In our current “Sellers Market” we are seeing a serious shortage of inventory for homebuyers to look at. Over the last 5 years, active listings have decreased by 60% in Colorado Springs. Multiple offers and bidding wars are forcing many people to throw in the towel on resale homes and turn instead to new construction. The cost is a little higher and you may not end up in your ideal neighborhood but there are some benefits.
Benefits of New Construction
The biggest benefit one new construction versus resale is that everything is new. You won’t have to deal with someone else’s messes, damage or lingering odors. The home will also come with a warranty, so if there are issues the builder will come back and take care of them.
You get to choose the colors, finishes, style and design options that appeal to you. This benefit can ultimately save you a lot of time and money by eliminating the hassles related to remodeling projects.
Homebuilders make the entire process easy, which might make you feel like you can do this on your own. You might ask yourself, “Do I really need a REALTOR® to help with the transaction?”
Whether you are looking at semi-custom (production builders) or a true custom home builder, here are some things to consider before deciding to call your REALTOR® to help you shop for new construction.
Reasons to Use a REALTOR® with New Construction
Advocacy and Representation
The most important concept to grasp about new home sales is that the person who sits on-site is the builders representative and they have the builders best interest at heart. This doesn’t mean they’re not a good agent and they’re not going to treat you fairly, but at the end of the day, they serve the builder first.
Real estate transactions work best when everyone is on equal footing and everybody has an advocate in their corner. The buyer should have a real estate agent on their side in order to make sure they are getting what they want. Most home builders will pay your real estate agent to represent you during the transaction.
It’s important to note that most builders are going to expect that the real estate agent be with the buyer on their first visit. Problems arise when the buyer visits the model home multiple times without mentioning a REALTOR® and then when it’s time to do the deal, a REALTOR® appears. If you do this, the builder is likely to refuse to pay your Realtor.
Choosing a Builder
Most real estate agents should know the reputation and quality of the local and national builders in the area as well as where the builder is currently building. Experienced real estate agents will know where these builders have built in other existing communities in the past and can take you to look at homes that have aged for 10 or 15 years. Additionally, builders have strengths and weaknesses, your agent can make recommendations of a builder based on your needs and wants.
Builders generally have a strong grasp on their pricing. There are times like toward the end of a quarter, or end of a filing they may be more eager to offer up incentives in order to close out a filing or hit their sales goals.
If a builder wants to create an incentive for a particular buyer, they might consider paying for closing costs or offer incentives with upgrades or design changes rather than dropping their prices. Dropping prices may have a negative effect on future appraisals in that neighborhood for the builder.
Some buyers assume that if they don’t have a REALTOR® involved in the transaction, the builder will take the commission right off the top of the price. For the most part, this is incorrect. Builders add the commissions paid to a buyer’s agent into the marketing budgets of the homes they build. If a home buyer decides to buy new construction without a real estate agent as their advocate, either the builder’s agent or the builder will realize the commission.
Most builders will use their own contract which is, of course, a builder-friendly contract. For this reason, it’s important that the REALTOR® understands the terms, intent, and language of the contract. Additionally, the REALTOR® should explain what the buyer’s risks and liabilities are before the buyer signs anything.
Typically the builders representative along with the buyers and their REALTOR® will work out all of the details of the contract before signing. This can take several meetings to iron out details and get prices for special items. Once everybody has a clear understanding as to what the buyer is actually purchasing, the price, inclusions and completion date, the buyer signs and the contract is executed.
Upgrades & Builder Incentives
Model homes are a dangerous environment for homebuyers. They are usually built out with all of the top of the line upgrades that they think most buyers want. The problem is that each upgrade comes with a price tag. Buyers naturally get excited about the prospects of acquiring this kind of home until they find out how much it costs beyond the base pricing of the home. At this point, they often feel like they were being deceived.
Of course, the builder is just trying to showcase the upgrades and options with the hopes a buyer will ultimately add them to the purchase of the home. This is where it becomes the job of the REALTOR® to keep things in perspective. When looking at a model home, the REALTOR® should always have a good idea of what is standard and what is an upgrade. Through the process of looking at the model home, the REALTOR® needs to clearly point out what standard versus is an upgrade and how much that upgrade will add to the base cost. This skill requires some knowledge and skill as to how this builder works, not an easy task but that’s one reason your REALTOR® is getting paid.
