With housing inventory at an all-time low in Colorado, finding an existing home to purchase can be a major challenge. Fortunately, home-builders have finally begun to ease the inventory shortage with an influx of new-construction. However, the process of buying a new home from a builder can be much riskier than buying an existing home from an individual. Unlike the “buyer friendly” contract agents use for resales; builder contracts are written in a manner that greatly favors the rights of the builder. If you are interested in purchasing new construction, it is wise to hire a Real Estate agent who is well-versed in interpreting builder contracts.
When you visit a new-home community, the builder’s salesperson is present to “sell you” on the community and convince you to buy a home there. However much like a car salesman, the builder’s salesperson absolutely serves the best-interests of the builder... not you. Their primary goal is to help the builder maximize profits and reduce the builder’s risks. Smart buyers understand the importance of having their own real estate agent present, to protect their best interests as well. Walking into a builder’s sales office without an agent representing you, is a lot like walking into divorce court without an attorney and expecting your former spouse’s attorney to structure a fair deal for you. It simply isn’t going to happen!
These are the top 12 things to know before buying new construction...
1. Be careful how you fill out the builder’s Registration Form. The builder’s salespeople are tenacious about pressing everyone who enters the model homes to fill out a registration card. Much like an “Open-House” on a resale, the onsite salesperson wants to capture your information for follow-up purposes. However, those registration cards also serve a more insidious purpose. The card always includes the question about “how did you hear about the neighborhood”? It will usually give options like “online,” “radio commercial,” “Zillow,” or “My Realtor.” If you check any box other than “My Realtor” or “My Agent,” then the sales office records this, and may use it in the future to avoid paying the agent that you bring in to represent you. Builders only want to pay an agent, if they feel that the agent was the “procuring cause” that helped you discover and visit their development. If they feel that your agent didn’t help you initially find them, they may refuse to compensate the agent.
However, If you initially visit the sales office without an agent, you’ll still be OK as long as you check specify on their registration card that you are represented by an agent The other acceptable alternative is that if you always politely decline to fill out their card. They typically won’t force the issue, if you don’t want to fill it out. Remember they are sales people, so they usually don’t want to alienate your or appear too pushy.
2. You are paying for agent representation, whether you utilize it or not. An additional 3% is already added into the price of every home they build, to cover the cost of paying agents who bring in buyers. Contrary to popular misconception, you will not be able to negotiate a lower price if you choose not to bring an agent. If a buyer chooses not to bring an agent, the 3% simply goes onto the builder’s bottom line as additional profit. Almost all the major builders now operate on a “One-Price Policy,” that insures that they do not negotiate any differently or offer additional incentives to buyers without an agent. The major builders realize that real estate agents are crucial to their long-term survival during down markets, so they are extremely careful not to alienate them during hot-markets. Builders also realize that most of the best-qualified buyers have already hired agents. Therefore, offering better pricing to unrepresented buyers, would be extremely counter-productive and downright foolish on the part of the builders. They certainly didn’t grow to be multi-million-dollar operations by making foolish business decisions. Bottom line, the price you pay a builder entitles you to bring representation, so it's foolish not exercise your right to have a real estate agent in your corner representing your interests.
3. Builder contracts are 60-80 pages of legalese, designed to limit your rights in the transaction.
In Colorado, most people’s issues with builders arise from the builder-slanted verbiage contained in their proprietary purchase contracts. Because the Real Estate laws in Colorado are extremely “Consumer Friendly”, all agents buying or selling “re-sale” properties are required to use a standard, state-provided purchase contract which is drafted with terms designed to offer buyers maximum protection of their earnest money. However, Colorado allows builders to circumvent the standard state-provided resale contract and substitute a contract of their own instead. These proprietary contracts are crafted by the builder’s attorneys and contain extensive language that heavily favor the rights of the builder. This language makes it FAR easier for a builder to keep a buyer’s deposit money if the deal fails to close, or a buyer chooses to back out. An experienced real estate agent will interpret the builder’s contract and carefully explain the buyer’s rights (and lack of rights) as stated in the contract. This includes noting any crucial deadlines related to the buyer’s right to terminate without forfeiting the deposit.
