By Terry McDonald
Purchasing a new home is challenging in any market and these 10 rules will help you buy a new home wisely in any market, but they are doubly important when buying a new home in 2008. I am a former New Home sales rep, former builder and veteran real estate broker… I know these guys and how they work, plus I’ve helped dozens of new home purchasers buy their new home here in Charlotte…
1. The #1 Rule of real estate, Location Location Location? Trite but true… but guess what? The #1 Rule for being happy with your decision 6 months or a year later? Location, location location… talk to folks about areas and neighborhoods, drive out and visit for yourself. Are you from out of town? Try and get a hotel in the area you are considering moving to. Decide on your area or areas first- and do not stray too far. In almost every case, straying is a mistake, even if it looks like “too good a deal to pass up.”
If it is not where you want to be, where it makes sense for your life, then a great deal on a house today will still be a bad deal on your house tomorrow, or 6 months from tomorrow.
Take the time to decide on the general areas, then look at homes. Resist falling in love with the new home pictured on page 27 of the New Home guide, then going to find it, and loving it, buying it…RESIST! Where the Home IS, is Crucial.. AND is frequently a Fatal Flaw. It is easy to understand this in the extremes- lets say you find the absolutely perfect house, absolutely everything you want, and everything you’d hoped for, and it was $80,000 under your budget, OMG…buy it now, it is such a great deal except one little (large) thing: it is 90 miles away. In this case it is obvious, 90 miles is just too far. But it is probably true closer in too. The houses will almost always look nicer one or two subdivision rings out. Some adjustment in search area may be fine, stretching that area a bit, OK, but not across town, unless you know that too is a great area for you. Location, commute time, particular schools perhaps, and the conveniences of life, are vitally important, and many experienced home buyers believe that, if they had to choose, those community features are slightly more important than the exact house. So no matter what the “Deal” is, don’t compromise on location more than a little, OK?
2. Is XYZ a good builder? The first thing to realize is that is an incredibly subjective question, and you will need a local expert to answer that with confidence… it may be your Agent, it probably isn’t. So what should you do? First lets rely on your own eyes and ears. What size and type builder are you considering? Small custom, or tract? If this is a small custom builder, then his references and his workmanship should be visible and verifiable. Often you will meet the builder himself and you can look at his work, ask questions, and interview him for the job. His work should speak volumes.
If it is a tract, or semi-custom, say the builder builds 50 or more homes per year, then the quality of the home you get is based more on the local superintendent and subcontractors, rather than a builder’s name or reputation. If you are unsure whether it is custom or tract, ask who supervises, who watches over the job. If it isn’t an owner, then you shouldn’t base your decision on their “reputation.” Look around. Talk to the superintendent if you can. Take their measure.
I recommend you hire a building inspector and get him in the house early in the building process. A quality home inspector early and often is the best defense against shoddy workmanship or worse. For the most part, the discussion below is about tract builders, the local and national builders who dominate most major markets.
3. As nice as the people who work there are- and the majority are very nice- they do NOT represent you, and they DO represent the builder, who writes their paycheck…Do NOT reveal anything about your buying motives or fears. NOTHING (SORRY for shouting) This includes when your lease is up. This includes “What else have you looked at?” and innocuous questions like, “Why are you moving?” They will ask too, trust me on this. If you like the project, then you say you are flexible, if you are an inventory buyer, and need something right away, I don’t care if your apartment building is being torn down next week, you are looking for something “relatively soon.” And do not rely on them for the truth or whole story… listen to this true dialog between a builders rep, myself and my buyer:
Buyer (to seller rep): “What is that land (pointing) going to be?”
New Home Rep-Sellers Agent (watch the carefully chosen words): “That property is owned by another party, and you should assume future development.”
Terry: (buyer looks to me) : “I’ll check.”
