Stories From The Street – September 2014

I’m thinking about buying a ‘New Construction’ Home, should I have a Buyer Agent?

Buying a new construction home is an exciting process. You get to pick out your flooring, your counter-tops, and your cabinets, as well as choose features like the layout, baths, adding a morning room etc. But what if you’ve never built a home before or, even more important, negotiated with a builder? Is this a process that should be done alone, without Buyer Agent Representation?

And even if you have dealt with new construction before, it is wise to have an agent representing you and looking out for your interests.

A common misconception is that it will cost additional money out of your pocket to have an agent represent you, look out for you, review the contract and make sure that all is going smoothly with the builder. This is not true. In fact, most builders welcome purchasers to have buyer agent representation and actually pay the commission for an agent to be involved in the transaction. Builders feel that agents, especially the good ones, can act as a go between, help facilitate the process, and help the builder in getting the house sold and the home built.

I have 2-3 clients per year that end up going the new construction route, and, just as I’ve written that no two real estate transactions (regular owner to owner re-sales) are the same, no two builder transactions are the same either.

As I was writing this Story and thinking back on the clients that I’ve helped over the years, there are about 8 key duties that I’ve performed on be-half of my buyer clients. It didn’t matter if they were purchasing new construction from a large track builder, be it Ryan Homes, Drees, Advantage Homes, Beazer, or a smaller regional builder like Oak Hill Properties or South Mountain Builders, there are 8 core functions that I perform for my buyers.

In this story, I’m going to focus on 3 of those core functions – not necessarily the 3 most important – but the 3 most common functions I’ve performed over the years.

Builder contracts differ from ‘Resale’ contracts, but you can still negotiate contract terms.

The key function I perform with new construction is probably negotiating and reviewing builder contracts with my clients. The builder contracts have clauses and addendum’s that are atypical compared to a regular sales contract, and unless you are a real estate attorney you will have a hard time determining what legal obligations both parties have regarding the contract. Not knowing your rights and your obligations regarding the contract is the single biggest pitfall when buying a home, especially a new construction. I am not an attorney and do not give legal advice to clients, but I’m familiar with builder contracts and the obligations by both the builder and the customer when it comes to performance within that contract.

Sometimes just getting to the contract is the hardest part of the whole process. If you have to sell your home to purchase their home, many builders won’t even accept your contract unless you have a Real Estate Agent already working for you because the risk of you being able to sell your home to purchase theirs is too high. Builders also have clauses in their contract that make the ‘normal’ closing costs higher on a new construction. They try and make the purchaser pay all of the transfer and recordation costs, as compared to splitting 50/50 on a resale. This is a point that we can negotiate with the builder. There are some builders that will end up splitting this with the buyer, and other builders absolutely WILL NOT negotiate this item. If I’m able to get a builder to split this fee it will save you $3,000 – $6,000 depending on the purchase price.

Another negotiating item, I’ve had greater success with is the ‘deposit.’

When you write a contract with a builder they typically require an upfront deposit of anywhere from 3-10% of the purchase price. Then when the builder is about to break ground in 30-60 days, they will require an additional 3-10% deposit. This amount could easily soar to $60-$80k. I have found that if you can present sufficient data to the builder that you have strong finances and are working with a reputable/local lender, they will reduce these deposit amounts, thus reducing the strain on your bank account during the building process.

Having a Real Estate Agent review and negotiate the contract with a builder is, without a doubt, in a purchaser’s best interest when dealing with a new construction.

Builders give ‘incentives’ to use their mortgage company and settlement company… What happens if I can get better financing elsewhere?

If you have ever been to a model home, talked to a builder, or purchased new construction you have inevitably seen flyers or promotions that offer a ‘free morning room’, a ‘free finished basement’, ‘free upgrade to granite’ or some other incentive offered by the builder. Much like anything in life, if it seems too good to be true there must be a hook, right? Yes, there is. In the fine print you are only eligible for this ‘free’ upgrade if you use the builders’ preferred lender and/or Settlement Company. Most of the time these preferred lenders and settlement companies are actually owned by the same corporation or, at a minimum, they have a professional association with one another. So, not only do you have to buy the house from the builder, you have to use their lender and their settlement company. Thus, they are making money off of you during every aspect of the home purchase. That is why they can offer these generous ‘free’ incentives because they are making so much money off of you, the buyer, that giving away a free morning room is chump change to them.

So what happens if you have your own lender? Can you still get the ‘free’ incentive?

The answer is yes and no. This is another point that I’ve been able to help buyers with in the negotiations with builders. Actually, just this year I had a couple that bought a Ryan Home, and the buyer was able to use their own lender and still get the incentive. The Ryan Homes sales lady was upfront from our first meeting, she said that if you can find your own loan program and our mortgage company, NVR Mortgage, can’t match the terms of the program that you find on your own, we’ll still give you the incentive.

The couple purchasing the home went and got ‘approved’ for a mortgage and the loan program. This was an incredible program through Navy Federal and was exclusive to Navy Federal. When we took the program and the terms to NVR Mortgage, they were unable to match Navy Federal. Ryan Homes still gave my purchasers their ‘free’ incentive and allowed my clients to use their own company, Navy Federal. So there are loopholes in the free incentive but if the builder’s lender can match the program that you can find on the open market then they will not give you the free incentive if you use an outside lender. It helps to ask the builder, up-front, what their policy is regarding their incentive.

What should I actually look for on the walkthroughs during the construction process?

As a consumer having a new home built, your mind is racing a million miles an hour. You are excited about the process, trying to figure what cabinets to choose, what flooring to choose, the counter, etc. You will be so wrapped up in this process that you might overlook important details of the construction.

During the construction of your new home there will be 4-5 walkthroughs with the builder/project manager, beginning with a walkthrough of the framing and layout. This is probably the most important walkthrough during the entire process. Do you know what to look for? Making sure walls are straight? Checking the layout of light switches? Are the rough-ins for the plumbing and HVAC all in correct spots? And what recourse do you have if they are not?

As someone who has built and acted as the General Contractor on 3 homes, I understand what to look for during these walkthroughs. As a consumer, you will be more concerned on the progress of your final designs and how to fit your furniture. My job is to be ‘your critical eye’ during these walkthroughs and catch features that you might overlook. If you have a question during the walkthrough and want to ask me your questions first before asking the builder, I can help here too.

Most importantly, if an issue is found during the walkthrough process I can serve as the bad guy and ask the pointed questions to the builder/project manager. As a consumer you might be hesitant to ask/confront the builder on issues with the construction of your home. More often than not, clients will pull me aside during these walkthroughs, and we’ll talk about their concerns. Then I can be the ‘bad guy’ and talk with the builder about the possible issues. This has worked well as some clients are uneasy or uncomfortable bringing up issues with the builder and that becomes my key role during the transaction.

The building of a new home is a stressful and unfamiliar process for many. Having someone else in your corner, looking out for your interest, who understands the process of building a home is invaluable. Before you go meet with a builder or walk through a model home make sure you give me a call.