For example, if completion timelines are delayed by things like bad weather, materials shortages, labor strikes of unionized trades, delays with county permit issuance, project financing issues, etc., the builder’s contract makes sure they aren’t liable. Most builders typically promise delivery somewhere between 6 and 13 months, but the contract may allow them to delay completion up to a full 24 months without penalty or legal recourse. These kinds of details are why it’s critical to bring an agent who understands (and can explain) all the legalese contained in the builder’s contracts.
Because a typical builder’s contract is 60 to 80 legal sized pages long, an experienced agent will often obtain a copy of the contract in advance, so that they can carefully read it in its entirety and highlight any crucial dates or clauses that a buyer should be particularly aware of. This makes the signing process go smoother because you won’t have to interpret a massively long contract on the spot. Or worse yet, not properly understand the details outlined in the contract you are signing. Many experienced agents keep a file in their office containing example contracts from every active builder in their area. This means your agent is prepared to protect your interests from the start.
4. Negotiating the Price, Incentives, and Inclusions can be trickier than most expect. Just like at a car dealership, new home salespeople often offer extra inclusions or discounts to secure a contract. Many builders may try to insist that their prices are non-negotiable. This may or may not be true depending on the market, neighborhood, and builder. If a particularly hot neighborhood is selling faster than a builder can release lots, then odds are they won’t offer a deal on the price.
This is often true in Denver and its more popular suburbs, where builders simply can't build homes fast enough to keep up with the present demand. In red-hot neighborhoods, they often have no need to discount their prices for anyone. They realize that if you won't pay full price for it, the next person through their door will. Of course, there are some exceptions to every rule. There are some circumstances were an agent can help you "work" the builder for better pricing, lot placement, landscaping, or incentives. A good agent recognizes these instances and makes sure you're able to capitalize on them if they present themselves.
However, if the builder has several unsold “spec” homes in inventory, they’re usually more willing to negotiate. The odds for negotiation are even greater at the end of the month, the end of the fiscal fourth quarter, or when the builder is down to the last few homes and they’re trying to close out the development. In these instances, a smart agent negotiates hard for you!
5. If you have a house to sell first, most builders have strict policies on contingencies. Builder policies on contingencies can be an extremely tricky balancing act. In fact, most builders in Colorado won’t even entertain a contingent offer on a completed inventory home. The ones that will take a contingent offer on an inventory home, won’t allow the contract to remain contingent for long. Therefore, if they do accept an offer that is contingent on the sale of your current home, the timeframe they will allow your home to remain unsold is generally very brief. If you fail to get your home sold quickly, during this timeframe, then most builders retain the right to cancel your contract and sell the home to another buyer. Their contracts also often define this scenario as a reason to retain your deposit money in the process. So, you can potentially be placed into a very ugly situation of losing the new home, along with the deposit you placed down on it.
In situations where the builder is building your new home from a “dirt-start”, the policies on contingency are often only slightly looser. We encounter quite a few builder contracts that require the contingent sale to be completed within 6 months, even if the home they are building won’t be completed for 10 months. Therefore, the buyer is literally forced to seek temporary housing for a few months and then make a double-move as well. This is where it's important to have an agent in your corner that is well-versed in managing new-construction time-frames. The agent representing you, will be responsible for timing the sale of your home to perfectly coincide with the completion of the new home. Threading that needle can be particularly tricky, due to the need to manage marketing time, days under contract, and possession dates, all while minding the builder’s contractual deadlines as well. If an agent mismanages this delicate juggling act… a buyer could end up with their current home sold out from under them, and the contract on the replacement home terminated by the builder. In states with strong laws pertaining to “Specific Performance” a seller can be sued for attempting to back out of a sale, and the court can often force them to complete the transaction. Once again, this is a situation where it is crucial to have an agent experienced with builder transactions, working on your behalf.
