Considering New Construction | SCHNEIDER Real Estate

21 Points to Ponder When Considering New Construction

At the onset, consider establishing a Buyer Agency Agreement with a professional real estate agent to represent YOUR interest.

It is important that you, the buyer, register your agent’s name at initial contact. Ideally have supply of your agent cards and give one to any other sales representative you encounter. Eventually register your name with your agent’s name. Establish whether builder will allow you to register your agent and compensate your agent. If your agent is required to be with you on the first visit then leave and return with your agent. Later in the process it will become more evident why this is so critical.
Meet with Display Sales Rep. or Builder to get overview of lots available, base package, optional features prices, etc. allowing the builder sales rep to do most of the speaking. Observe, take notes, ask questions and collect written material.
If you are comparing builders, be certain to compare apples to apples. It can become quite confusing with different styles, square feet, standard features etc. Make a spread sheet on paper in columns, putting ideal home with all desired or proposed features in a column, then line one or two others in column style, side by side and prepare careful comparison.
Assuming you have resolved step #1 above, then it is O.K. to put $500 down to reserve lot. Generally they just hold the check and hold the lot. Usually the builder will expect a sales contract within 2-10 days. It is O.K. to have builder write a rough draft of a sales contract with options addendum and practice pricing. Pre-arrange ahead with your agent that this is as far as you should go together initially. After this point, it is time to temporarily put a distance between builder and buyer. Create atmosphere for offer/counter offer. Ask builder or rep. if you can take the rough draft sales contract with you without signature to discuss BEFORE SIGNING. Usually we use a builder’s sales contract – different from the St. Charles County Association of Realtors Sales Contract. Your agent should have the “Buyers Agency Disclosure” added to builders contract along with “Earnest Money Disclosure” showing the builder is holding funds and can commingle with other funds.
Some builders allow for negotiating, some not as much. Larger builders may negotiate some, but some won’t budge. Some smaller builders, depending on the market may show a willingness to negotiate, maybe as much as 4% off gross. Inventory or spec homes often are negotiable because the builder is more motivated to sell one he is sitting on. The more options, the more profit/negotiating room. On a base home (no options), profit margin is narrow, but on options a markup is higher and give more room to negotiate. Add $25,000 in options, another $12,000 profit. Sometimes it is best to eliminate some overpriced options (i.e. microwave $650) and buy after closing i.e. (but get pre-wired with dedicated circuit). Go down the list of items that can easily be added later. Having options in the builder’s package however does have the advantage of being incorporated in the loan and built into your monthly house payment. Most builders will not publish their price sheet on options (refer to options price guide prepared by this author).
Ask to see grades of vinyl, carpet, pads, cabinets, vanity and tops, etc. before negotiating a contract. Some builders generally do not arrange for you to see these at “showroom” until 3 weeks after accepted contract. At that time you may be shocked to find out the standard grade does not satisfy, and you will need to bump up the price to get flooring, pads and cabinetry etc. acceptable to you.
Buyers can usually make minor changes and modifications to the basic floor plans. Some changes cost, some don’t. Don’t hesitate to consider changes that better suit your needs and preferences. Make changes on floor plan sketches and document to by making it a part of sales contract with signatures and initials. Everyone to get copies.
Consider Sweat Equity Programs. FHA may allow up to 2% credit for painting interior (including 6 panel colonist doors) and 1% for seed and straw by buyer (builder supplies materials). This 3% will show as a credit toward down payment. Some builders may allow buyer to do some own work, i.e. one buyer is currently doing his own plumbing since he is a licensed plumber. This is possible but frowned upon because of so many issues that arise. The best is on paper to become a subcontractor and get paid for your work.
In lieu of Sweat Equity or possibly in addition to, the builder usually has 1-2% built into the price for paying for buyer closing costs, points, prepaids etc. Depending on purchase price, the builder can pay most of your closing costs and prepaids as a credit on the closing statement. Sometimes your buyer’s agent may recommend writing the offer for higher than the builder’s retail price to allow for a larger credit back from the builder at closing and diminish cash requirements for buyer.
Deposits may look like this: Range
- To hold a lot $100 – $500
- At Time Contract is Accepted $2,000 – $5,000
- At Time of removal of Contingencies & start of home (approximately 5-10%) $10,000 – $25,000
- $2,500 – $12,000
- Again, many builders may be negotiable here – its worth asking or make it part of the offer.
Get a copy and review Subdivision Restrictions with your agent before negotiation sales contract. Most subdivisions have an annual association fee. Some builders charge a sizable initiation association fee. Simply be aware. Ask questions.
