Tuesday, April 28, 2009

Buying a New Build with an Agent

I've heard questions over and over again about whether you need a buyer's agent to purchase a new build and whether it's beneficial for the buyer. I can't believe I haven't written about this topic yet! I've been the builder's representative for three different builders and have been a buyer's agent for another builder so I have a pretty broad overview on the way builders operate.
A builder needs to keep in mind the value of the other homes in the neighborhood when they are designing their incentive programs. In many cases they cannot lower the price of a home without reducing the value of the other homes in the neighborhood or the value of their future sales. For example, if they sell one home for $185,000 they cannot ask $195,000 for the exact same home in a buyer's market like this. Buyers won't pay more for the exact same house.

For this reason, builders often offer incentives, like paid closing costs, flooring upgrades, or free appliances instead of reducing the price.

Also, the lending rules limit the amount of money that sellers (or builders) can give buyers. On a conventional loan the limit is 3% of the sales price while on an FHA loan the limit is 6% of the sales price. So, if the seller is already giving the buyer the maximum amount in the form of closing costs or discount points they cannot give any more money back and looking at the last example, they cannot lower the price any more.

Builders heavily rely on Realtors to sell their homes, so they plan to offer Realtors a commission. Some buyers have the misconception that if they do not have a Realtor they can keep the 3% commission that the agent would have received, but as you can see it's just not possible.

Here's an example with a Realtor. A builder is asking $200,000 for a home. They offer upgraded appliances, a $5000 value, and pay closing costs and points, a $6000 value. They pay the buyer's broker $6000. This particular builder is willing to negotiate on the price (not all are) and they and the buyer agree on a purchase price of $195,000. This leaves the builder with a net of $178,000. The builder is happy because the property value is $195,000 and the buyer is happy because they receive $11,000 in incentives.

A different buyer comes in the model home without a Realtor, interested in the same house. The price is still $200,000. The buyer sees the sign advertising the upgraded appliance package ($5000) and paid closing costs and points ($6000). The builder's representative starts writing up the contract "assuming" a full-price offer. The buyer doesn't know that the last purchaser paid $195,000 and the builder's representative doesn't tell them because they have the builder's best interests in mind. Also, they can't receive the money that would normally go to the buyer's agent because they are already at the 3% allowable contribution limit. So, in this case the builder nets $189,000.

So, what value do Realtors provide? Going back to the first example about the purchase price, you don't want to pay more for your house than your neighbor paid for the exact same home. The Realtors have access to information about recently sold properties in the MLS that the public cannot access. The county auditor sites are public so you can see the sales price, but not the options and upgrades included in those homes.

Realtors also have experience with builders to know how builders work, what questions to ask, and what is negotiable. It depends on the builder, but I have seen buyers with Realtors get better deals than those without because of the Realtor's negotiation skills. Also, sometimes buyers "fall in love" with a home and want it so badly they forget to ask about other development in the area. There could be plans to build a "big box" store with its loading docks facing your backyard where trucks with beeping backup alerts load and unload all night. A Realtor takes the emotion out of it and thinks and negotiates with their mind instead of their heart. A Realtor also knows how builders work to know what is negotiable and what just isn't possible with the construction or because of lender's rules.

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