Here’s what that means for buyers…
Thinking About Building? Here’s Some Facts!
For some buyers, building or buying a brand new home is the way to go. It’s their opportunity to make it what they want without all the headaches of redoing and repairing a resale.
There is nothing like the smell of a new home with gorgeous flooring, gleaming countertops, sleek cabinetry, a grand master suite and a luxurious bath.
However, the process to get there is not without its own hitches. The possibility of a new home can seem exciting at first, but can easily become overwhelming.
From determining which neighborhood to selecting a floor plan and lot, there are a lot of decisions that typically have to be made rather fast, and it can be like trying to fit pieces of a puzzle together that don’t quite match up.
The buyer wants a particular floor plan, but it can’t be built on the lot they want because there are already two other homes of the same plan slated to go next to and across from the buyer’s desired location. Of course, the only lot the home can be built on commands a $50,000 premium. Now what?
Welcome to new construction 101. Patience and managing expectations upfront are key. I covered many things to watch out for in my prior piece “Everything buyers need to know about new builds.” Here’s “next level” awareness with 10 more things buyers should know:
1. Using an agent to represent you doesn’t cost more money…
This is by far, one of the biggest misperceptions of buying new construction. The site agent for a builder represents the builder and not the buyer. Their interest tends to be largely focused on builder inventory homes at various stages of construction vs. build-from-scratch options, as inventory homes are the ones a builder is expending money on upfront.
Every buyer is different and their timeframe for a new home may vary. For buyers who are relocating or whose home has gone under contract rather fast may need options that are ready sooner versus later. However, there are also buyers that have the luxury of time and not feel as if they have to compromise on the lot, floorplan and everything that goes in the house. No matter what stage a buyer may find themselves in, working with an agent gives them an advocate for what they want—not simply getting a home off the builder’s books in time for the end of the quarter.
Agents can also provide unbiased feedback on builders in their marketplace so a buyer knows what to expect. Not all builders are the same and some provide a better customer experience.
The agent understands the new home sales process, how to best to negotiate, what can and should be asked for, as well as things that may not fly. The agent can pull up comparable sales of new construction homes to give the buyer an idea of what other properties have been selling for. A buyer may be surprised to learn that a site agent may not have access to MLS. Builders typically have listing information handled by someone in their corporate office, so site agents are not able to research the data the way a residential agent can to give the buyer an idea of market statistics that could impact their decision.
It is important for buyers to involve an agent before their first visit to a new construction community and always mention the specific agent they are working with to any site agent that they may be having communications with. Many builder policies require that the buyer’s agent accompany the customer on their first visit and that they be properly registered to that agent. If a buyer does not discuss having an agent and then tries to involve them when they are close to making a decision, some builders may not allow them to be involved, so best to err on the side of caution and bring your agent along in the beginning.
Buyers should be leery of any site agent who frowns or discourages them from having their own agent or attempts to minimize their need for one. Some site agents will go so far as to suggest that buyers can save them money by not having an agent. By doing so, the site agent may be subtly suggesting that by not having an agent will mean more commission for themselves.
2. Relationships matter…
All site agents are not sharks in the water. Many work hard to cultivate, maintain and nurture relationships with residential real estate agents as they know agent-brought customers are a critical component of their business. Agent customers tend to be more serious and ready, willing and able to do something versus people wandering in off the street.
Conversely, agents that are well-versed in new construction tend to have established relationships with site agents as well, and can leverage these relationships to the buyer’s advantage. They may be given access to properties and lots that have not yet been released to the public and could be made aware of special incentives or offerings that no one else knows about. In addition, an agent will schedule an appointment with the builder’s site agent who will set aside a significant amount of time to meet one-on-one. Builders are often unable to accommodate drop-in visitors because the site agents are currently occupied with customers and out showing available inventory and lots.
3. Offerings are subject to change at any time…
The communities, base prices and available lots that a buyer or their agent researched three months ago are likely not going to be the same when the buyer revisits it a few months later. Builders typically raise prices based on a certain number of sales if demand is strong. Any incentives towards the price, options and upgrades, and/or towards closing costs could be pulled back or eliminated altogether. Additionally, if the market slows, buyers could find builders willing to offer incentives that were not previously promoted.
4. Contracts might not be negotiable…
This has been written about before, but it is worth mentioning again: A contract is a contract and builder contracts are typically not negotiable. They are designed and written to protect the builder and focus more on what they are not responsible for or do not warrant rather than the buyer’s obligations.
Read the fine print closely and have your attorney review it so you can fully understand what you are signing up for as well, as the financial implications of deposit money required. Builders typically don’t allow “outs” like a residential resale contract allows for. The builder may have a say in everything from who your inspector is (if you choose to have inspections) to your visits to the property as well as when you will close.
If the property does not appraise for the price you are paying? The builder’s position is typically “too bad, so sad.” Make sure you can truly afford what you are buying and understand the values in the neighborhood.
