Why Buying a Brand New Home is Like Buying Groceries or Gas

When you’re standing in the check out line with a cart full of groceries, you understand you’re going to pay the price that gets rung up on the cash register. The same is true when you’re at the gas pump. Unfortunately, there is a tremendous misconception in the real estate market by buyers and the real estate licensees who represent them that buying a brand new home from a builder is more like negotiating for a used car rather than the gas you put in the car. But, just like groceries and gas, there is little, if any, negotiation when purchasing a new home.

Unlike resale sellers who have what we call ’soft’ equity because they bought a home ten years ago, faithfully made their payments, are fortunate enough to live in Alaska and now have the benefit of double digit appreciation, builders run a business. They have overhead, transportation costs, material costs, labor costs and a construction loan with an interest rate hovering around 7.5%, even when prime is at 1% because banks have put a floor on commercial rates. Builders are also now required to put in a minimum of 10% of their construction costs up front and in cash just in order to get the loan to build the house that you have now decided you want to make a low ball offer on.

So when a realtor brings in an offer from a buyer that represents as much as 5% less than the asking price, they need to be prepared for rejection. A builder’s profit varies from 5 to 8%, depending upon what they have paid for the lot, how long it has taken them to build the house, i.e. accumulated interest charges; whether or not they’ve had winter construction costs and other unforeseen expenses like supplies stolen from the site. And builders must maintain a profitable balance sheet in order to continue borrowing from their ever vigilant lenders.

Some escrow closing agents make the mistake of showing the realtor and the buyer the seller’s side of the HUD closing statement. The proceeds shown on the HUD is NOT the builder’s profit. He still has to pay for the final materials that have gone into the home the last 30 days of construction like carpet, vinyl, tile and mirrors. From those proceeds, he also has to pay his on-going overhead costs.

One benefit that can potentially be passed on to a buyer is interest savings if the buyer is prepared to close immediately after the certificate of occupancy is issued on the home. Builders typically include two to three months’ worth of interest into their asking price. Closing at the time of the CO also allows the builder to build more homes on his revolving line of credit. New home priced below $400,000 will also typically have some buyers’ closing costs built into the purchase price but unless the builder has advertised he will pay all allowable buyer closing costs don’t expect him to pay for all of them.

Like all negotiations, emotions play a role. Even if you eventually come to terms with a builder, an initial low ball offer will result in hard feelings and a perception that you are unreasonable. Invariably, you’re going to need a favor now and then. Moving a light switch, a window, widening a staircase are all items that a builder can do with little or no cost to him if you’ve been reasonable with him in your negotiation. If not, you can expect to pay for the cost of every change plus a change order fee.

Time is money to a builder and if you demand too much of his or his subs time by taking too long for your electrical walk thrus or request too many on-site meetings to which you come unprepared, he’s not as likely to make the one change that is so important to you without a significant charge. However, don’t expect him to change out windows that are already installed or make significant structural changes without an substantial increase in price. Once an item has been installed, tearing it out and replacing it, becomes an expensive process.

Finally, remember the builder is in business, probably much like your own. Start off your relationship the right way by making a decent offer. If your realtor is unfamiliar with new construction or what a particular builder will or will not do, then ask her to talk to the licensee representing the builder for guidance. It will save everyone time and you’re more likely to get the home you want at a fair and reasonable price.