6. Builders advertised “base prices” are often quite deceptive. The builder’s advertised base price is generally tens of thousands of dollars below the final completed price. The final price is determined after lot premiums, design center options, structural upgrades, low voltage options, appliances, landscaping, and builder incentives are factored in. The model home is packed with every imaginable upgrade. It’s extremely crucial to ask what features are included with the basic home and what items are upgrades. Even basic things like lawn grass, sprinklers, and fences are often not included. Refrigerators, garage door openers, window blinds, and central air conditioners aren’t always included either.
Also, the builder won’t normally allow changes to materials or structural features once construction has started. This is because the builders cannot deviate from the initial building plans they submitted to the county to obtain the building permit. Likewise, materials such as tile, wood flooring, countertops, and appliances cannot easily be changed midstream. Builders place their material orders in bulk to receive wholesale pricing; therefore, it isn’t feasible for them to make changes after the materials order has been placed.
*Review my “Ultimate Builder Questionnaire for Buying New Construction” as a guide to the specific elements you need to consider when purchasing a new construction, and common questions about modern building materials.
7. Interpret the Meaning of Soil Surveys, Engineering Reports, and issues with high water tables. A real estate agent understands how to interpret the meaning of the soil surveys and engineering reports pertaining to the chosen lot including reading blueprints and floor-plans.
The amount of expansive soils found during the soil survey determines the type of foundation the home requires. Slab-on-grade foundations can be used when the expansive soil content is low, but costlier pier-and-beam foundations must be used when high amounts are present.
Special consideration must also be given to lot selection, when dealing with properties such as golf course homes, or homes on hillsides, etc. Poor drainage, moist basements, and erosion issues that have been known to arise from unique topography and elevated water tables often found along golf courses. An agent with extensive builder experience, will typically know the soil conditions in the various areas they work in, and know how to best advise you on the pros and cons associated with various lots the builder may have available.
8. Strategy is often required when maximizing a limited budget with a builder. A real estate agent advises you to make the best use of your budget. Choices like lot location, structural upgrades, and design center options can all make-or-break a buyer’s budget. Some cosmetic options can be done more affordably after closing, while some structural items cannot easily be done after the house is completed. Most builders also require additional deposit money, once a buyer’s design center choices exceed a set amount. The required deposit can be up to 50% of the cost of the upgrades if the cost of the options goes past a predetermined dollar amount.
Your agent questions the builder about all the inclusions, contingency terms, financing, and incentives to meet your budget. Also, a quality agent advises you not to over improve the home above the norm for the neighborhood. New construction homes almost always appraise for financing unless the buyer goes overboard with design center options. However, most builder contracts state the buyer is still required to close on the home even if the appraisal comes in low.
Aside from the buyer’s loan getting declined due to no fault of the buyer or the builder failing to compete the home in time, builder contracts generally have no other provisions in place for a buyer to terminate without forfeiting their deposit. It’s critical to understand how to manage your budget to protect your investment.
9. Issues with quality and defects can arise during the construction process. As stated above, the builder’s salesperson protects the interests of the builder. They’re not responsible for protecting the buyer. Because building a home is a complex process, with plenty of room for errors, a second set of experienced eyes looking for potential issues during the stage-inspections is crucial.
Your real estate agent accompanies you at walk-throughs with the foreman at the various stages of construction – pre-drywall, electrical, low voltage, and the final pre-closing walk-through to identify touch-ups. It’s the agent’s job to help to help catch deficiencies and hold the builder’s foreman accountable for completing all repairs or necessary corrections prior to closing.
New homes are fully covered by the builder’s warranty and a builder’s reputation depends on delivering homes that are free of problems. However, you should pay close attention to the verbiage in their contract that deals with defects that are discovered during the routine walk-throughs. Most builders will not allow a buyer to terminate over these items, but rather insist that the buyer allow them to correct the issues before the home is delivered.
