Dos and Donts of Buying a New Construction Home
The top 3 list of what to know when buying a builder spec home will probably vary from agent to agent, or buyer to buyer, but as a new construction expert here in South Carolina, I’ll give you the shortlist. It is the American dream to be a homeowner, and many home buyers like the idea of owning a new home vs pre-owned one. Don’t get me wrong that doesn’t mean there is anything wrong with an already lived-in home, but just like new cars knowing it’s brand new just gives you a certain peace of mind. Sort of.
If you want a new home there are a few things to consider before you get started with your decision, as there are different types of new home construction. You could obviously build one yourself by hiring your own builder, purchasing a spec home from a local spec builder, and the most common is buying one from a large national tract home builder. Most home buyers readily figure this to be the best and most simple option for getting that new home. However, there are some pros and cons to buying from one of these large national builders like Beazer, Pulte, Centex, DR Horton, Lennar, Hovnanian, or even Mungo Homes in SC.
National builders’ profits are built in a few different ways, and knowing some tips will save you a lot of money.
1.) MAKE SURE YOU HAVE A BUYER’S AGENT REPRESENT YOU
IT IS FREE! Use a real estate agent to represent you in your purchase, an experienced agent will know the tricks of saving you money. Do not go to the development site/neighborhood without an agent. It is free to make sure you’re protected. You will get yourself in trouble and cost yourself money. That’s exactly what these builders want you to do, to be that unsuspecting and naive buyer and “show their cards”. If you don’t know their game you’re already at a loss. I can not stress this enough
It is imperative to have a real estate broker or licensed agent accompany you to see the model home or at least review the builder’s contract and practices by email and in correspondence with the sales agent for the builder. A real agent knows all the tricks, smoke, mirrors, and sales pitches that the onsite agents and builders try to feed visitors who come to see their community. Having a buyer’s agent there with you does NOT cost you ANYTHING. In fact, having an SC real estate agent will save you money and protect YOUR interests, not the builders’.
— What’s a Lot Premium? Lot premiums are when builders add an additional cost for the lot they would build your home on. So, for instance, Oyster Point Mount Pleasant by well-known national builder DR Horton is a wonderful community and like all builders what they advertised for the prices of the homes is the price WITHOUT the “lot premium”, So really the cost of the home is probably $35,000 more before you choose finishes or upgrades. More times than not the lot premium is for the cost it will take them to prepare the lot, i.e. clear it of trees and undergrowth, site plan/house orientation fees for the architect, additional fill dirt, and grading. But I can guarantee this if the lot premium is $65,000, they’re making at least $20-30k profit.
- I once made my client $20,000 more because I was with them while they were looking at a community site plan of available lots with the builder’s sales agent, and by knowing how neighborhoods are built out I told them which lot was going to be the best one and that they needed to buy it “now”.. Sure enough, the next week the builder raised the prices on the lot premiums. Secondly, your agent (shall I say new construction experienced), will know which locations are most desirable for return on investment, which ones will be most desirable when you go to sell. They should know what buyers are looking for vs what you think you want or you think is best.
- I had a client fall in love with a new construction home in the Upstate of SC by a small local builder, the house looked beautiful and flawless from all appearances. Most buyers would think “I don’t need a home inspection”, the “house is brand new and look how beautiful it is”. I advised my client to get a home inspection, and the home inspection came back with a laundry list of serious problems and poor craftsmanship. Honestly, most agents would not have known what they were looking at on that home inspection, but that’s another story. Luckily, I understand new construction so well and most building codes, which would have cost my buyer at least $60,000 or more to make right and/or put their safety in jeopardy. So I was able to get my client out of that contract and have their earnest money returned.
- Another buyer client wanted to buy a brand new home from DR Horton like many inexperienced buyers thought they were supposed to call the builder directly and had prepared themselves to pay the full advertised list price. They called me, and I was able to look at the pricing history of this home. I saw the house had been once priced $17,000 lower 6 months prior. The same exact house. So I made an offer of the original advertised price from 6 months before and saved them from paying the higher price.
