How New Home Buyers Walk into Trouble

This is the prime season for new home buyers in metro Atlanta to royally screw things up. Screw things up badly, as in getting sucked into the new home vortex and not being able to get out. Builders are back with a vengeance after years of depressed markets, and they’ve picked right up where they left off. Buying remains a fantastic option, provided the proper analysis is completed and traps are identified and neutralized. The shortage of inventory has resulted in a drastic increase of new home starts over the last 18 months. Over the next several months, buyers will waltz in, sign a contract and begin their walk off the financial cliff. Why? For several reasons, most of which can be completely avoided by consulting with an expert buyer’s agent. There are many obvious reasons for buyer implosion (to those in the industry anyway) including:

Buyers not using an agent for new construction

Building a home is not like buying a car, there are hundreds of decisions that need to be made in a very short span of time. A quality agent can provide guidance from the initial meeting through closing. No matter how well a buyer thinks they understand the process, they cannot fathom the issues that will occur. Builders do it all of the time – buyers once or twice in a life time. It is foolish to be subject to dual agency and let the listing agent run the operation as the seller’s representative.

Builders are back to their “My way or the highway” approach. They are making up for lost time during the slump and many buyers are getting dizzy from the construction process. Building a home isn’t like buying a book from Amazon.

New construction contracts are completely slanted in favor of the builder, an experienced agent can ensure understanding. While most builders do not modify contracts, some will make exceptions but without an agent pushing them, the motivation to do so wanes. There are key points in a new home contract to be aware of. There is often NO DUE DILIGENCE period in the offer. There is often NO APPRAISAL CONTINGENCY in the offer; if the home doesn’t appraise the buyer makes up the difference in cash.

Junk fees can be hidden in contract. Some builders are passing along “impact fees” to buyers; some are adding “doc prep” which tend to be fees surrounding permits. The almost universal one is “lot premium” which is completely fabricated but been around so long that it’s accepted as a cost of doing business. Can all of them be avoided, probably not but some can.

One of the most important advantages an experienced agent brings is leverage if and when something goes wrong –and something will. Builders need excellent reputations among the agent community; they know agents talk when they have a good experience but broadcast it far and wide when they don’t. A buyer without and agent is less of an issue for them, yes they’ll complain but in the end….to whom?

Last and most important point about using an experienced agent for new construction – the fee is not paid by the buyer. A contract exists between the broker on site and the builder; buyers are not legally permitted to be given a kickback. Builders will not discount price because an unrepresented buyer comes in. There are agents and companies that will kick back – errr “rebate” some or most of the commission to the buyer. Given that building can last from weeks to months, how involved with the “rebate” agent be? Buyers are not paying a dime for representation, it’s foolish to not hire the best available.

Panic to act now

In late 2013 the marketed shifted to neutral and then to a strong buyer’s market. This was less about the economy and most about a shift in the real estate market. Rates were held down and the inventory of distressed homes was largely absorbed. Builders moved the lots purchased at discount from banks and “new construction” was deemed “back” by experts. That was noticed by buyers, along with the drumbeat of rising rates, inventory shortages and rising prices. 2014 favored sellers and 2015 is doing the same to this point. And buyers are nervous, now more than in 2014.

The media has been trumpeting “recovery” for a good two years, rents are rising, rates are expected to increase, the builder is increasing prices “after this phase”…It’s critical to properly and objectively evaluate every opportunity and not let background noise cloud decisions.

Builders are pushing major projects now, from the ground up projects and not “completion” builds. The results have been price increases due to material costs, impact fees, labor shortages and of course, demand. In many communities, after the first phase of homes is contracted, builders apply “increases”; this does two things – increase profit and encourage buyers to act now. To the point where poor decisions are made – like accepting that lot next to the road or detention pond, or not negotiating certain items or failing to understand the micro market and the data. Things an experienced agent does.

A big part of the equation is a failure to understand financing options. A new build is not like buying an existing home, it’s impractical to lock rates six months out. The “preferred lender” on site? They’re affiliated with the builder. They’ll offer closing costs and simply charge it back in origination fees or a higher rate. Should you talk with them, probably. Should you use them; only if they are the best route after you compared them with other lenders.

Read the second part of How New Home Buyers Walk into Trouble

Questions? Maybe we should talk.

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