NEW CONSTRUCTION REALITY CHECK

Let's get real about what's under the surface before you sign on!

1) "Free Upgrades" and "Rate Buy-Downs" Aren't Free

Builders often keep the listed price high, then layer in closing cost credits, upgrade packages, or temporary rate buydowns. Looks like a deal — but the recorded sales price stays high. If the

market softens or the builder later drops price on similar units, your "deal" can evaporate fast.

2) Low Down Payment = Thin Equity Cushion

Using low-down-payment financing (³.5 % down for Federal Housing Administration (FHA), 0 % for the Department of Veterans Affairs (VA) eligible buyers) gives you little wiggle room. If you start with 96.5 % LTV or worse, a small price drop puts you underwater.

3) Appraisals & "Sub-Pricing" Risk

Because the builder wants to preserve the tracks value, they push recorded comps high. The true net market price might be lower once you strip incentives. That means you're starting at effectively zero real equity while the loan amount is based on a higher number.

In resale markets, appraisers pull from multiple sellers, listing agents, and buyer motivations. There's no single entity propping up the value. Incentives are minimal, so the recorded sale price = market price. That transparency means less "phantom value" and less exposure to rapid equity loss.

4) Buying Early in the Tract Means More Risk

If you buy in Phase 1 and the builder later has to drop price in Phase 3 to move inventory, your value drops instantly. Resales in a stable neighborhood don't usually face that same sort of built-in price-dump risk.

5) Bottom Line

A new build can be a fantastic home. But you need to know the real number (net of incentives), know the down-payment cushion (or lack thereof), and ask what happens if the builder has to discount next phase.

The Bottom Line for Buyers

• Incentives mask true value — they aren't free.
• Low down payments magnify risk when incentives inflate recorded prices.
• Builder-controlled comps can distort appraisals and delay market corrections.
• Even a minor downturn (3–5%) can erase all equity and leave you owing more than the home is worth.

Ask before you buy:

• What's the net price after incentives?
• How many homes in the tract are still unsold?
• What's the average discount on closed homes in the last 90 days?

Let's Dive a Little Deeper

A. FHA & VA Loans = Higher Risk on Equity Right Now

• FHA and VA borrowers are more exposed: low down, often less equity, higher risk if the housing market dips.
• For FHA loans, "serious delinquency" (90+ days late or in foreclosure) rose from ~3.7% in Q2 2024 to ~4.8% by February 2025. Urban Institute+2HUD+2
• According to the Mortgage Bankers Association (MBA), FHA loans make up ~38% of 30+ day delinquent balances despite being only ~12% of total balances. Liberty Street Economics
• One recent MBA release: total "30+ day" delinquency for all outstanding FHA loans was ~10.62% in Q1 2025. National Mortgage Professional+1

Translation: FHA/VA = higher stress, higher equity-risk compared with mainstream conventional loans.

B. New-Home Builders & FHA/VA Usage Are Trending Up

• The share of new-home sales financed with FHA rose to ~14.0% in Q2 2023. Eye On Housing+1
• Builders are increasingly offering low-down payment financing plus sweeteners to make "new construction" sales hit despite affordability pressures.

Takeaway: More new-home buyers are using FHA/VA/low-down financing in new-build communities.

C. Incentives + Low Down + New Build = Equity Risk Multiplier

• Incentives (rate buydown, closing-cost credits, upgrade packages) let the builder keep the headline sales price high rather than reduce it.
• The recorded price might be $600K, but once you account for $20K+ of incentives your "real" market support might be $575K. You're buying at very thin (or zero) equity.
• If the builder later discounts next phase or market softens, you're the early buyer eating the loss.

In short: Low down + inflated price base + new construction = bigger risk of going underwater.

D. Why Resale Might Be Safer (from an Equity-Risk Angle)

• Resale home pricing is driven by the neighborhood comps, not by a builder protecting future phases.
• Down payments are often larger, and pricing isn't as inflated by "builder incentives."
• If you're coaching a buyer whose #1 goal is building equity (in addition to finding a good house), you can defend saying:
  • "If you're buying new construction with low down and big incentives, you're taking more risk of starting with zero real cushion."
  • "If you buy resale under more normal terms, you may have more equity buffer and less chance of being upside-down."

