Phoenix is full of developing neighborhoods, which offer the chance to buy a new home in an up-and-coming area. But before you take the plunge, beware: Neighborhoods don’t always develop the way you expect, and that can send your home’s price lower instead of higher.
“There’s a risk associated with buying in a place that’s not fully developed yet, and that’s the risk of uncertainty,” says Mark Stapp, professor of real-estate practice at Arizona State University’s W.P. Carey School of Business.
Still, the chance of getting in early—and watching property values take off—is tempting to many potential buyers.
“Your greatest appreciation is going to be in a developing area,” says Jim Belfiore, president of Belfiore Real Estate Consulting, a Phoenix-based market research firm.
Potential for Big Gains
Although new homes cost an average of 15 percent more than older ones, they can appreciate dramatically as the area fills in and availability shrinks, Belfiore says. At the same time, values in partially developed neighborhoods can decline more than in established areas should the market slow, says Phoenix Realtor Pam Eagan.
In the last downturn, “all [of] these subdivisions sat with houses in frames,” Eagan says. The half-finished houses — compounded by better deals in more desirable locations — pushed prices lower.
It’s not just the houses, either. If a developer files for bankruptcy, key amenities such as streets, curbs and gutters can go unfinished. Cities typically require developers to post bonds and offer proof they can pay for public improvements, but that’s no guarantee they’ll get done, Stapp says.
“That’s good in theory,” Stapp says. “In reality, cities and towns don’t like to touch those because then they become liable for all the costs.”
Check Out the Builder
To avoid this scenario, Stapp recommends purchasing homes from well-established builders with a solid track record of finishing projects and building quality homes. Buyers can check with the Arizona Registrar of Contractors or the Better Business Bureau to see if any complaints have been filed and how the issues were resolved.
Vacant land surrounding the new community presents another question mark. Stapp says potential home buyers can learn about proposed plans and zoning by visiting the local planning department.
“You really need to get to know the overall community and the neighborhood and its surroundings; the best way to do that is to go to the town,” he says. Zoning can change, but the public nature of that process ensures residents would have the opportunity to provide input.
What’s built outside the development can affect prices as well, though it’s not always clear how, Stapp says. For example, a nearby retail center may be attractive to some buyers, but others may only see traffic congestion.
“If you’re worried about the value of your property, that means you have to be worried about it relative to how others think of it,” Stapp says.
You can find more information about adjacent land use in the subdivision report that Arizona law requires builders provide to potential home buyers. The reports also include information about schools and utilities, providing a comprehensive view of what to expect.
Using a Real Estate Agent
Potential buyers may want to think about having a real estate agent with them when they visit an on-site sales office.
Agents help buyers negotiate key contract details, Eagan says. Although new home prices are typically non-negotiable, other contract details are. For example, a builder contract might provide a 90- to-120-day range for closing instead of a specific date, with no builder penalty for running behind. Buyers might be able to negotiate an exact closing date, or at least narrow the range, Eagan says.
Developer contracts will also frequently direct your security deposit into the builder’s general fund instead of a third-party escrow account. Getting that deposit back could become an issue if the builder files for bankruptcy mid-development.
Buyers should also negotiate to make sure all final fixes are done before closing, Eagan says. Builders will sometimes push to close even if the final “punch list”—the list of needed changes—isn’t completed to the buyer’s satisfaction, she says.