At time of contract writing, ascertain from builder/rep. if there are any surprise charges relative to the construction that they pass on to the buyer at closing i.e. termite pre-treatment, plot survey and stake survey for foundation, utility tap on fees etc. A few builders have been known to slip these in on the closing statement. At this point it is often too late to deal with these issues effectively, or, it may be wise to include a statement on sales contract i.e. “Any charges or fees charged by builder or passed onto buyer at closing must be disclosed first on this sales contract”.
Immediately after writing and accepting the sales contract, including upgrades of various items already in the sales contract, a “START SHEET” is prepared. They often type it up, have you review and sign off on it. Then builder goes to get a “building permit” and a plot plan. Any changes to START SHEET after this point usually costs $100.00 or more per change, plus the cost of the actual modification.
In designing a home, be careful to stay within norms. Within a subdivision be careful about buying the highest priced home. Try to stay in median. Be careful of functional abnormalities i.e. moving walk-in closet out of the master bedroom and down the hall. On resale you have created a problem. Color selection must keep resale in mind. Even though you may plan to make this your home for life, this author has observed many situations where buyer had some major unexpected life changes creating the need to sell prematurely. That black and white contemporary kitchen may fit you, but on resale you have drastically reduced the number of potential buyer prospects. Think it through, stay neutral and decorate with paints, wallpaper, artist paintings, window treatments etc. then it can be more easily neutralized. Attempting to resell a home while the builder is still in the subdivision presents an additional special challenge.
Home buyers should make arrangements to visit and watch their home regularly – weekly – checking the size of fireplace, location of closets, rooflines, location of sump pit etc. Specify on a drawing of floor plan location preference of basement windows, sump pit, rough-in etc. (Some sump pits have been installed right at the very bottom of stairs. Da!) Keep in mind each builder has rules and limitations on visiting the job site. Be careful to allow them to do their job and do not increase risk of injury. Be sensible at this point.
Sometimes it may be acceptable to ask the builder to give credit for $600 lighting allowance from expensive lighting shop and customer go instead to a hardware store where prices may be more reasonable. Sometimes the builder is inflexible here but some outlets can be capped off and dealt with after the closing. Any lighting not bought through builder or installed by builders electrician generally is not warranted by the builder. There are locations that must at least have inexpensive temporary porcelain light fixtures to pass inspections.
Locally there may be a loan called ProLoan – however the workers must all be union workers. You can lock in a rate 180 days at no extra charge. This can be a two edged sword. In peak building times, the largest builders are absorbing all of the union carpenters and a smaller builder required to use only union carpenters can’t get started. Here you need special help from your agent to help evaluate your financing options. In addition many builders try to pressure you to utilize their select Lenders or Title Companies. You are in reality FREE to use any source you choose.
Be careful to add minimum of 15 days as safety on top of the builder’s verbal projected completion date. Special orders on counters and countertops, etc. can cause you to run over and lose your interest rate lock. Buyers may or may not be able to escrow for uncompleted work as most lenders frown on it with rare exception. Where escrow’s are allowed lenders often require the escrow amount to be usually 1.5 to 2.5 times cost of item to assure fund to hire third party if builder doesn’t follow through.
Sample Schedule: Visit display June 1
- Deposit on lot June 5
- Write and negotiate contract June 15
- Order building permit June 30
- Get permit July 10
- Start foundation July 30
- Finish in 120 days November 30
- Builders high – builders wait until the last few days and then they swarm like bees on a hive to get the final pieces done. They do miraculous things and the builder experiences a special ecstasy – hence called a “Builders High”.
Review “Builders Warranty” – most items builder will remedy in the first year, under what amounts to a “bumper to bumper” all inclusive warranty. If the builder purchases what often is referred to as a ” 2-10 Home Warranty” – then a third party warranties but the builder is still responsible for defects. In the event the builder doesn’t or can’t because builder is out of business the warranty assures the buyer problems will be taken care of. Also it provides for binding arbitration to resolve defect issues. Typically a 2-10 Warranty covers “bumper to bumper” in year one, major systems for 2nd year and only serious structurial defects in years 3-10. This warranty plan defines and gives examples of when it is a defect and when a concern is within normal tolerances.A few days prior to closing or on the day of closing your agent will arrange for a “Walk Through”. This can take from one to two hours time. Some builders actually have a crew of workers repair items on the spot or during closing – others create a “Punch List” and make appointments the first week or so after the closing. The larger builders tend to be very good on follow up items. The smaller builders frequently need your buyers agent to negotiate and later put pressure to get the items on the punch list done.
Congratulations on your brand new home. The day after you move in, it has a market value of 2-5% less than you paid for it.