Understanding Plans, Projects Additional Development
If the new construction home you are considering is in a new neighborhood, it is important to understand and think about what is going to be built on that empty space behind or in front of your home. Your real estate agent can help you understand what the area around your home is slated to become so there are no surprises down the road.
You love your new view, but what will that view be like in the future? Builders hold the home buyer responsible for finding out about future neighborhood development. Traffic planning, open space, and commercial development can be big unknowns in a new development. REALTORS® often will have connections through city planning, public documents and other builders and agents that can give you an insight as to what might transpire with future development.
The paperwork for new construction is complicated and slightly different than an existing home. The paperwork for new construction is more about setting expectations about construction and completion timeframes. Also, the builder needs to make sure the buyer performs their responsibilities in securing financing so that when the home is complete, the buyer can close.
The terms, forms, disclosures and agreements are different than those used in a typical resale transaction. Because of this, it’s important that you and your REALTOR® understand the responsibilities and consequences of everything you sign.
How Does a REALTOR® Get Paid on New Construction?
Homebuyers worry that if they use a REALTOR® for the purchase of their new construction home, they will need to write a check at the end of the transaction to their Realtor. This is not the case, as the builder will actually pay the REALTOR® as a part of their marketing costs.
One of the biggest myths in purchasing new construction is that if a home buyer negotiates directly with the new home builder or their representative, they can reduce the home price by the amount of the commission. The new home buyer will quickly find out that this is not true and hiring a REALTOR® can actually end up saving them additional money and headaches in the long run.
Financing a New Construction Home
The financing for new construction homes is much different than getting a mortgage for an existing home. If you are building a custom home, the builder will most likely require you to take care of the financing on your own; this means going to the bank and taking out a construction loan.
This is a difficult loan type to qualify for because the banks want a lot more in terms of net worth, equity, and cash reserves. This is a major factor people choose to buy production homes as opposed to custom homes. Production home financing is much easier to obtain.
On the other hand, if you are buying a production home, the loan process is very similar to the resale home loan process. The builder pays for the land and construction upfront and when they are finished they actually sell you the house.
Inspections & the Final Walkthrough
Most unrepresented buyers will do a final walk-through with just the builder. Prior to executing the closing documents, a good REALTOR® will recommend utilizing a certified property inspector for a full inspection and oftentimes walk will through the inspection with the prospective buyer.
New homes have as many, if not more inspection issues than resale homes. Things like leaky seals at gas-burning appliances, problems with furnaces as well as incorrectly installed appliances are some of the common things that can surface during a home inspection.
Hire a REALTOR® with New Construction Experience
According to the United States Census Bureau, the average person will move 11.7 times in their lifetime. Most of these home purchases will be existing homes which will likely involve a real estate agent. The majority of home buyers feel that purchasing new construction is more complicated and overwhelming than buying an existing home so it is even more important that the buyer hires a real estate agent to represent them in this process.
When looking for a REALTOR® to help with your new construction home purchase, this agent should be a local expert and have experience with local builders and the new construction process. The job of a REALTOR® in a new construction home sale becomes to both protect and explain for the buyer. Not all real estate agents have the experience in dealing with new construction, so researching your Realtor’s experience is essential.
Be aware that most builders or their salespersons will advise you that there is no need for you to have a real estate agent. It is important to remember that builders represent themselves; not you as the client. For such a large purchase, you definitely need an advocate in your corner.
Some of the biggest benefits are that the real estate agent will help the buyer keep the design and cost in perspective, and help watch the builder’s schedule and deliverables to make sure that you are getting the home that you contracted to buy for the agreed upon price. Since there are no commissions fees for the buyer to pay, it is definitely worth it to find an experienced local REALTOR® to help you in the process.
- 15 Questions to Ask When Buying New Home Construction – Sharon Paxson
- Valuable Tips for Buying a New Construction Home – Petra Norris
- Questions to Ask When Buying New Construction – Bill Gassett