buys large tracts of land, usually on the edge of population centers, and builds large developments to achieve cost reductions through economies of scale, says Ford.
Brian Brunhofer, division president of Pulte Homes, builder of Auburn Lakes, says his firm concentrates on locating developments with good access to work and recreation. He says Pulte works closely with buyers to make sure they understand the true costs of any purchase.
Financing programs are another way builders appeal to first-time buyers.
Denise Sperekas says when she and her husband bought their $127,000 townhouse they benefited from a program that allowed them to put down a deposit and then add to that amount with monthly payments while the home was being built.
Offered by Hoffman Estates-based Lakewood Homes, the plan helped them accrue a 3 percent down payment.
“It was a nice way to get into a nice home a lot sooner,” said Sperekas. They bought a home at Lakewood Creek in Montgomery.
The couple, who now have three children, are among the increasing number of first-time buyers who have bought in a development with a special area assessment (SAA).
SAA and special service areas (SSA) are variations of special taxing districts in which residents pay an added assessment each year for up to 30 years for roads, sewers and other infrastructure.
The infrastructure costs are delayed rather than folded into the price of the home.
While Sperekas is pleased with the SAA, Charles and Jennifer Simon bought a home in Auburn Lakes just to avoid one. Neighbors of the Patels, the Simons first saw their “dream home” in a subdivision in Bolingbrook.
“But it was a subdivision with an SSA and I did not want that,” says Simon, who claims the additional assessment would have “tacked an extra $60,000” onto the cost of the house over the long term.
Investigating further, the couple found the very same model just seven miles away in Auburn Lakes, where they moved in March.
It is the costs beyond monthly mortgage payment that first time-buyers often overlook, say realty agents and others who have bought for the first time.
Home ownership involves a continuing series of relatively modest expenditures, notes Jim Merrion, regional director of Re/Max Northern Illinois.
“Experienced homeowners have a pretty good grasp of that fact, but it can come as a shock to first-time buyers who are used to the simplicity of a monthly rental payment that covers just about everything,” he says.
In Merrion’s experience, most first-time buyers have carefully thought about their mortgage, taxes and insurance, but “they never think about utilities” most of which often are included in rent.
It can come as quite a jolt to new homeowners “when they get a $150 electricity bill because of the air conditioning,” he says.
He advises first-timers to budget 5 percent of the house price, or 1 percent to 2 percent of the price of a condo, for such nitty-gritty expenses as landscaping, appliances, drapery rods and window treatments. That is an additional $15,000 for a $300,000 house.
“If you are used to paying $1,200 for rent and utilities” and research indicates your monthly new home costs will be about $1,800, Merrion suggests that, before buying, try to live on $600 less a month for a while to test the comfort level.
“It’s like trying clothes on for size, in my book,” he says.
Taxes can be an especially troublesome matter. In Illinois, real estate taxes paid in 2004 are actually for the tax year 2003.
Those going into fast-growing new developments should be especially careful. It is not unusual for sales representatives and sales agents to talk about a “honeymoon” period for newly constructed homes because traditionally there has been a lag time in reassessing property that changed from an empty lot or field to residential use. But that may be changing.
Dan Warrensford and his wife bought a townhouse in Ryland Homes’ Union Square development in Hainesville a year ago.
Told that they would have a one-year honeymoon on property taxes, they were shocked when the first–much higher than expected–tax bills arrived.
Merrion agrees that the honeymoon is over. “All the counties now regularly reassess because they don’t want to wait for revenues,” he notes.
To counter ugly surprises with tax bills, he is seeing a rise in the use of a clause for escrow accounts to be pro-rated at 105 percent and 110 percent of existing tax bills to cover anticipated increases.
And he is seeing more and more requests for a “re-proration” clause in sales contracts. This asks, in essence, for more money to be taken out and set aside for taxes than the estimated tax–protecting the buyer if taxes are higher than budgeted.
If the estimated taxes are $1,800 but the bill is actually $2,500, the extra amount is already in escrow, Merrion says.
Debbie Battersby of Re/Max Associates West in Bartlett advises buyers of newly built homes to plan for taxes and save for them in advance.
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“Too often, the tax escrow payments set up by your lender won’t actually cover the larger bill when it finally arrives; so your escrow payment suddenly skyrockets,” she says.
“If you set the money aside in advance, it’s less stressful.”
Finally, researching a new home should not be limited only to financial matters.
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Denise Sperekas has been surprised that the school boundaries in her fast-growing area keep changing; so her young daughter has been in three different schools in three years.
Raju Patel advises checking with village government on questions about quality of life–matters from garbage pick-up to local zoning rules about decks and patios over which “neither the developer or you have control.”
And reasoning that “the crew who built the house next to me is probably the same one building my house,” Patel says he “talked to two or three of my neighbors to ask them whether they were pleased and if they had experienced any problems” before he signed a contract for his home.
“At the time, it was reassurance” he admits.
He knew which floor plan he wanted and where he wanted to buy: “But I wanted to know if I would I be comfortable with the experience. I didn’t want to have the stress.”