- I have been to many meetings with buyers sitting down with the builder’s sales agent, and every time the builder’s sales agent goes over the “upgrades” because they know most buyers want them. They’ll show them photos of what the upgrades look like so it gets the buyers excited. However with me there with the buyer they know they can’t get away with a lot of the “smoke and mirrors”. I have saved my clients over the 15+ years I’d guess $100,000+ in buying unnecessary upgrades and upsells by the builder’s rep. I know that the upgrades they push cost usually 3 X less than what it would actually cost to have a carpenter/contractor come in and build it after you’ve purchased the home. I know what is a waste of money and what isn’t, what future buyers later will find value in and won’t. For example, a client wanted to put in hardwood floors which was an upgrade, as the builder had only speced out carpet. The upgrade was an additional $30,000 for hardwoods throughout. I told my clients not to have the builder do it because I knew they were not moving in immediately and to find a flooring company to do it. They saved $15,000.
- My buyer wanted a wooden privacy fence and the builder was going to use the same fence company as my client to build the fence for him the builder was going to charge my client $4800, but my client hired the same fence guy himself and got it built for $2500. For the SAME exact guy and plan.
- I had a client buy a lot in my own neighborhood and build using a smaller regional builder. I was driving by the lot one day, and I already knew the lot clearing crew subs were there to remove all the trees. They had packed up and left but I noticed they left trees along the lakefront. Who buys a lakefront house and leaves trees to obstruct the view? I thought. NO ONE. Since I lived on this same lake about 10 doors down I knew it was ok to remove them. I went back to my office and reached out to the builder’s rep real estate agent and told him about this, and requested they send me the site plan. Sure enough there it was, the site plan showed where the trees by the lakeside were to be removed. So either the project manager for the builder dropped the ball, or the land clearing contractors were misinformed. Either way, if I had not been driving by this could have been a huge problem. The builder went back the next week and the crew went back over to their lot and had the additional trees removed.
2.) TRY TO AVOID CHANGES
Every time you make changes it will cost you. (99% of the time) if you cause them hassle and time they are going to charge you for it. Once they have ordered materials, scheduled carpenters and installers. If you change it, they are going to charge you what’s called a “change order” fee. Another way they make their profit is markups on materials. Honestly, there isn’t much you can do about that. They buy it in bulk from their suppliers and then tack on additional profits from what they paid for it. They have the cost of these materials built into the base cost of the house so there really isn’t any reason to try to negotiate those from the base price. The builder knows exactly what it costs them to build each floor plan. For example, their cost maybe $150 a sq ft to build, and the base price they sell to you without upgrades may come to $200 sq ft. Notice I said upgrades. When you change materials if you are forced to buy from them, they’re going to hit you for it.
3.) YOU MAY ACTUALLY WANT TO USE THE BUILDER’S MORTGAGE LENDER
I was once in the mortgage business for 13+ years, and even founded and owned my own firm with hundreds of millions of loans written. Oftentimes large national builders such as Beazer, or DR Horton would have their own mortgage company. The builder would offer to pay up to $5000 in closing costs if you used their lending company. When I was a mortgage pro, I hated this and I’d tell my buyers there was no way their lender could match or beat the program or rates I offered. Unfortunately, I was only right about that about 25% of the time. As a Realtor, I have been able to see this first hand, when my client compares the loan terms offered by someone I refer to them vs the builder’s company, they’re usually at least the same. So you’d be throwing away $5000 in closing fees for nothing.
Conclusion – THE DONTs
Don’t go unrepresented and unprotected! Have your or an agent with you on your side.
Buying a new home is very exciting, but take a real estate agent with you if you are interested in a new home development by a large tract builder. Don’t get swept up in the “extras and upgrades”, as they are there to sucker you into overpaying for things that just aren’t worth the drastic up-charge.