E. Appraisal & Equity Risk — In A Nutshell:

• Don't assume "contract price = market value earned." Incentives can hide the true market price.
• Ask the builder: "What incentive are you giving, and how is the contract price adjusted (if at all)?"
• Ask the REALTOR® or appraiser: "What are the net effective comparables in this tract (incentives stripped out)?"
• If you're buying with low down payment (FHA/VA) in a tract with heavy incentives, accept you are taking equity risk — not just payment risk.
• Plan for what happens if the next phase drops price or nearby homes begin closing at lower effective prices. You should be comfortable with the home even if you didn't get the upgrades or incentives (i.e., if you'd paid the market-net price).

Appraisal Math & Value Risk — The Untold Story

Here's a sharper breakdown of how incentives affect appraisal math — and where the buyer can silently take on risk.

1. How incentives shift the "effective price" vs the "recorded contract price"

• Builders often keep the listed contract price high (for future comps, marketing, plat value) and instead give incentives such as:
  • large rate buy-downs (temporary or permanent)
  • closing cost credits
  • upgrade packages (appliances, floors, landscaping) zakschmidt.com+3https://www.mihomes.com+3NewHomeSource+3
• From a buyer's viewpoint: you sign for $600K, you put 3.5% down ($21K) on an FHA loan, contract says $600K. But the builder gives you $20K in credit/upgrades/rate buydown. The "net" price to the builder is really ~$580K—even though the contract price stays $600K.
• Appraisers and lenders look at the contract price ($600K) and comparable sales at $600K. If previous comps were also inflated by incentives (or if few true "no-incentive" comparables exist), then the market may appear to support $600K. But in reality, the market without incentives might support $580K or less. See "Why Appraisers Don't Call Out Huge Builder Financing Incentives." JVM Lending+1
• ? The risk: the buyer is effectively starting with zero true equity. On paper, they have 3.5% down ($21K), but "really" maybe they have $0 equity (because the effective cost = $580K vs loan amount ~$579K). So it only takes a ~3% drop in "true value" for them to be underwater.

2. Builder-Controlled Comps Keep Values Artificially High

In re-sale purchases Appraisers use recent comparable sales ("comps") to justify value. In a new construction subdivision, builders use a MASTER appraisal all the comps are the builders one homes. Every comp includes similar incentives but at inflated contract prices, the appraiser sees "support" for that value.

Incentives raise contract price → recorded comps stay high → next appraisal validates those high comps → buyer thinks they're paying fair market value → builder avoids lowering base prices.

This dynamic creates a "false floor" under prices — until the builder finally needs to clear inventory and cuts prices outright. That's when the illusion breaks.

2. How appraisal comps in new-tracts tend to be "protected"

• Builders have a strong incentive to avoid lower recorded sale prices in their tract, because one lower comp drags down future appraisals, value perceptions and resale support for nearby units. JVM Lending+1
• Appraisers, when evaluating newly developed subdivisions, often see: "Many sales in this tract have builder credits/incentives; this is typical for market, therefore contract price is ok." The appraisal may gloss over or not fully adjust for the fact that incentives obscure the true market price. JVM Lending+1
• The outcome: contract price = $600K, builder says "we gave $20K in incentive," but comparable sales show $600K. Appraiser, relying on "market supports it," records value ~600K → loan approved for ~579K. Buyer's risk is hidden.

3. What happens if the market cools or builder inventory pressures build

• Because the buyer effectively has no cushion, if market "true value" drops even 5% (from $580K → $551K) you're underwater.
• Many new-home tracts face inventory pressure: if too many unsold lots/units exist, builder may discount later phases or use heavier incentives just to move product. That creates new comps at lower net effective prices (even if contract price stays high) and starts dragging down values for earlier buyers.
• In resale homes, you don't typically see "there are 30 identical units waiting, builder must drop price" dynamic. Resales are generally more dispersed, so the comp base is more stable. New builds are more vulnerable.

Straight talk - in plain English

• "The contract says $600K, you're putting down $21K, you think you have $21K in equity. But because the builder gave a bunch of credits/upgrades, the real market cost to you might be $580K, meaning you're practically at $0 equity once you close. If values drop 3-5 % you're underwater."
• "Because the builder needs to protect this subdivision's resale value, they're reluctant to record $570K sales next door, but if they have to later, you who bought early at $600K get hit."
• "When resales drop by 3-5 %, it's painful but less likely to quickly hit zero equity. With new construction + incentives + low down, you're already at the edge. The margin for error is tiny."