5. Financing a new build has some caveats…
Builders typically offer incentives to a buyer for using their “preferred” lender(s). This usually means a dollar amount that the builder will be contributing toward the buyer’s closing costs. The real scoop behind this is that it is a joint contribution typically shared in some way between the builder and their lender partner.
In addition, there are typically more closing costs that a buyer is responsible for in a builder transaction versus a resale where the seller may be picking up some of those costs as dictated by what is customary in the market where the closing takes place. By not using the builder’s lender, the buyer would bear the brunt of all of the closing costs and would not be able to negotiate a discount off the price of the home accordingly.
The builder is all about profit of course, so capturing the financing piece of the home is an additional source of revenue for them. Keep in mind that interest rates and some fees could be a bit more when using a builder’s lender due to the closing cost concession being paid for. In other words, “there is no such thing as a free lunch.”
6. The initial quote is probably much different than the final price…
Determining the final pricing on a home will take time. The initial pricing a buyer is quoted typically reflects the base price of the home, plus the lot if there is a premium being charged due to the type of lot – if it is private (such as a conservation lot), located on a cul-de-sac or has a view such as overlooking water, golf course, etc.
The builder can usually include any structural options the buyer wishes to make at this time as well. However, the final price is driven by what the buyer chooses to put in the home beyond the standard offerings.
7. Upgrades can be costly…
Speaking of which, it is important to understand what is considered standard and what’s an upgrade along with what the different levels of upgrades mean. Builders typically offer a lower grade (often referred to as a level) of flooring and cabinetry as standard. This could mean a more basic tile floor in “wet areas,” like the kitchen, bath and laundry rooms, and carpet in the living areas and the bedrooms.
Levels generally range from one on up. The higher the level, the more expensive the material. Buyers need to understand the cost difference if they choose to upgrade the flooring, cabinetry or countertops. The basic builder offering with cabinets may necessitate a buyer to upgrade up at least two levels, and don’t expect quartz to be the standard for countertops.
In other words, it is important for a buyer to understand that they will likely need to budget for upgrades during the construction process because it would not make sense to change those things once the home is completed.
8. Choosing design elements can be overwhelming…
The builder’s design center is like a candy store for the home. The choices can seem mouthwatering and mind-numbing at the same time.
Nowadays, many builders have decided to offer potential buyers the opportunity to preview choices at their design center before going to contract. This way, they can get an understanding of the offerings and different levels without the pressure of an appointment where they have to make all of their decisions. This is a great opportunity to become educated on what level one compared to level five means when it comes to tile flooring, for example.
Upon going to contract, buyers will need to understand how much time and what kind of guidance they will be given at the design center. Will they be expected to do selections in one appointment or will they have more than one meeting? What about pricing and should they want to make changes? This can be an overwhelming experience, and they should not only take notes on the choices they’ve made but also pictures so they can remember exactly what they chose.
9. Changing your mind might be out of the question (or at a huge up-charge)…
There are two words that builders dread: change order. A buyer needs to understand the contagion process that is involved once structural and design selections are made. Forgoing the covered roof extension over the patio and then deciding to add it once under contract may not be possible as the permit has been filed based on the structural items submitted at the time of contract. Ditto for adding a plumbing line for an outdoor kitchen.
If a builder can accommodate a change, there could be a fee charged for it. It’s best to find out when first discussing options and upgrades what kind of fees would apply if that should happen. Speaking of changes, sometimes a particular item that was chosen is no longer available or is on back order, so much so that no definite timeframe can be provided. The builder may ask the buyer to choose something else.
While that may not seem like something that should happen from a buyer perspective, a buyer needs to understand that a builder has their preferred and approved list of suppliers that they’ve negotiated pricing with on everything from framing and flooring to cabinetry. It may not be as simple as the buyer locating the desired material on their own and arranging for delivery or installation. If the builder is national, there may be tightly wound purchasing processes and procedures.
10. You might need an attitude adjustment…
Building can be an exciting time for a buyer, but it can also be a stressful experience. At times, a lot of things seem to happen at once and then at other times, it appears that nothing is happening at all. A buyer’s visit to the house at various stages of construction can produce anxiety and even concerns about if something is being done properly.
There are many hands in the pot, and it is best to relay all concerns to the designated construction manager instead of trying to tell any crews on site, which will only cause confusion. It is important to stay in constant communication with the construction manager and discuss the frequency of your visits and what would be permitted, etc.
While perfection is expected when building a new home, it is important to remember that humans are doing the work and humans aren’t perfect. There will be things that have to be adjusted, redone or replaced along the way. And in the current climate, there is likely the challenge of an adequate supply of tradespeople no matter where in the country you are located. While that is not a buyer’s problem, it is important to understand the limitations and reality with which builders may be working and adjust expectations accordingly.