10. Protecting your Deposit Money is always a major concern with new-construction. Builders typically require a larger deposit than with a traditional resale purchase. The deposit amount usually falls between $10,000-$15,000. As we said, some builders may require additional deposits of 50% of the cost of your upgrades. Many buyers end up with $30,000 to $50,000 in the hands of the builder prior to closing.
This is where the builder-slanted language in their proprietary contracts comes into play. Much of the language in their purchase contract revolves around their recourse if the buyer fails to close on the home. Most of this language grants the builder the right to keep all of your deposit money if the deal gets derailed and fails to close.
However, the contract also contains a few clauses that grant the buyer the ability to back out of the deal with a full return of their earnest money. Don’t count on the builder's salesperson to point these out. They are incentivized to not lose a sale. Once again, an agent in your corner ensures you understand your rights.
Your real estate agent helps protect your earnest money. There aren’t as many crucial deadlines with a new build. However, the real estate agent works with you to ensure crucial deadlines like the loan application deadline and the contingent sale deadline are met. Also, some builder’s contracts have verbiage that entitles them to keep a percentage of the deposit even if you back out for a legitimate reason defined in the contract. A real estate agent works closely with you to avoid unpleasant surprises.
11. If interest rates rise too much during construction, there can be major repercussions. Most mortgage lenders typically won’t lock-in interest rates more than 90 days in advance of a closing. Therefore, when dealing with new construction that likely won’t be completed for 4 to 18 months, this can pose a substantial risk. If your debt-to-income ratios barely qualify you to purchase the home at the time it’s contracted, there’s a risk that you may no longer qualify to buy if mortgage rates increase before you’re eligible to lock-in the rate.
Interest rates are unpredictable. It’s always prudent to make sure you’ll still qualify even if the rates increase. A good rule of thumb is to know whether you’ll still qualify if the rates climb by one percent. If not, then you’re taking a major gamble buying new-construction. You may find that buying an existing home where you can lock in your rate is a better choice.
Most builders also have an ownership stake or affiliated business arrangement with a lender and title company. Additionally, most builders require buyers to use their lender and title company to qualify for incentives and discounts. While they cannot force you to utilize these service providers, they will routinely withhold discounts and incentives if you insist on using an outside lender or title company. (*The good news is that the builder’s lender usually has competitive rates and wants buyers to qualify).
12. Hire a Real Estate Agent that has experience dealing with builders (*Hint...most don’t)
The Pareto Principle (also called the 90/10 rule) describes the real estate industry very accurately. It states that 90% of homes in the market are sold by only the top 10% of agents. This also means that the remaining 90% of agents “fight over scraps”, for the remaining 10% of transactions. In other words, if you lined up 10 real estate agents, one of them sells far more homes than the other 9 combined! To make matters worse, out of the 10% who are doing most of the business, a substantial percentage of those agents have rarely dealt with builders. This means that finding an agent that is extremely well versed at new-construction transactions, is like finding a needle in a haystack!
*David Hakimi is one of the most experienced “New-Construction Specialists” in Denver and the entire country. When it comes to dealing with builders, there aren’t many other agents in the entire U.S., with his level of expertise. In fact, David is nationally published by The National Association of Realtors, and Realtor Magazine, on the topic. He has written several articles on selling new construction, and his article “The Rookie Agent’s Guide to Selling New Construction” was published by the National Association of Realtors and Realtor Magazine. It was one of NAR’s most read articles in 2017 and was shared online by over 18,000 agents nationally!
The Hakimi Team at Berkshire Hathaway HomeServices- Innovative RE, serves Denver, Boulder and surrounding Colorado communities. They specialize in New Construction and Luxury Transactions. Contact David Hakimi today to start searching for your perfect home, 720-370-3000 or David@HakimiTeam.com
*This article was adapted from David’s article, “The Rookie Agent’s Guide to Selling New Construction”, originally published by the National Association of Realtors, Dec 12, 2017.
David Hakimi writes regularly for NAR on their YPN Lounge and is nationally recognized as an authority on new construction transactions.
Subscribe to CommentsComment