And check I did. In about 15 minutes of online research I found that the zoning jhad recently changed, there was a proposed shopping center there. In fact, a Target shopping center sits there today. Now do you believe that this rep honestly didn’t know there was a Target going to be there? Who knows, she may have “heard” there was one coming, but not wanting to know, never took the 15 minutes to verify it for herself… she didn’t want to know, therefore she didn’t want to report just “rumors.” A classic “don’t ask, don’t tell” policy, and if you look at their words above,she very carefully stated so as Not to misrepresent, …”owned by another party, and you should assume future development.” No lies there, just not the whole story either! Some of you will be smarter than me, and really get to know these folks, and think they are working for you, or on your behalf. Well uh no, they aren’t… In the case above is it possible the seller agent didn’t know about the Target? Just possible, but if true, that is another reason to NOT rely on their advice. Best to have your own Agent.
4. Buyer incentives- these are inevitably tied to using builder’s lender and closing attorney. I am not a fan of this, but all builders do it and these are powerful motivators to use the builder’s lender and closing agent. On a recent townhouse purchase there were $12,000 of buyer incentives tied directly to the use of their lender and closing attorney. Now my buyer was pre-approved and when the first lender came in high, we asked for their second lender. My borrower, with excellent credit and 20% down, got the rate to 5.35. Their first offer was 6%. So, negotiate. Now he has a great rate and the $12,000 in incentives, but it pays to know what you are qualified for BEFORE walking in, so get Pre-Approved, so you know what a good deal looks like. There is no real downside here if they are using a quality lender you’ve heard of before-as most major builders do, and of course you will want to compare “Good Faith Estimates,” but once again, all is not as it appears entirely. In North Carolina, under the standard re-sale contract, buyers get to choose and pay for the closing attorney.. so if the builder picks and pays for the attorney, who does that attorney represent? You guessed right, the builder! It is recommended you bring your own attorney for legal representation, here in NC the cost is about $250.
5. Decide whether you are an “Inventory” customer or a “to Be Built.” Inventory homes are ready now, or in some cases up to 60 days- “to be builts” are probably 4-8 months out- so this easy right? Just pick your preferred time schedule and you are done… or, perhaps, if you don’t like the Inventory, then build? What’s wrong with that? Nothing, necessarily, but there is a BIG difference, you probably haven’t noticed. What is that?
Well most builders WILL negotiate on Inventory homes, and will NOT negotiate on “To Be Built” homes.
So how bad do you want a deal on a New Home? …you want it bad? Then you are an Inventory only buyer. In today’s market in Charlotte, the healthiest in the nation, I insist my new home buyers buy Inventory at a discount, to protec, hedge, their investment. “No deal, no buy!”
6. If you are an Inventory buyer skip to 9 below, the next 3 will be about To Be Built Homes, assuming you have to have one built… in most markets there is not a lot of inventory.
The first question to ask is always, “In the model we are looking at, what’s included, what’s not included, and how much do the common options cost? The “includeds”- “not includeds” etc can get very complex- ask the question if your Realtor doesn’t, “What is the average option package?” The sign you saw out front, “From the high 200’s” often means from the mid 300’s once they are outfitted… and that may be all together too much. Also ask about Lot premiums, a clever way to raise home prices without changing all your brochures. There standard brochure package should have all this information, as well as any on Inventory homes available.
7. Buying Options– there are two concerns here, watch out for over-improvement, and watch out for additional deposit requirements. These bells and whistles are easy to over do. But “I want the house the way I want it” you say… that’s OK, just know that it commits you to the house for the long term- 5 years or more in all likelihood. What’s a good rule of thumb for options? 10% If options exceed 10% of the home purchase price, more than likely you are over budget. Be sure and get the things everyone looks for: extra hardwood floors, granite kitchen counters to name only two. What about brick on 4 sides, when brick front with siding on three sides is standard? Skip the $20,000 they will ask for the brick, unless you can get your arms around the fact that it is probably worth $5000 max on resale.
One honest builder here in Charlotte, with honest appraisals, has a notice you must sign at time of contract. That notice states that options are there for the client enjoyment and not all options will raise the appraised value. Amen to that, he is the only one so straightforward. Some builders use a Design Center to sell you options. Again, the main thing here is, don’t get carried away, and look for lasting value, things everyone seems to like. Watch out especially for options that require 50% deposits. These deposits are almost always non-refundable, even if you are denied a loan and the contract is “contingent” on you obtaining financing. You will find that the language surrounding these deposits is different, and in almost every case non-refundable.
8. When is the best time to buy? What you should know about lots… When is the best time to buy in a community? What kind of lot should you get? Should you buy before there is a model? In the middle? At the end? That depends of course on the exact situation… but if price is what you are looking for, prices are always best before there is a model… but you ask, how do I know what the community will look like? That is the trade off for the early purchaser… what will it look like? You have some pretty drawings and promises, then what? If you haven’t seen their other communities, I think you should. If they are large and established, that sounds good. If they are small and local, and never attempted a project this size, show me the money- I mean amenities! If the pool and clubhouse are already built, then the neighborhood is well under way…if not? If you move forward, do it with with caution. Never take the last lot of this section aka the bottom of the barrel (this section is almost sold out)- wait or move to next community. Why do they “release” only these lots? Sometimes, they haven’t received final city approval… most of the time, they are artificial, to create urgency on the Buyers part… “It is the last one left, we aren’t sure when the new ones will be released” This is also done to move the bad lots. Remember who do they work for? That is their job.
There are a few specific lots to ALWAYS (99.9%) avoid. The first lot in on either side- every person leaving the neighborhood will have to pass this house twice daily. Often there is an entry road, then it comes into a stop sign and you have to turn left or right. If there is a house/lot directly in front of you while you are stopped, that is one to avoid. In the evening every car’s headlights will shine brightly in that house…Watch out for grade. Too steep front yards or backyards should be avoided or bought knowing they will be more difficult to resell.
9. The Builder Contract- This is the quintessential one sided contract. I think some law schools demonstrate one-sided contracts with builder contacts. Seriously, the actual agreement can be written in 3 or 4 pages- why then does the average builder contract have 30 or more pages? Well they have the 4 pages to describe the agreement, and 26 pages of things the builder is not responsible for… I am not kidding. Worse, the contract can’t be changed or altered, or the contract is nullified. So, if they all do it, why is it important?
Because once contracted, they have a substantial amount of your money, and a one sided deal you are not likely to back out…because you risk losing your deposit. As a buyer, you need to know that they hold all the cards–i.e. you need to have confidence they will deliver. Your recourse is limited if they do not.
This is another reason I have a strong preference for the Inventory purchase. It is WYSIWYG-What you see is what you get, and for the most part, the 26 pages of excuses and things not responsible for, simply don’t apply since the house is done or almost done. If you need something else in the contract, have the Agent writeup an Addendum to add To the contract- therefore not “changing” just adding to.
10. Do you need an Agent? Can you do this yourself? My answer is Yes and Yes, you do need a good Agent to advocate for you and to get the best deal, and you can do it by yourself, but why would you? Customs with Agents and New Home Builders differ from area to area, but in most major markets this will be true: You lose nothing having an Agent-you don’t gain a better deal with out an Agent, because any builder dependent on Realtor sales (Realtors bring 75-80% of the buyers in Charlotte) will not cut them out his way, no sensible builder would because word would get out, and Realtors, and their buyers would stop coming out.
When it comes to negotiating, a good Realtor will know something of the builders reputation for deal making, and what to offer on an inventory home. Additionally , they will be there to fight for you if you get into a contract dispute. Here, the Agent’s power is multiplied, because if the builder is perceived to be screwing you, the buyer, (my customer) they may be more concerned about their reputation with us Agents, than with doing the right thing by you, and the issue will be more likely corrected to you the buyer’s satisfaction,out of fear of offending the Agent, if nothing else so having an Agent leverages your position
Negotiating with a builder is a zero sum game, and they can be quite tenacious. Once or twice a year, a builder helps keep my negotiating skills sharp. Most builders are honest and most transactions go smoothly- however if they don’t, they will fight, no doubt about it, and you need a fighter with you in the ring, that is why you need a good Agent. Note I said Good Agent, take your time, talk to several, quiz them on these points and test their knowledge on local issues, how things are done in your area. Then decide, do I want an Agent? I’d say Yes you want a Good agent.
One last thing, the best time to get what you want is before the contract is signed. Do your research, know what you want, then find a good Agent, or Go in and do battle yourself, prior to contract signing or as part of the original deal–and do buy Inventory at a discount.
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To learn more call me direct at 704-351-1519. tm