Cutting Deals with Homebuilders

After much consideration and lots of tanks of gas, you’ve narrowed down your search to one house from one builder that seems to provide everything you would expect. Today is the day you’ll make it clear to the builder’s on-site salesperson that you’ll take them up on the two-story, 2,400 square foot Amadeus floor plan, with its beautiful entry foyer, sweeping staircase, huge kitchen island and remote home office space.

By now you’ve probably been made aware of the home sites available for this plan and if they haven’t changed, it’s time to decide. Using the criteria we mentioned in previous chapters, that’s not difficult to do. So what comes next?

It’s a good idea to shoot a phone call to the builder’s salesperson to let them know of your serious interest, since they may have dozens of people looking at the same floor plan and home site for which you’ve gotten your heart set to buy. If the salesperson indicates that you could lose out on it, he or she may suggest that you place a reservation, or “hold” on that particular lot, pending your imminent appointment to sign the purchase agreement. This may require a deposit check, used by the builder as an instrument to hold the home site or house off the market. This check (made out to either the builder or the title company) may either be handed back or used as part of the earnest money required in the builder’s purchase agreement. Make sure that unless a legal agreement is signed between you and the builder, however, this money is refundable if you change your mind about proceeding with the purchase agreement. Keep in mind that some builders do not permit lot holds at all and others do it routinely – so there is no exact science to this. It’s not a good idea to tie up a builder’s property unless you are serious, however.

The question is often asked, “Is it possible to negotiate with a homebuilder?” Although the price sheet indicates the builder’s asking price, is this purchase the same as buying a re-sale home in that you can offer what you deem fair?

In today's buyers' market offers are the rule and not the exception to it, but who knows just how long that can last? You'll get your BEST deal:

• If the house is already built (there is already a monthly carry on it)

• if the location of the home site is not considered optimum and there aren’t as many people lined up to buy it (but it may just be perfect for you!)

• if there are only a few homes left to build and they want to pack up their tents and move to another tract of land to build another neighborhood

• if incentive monies the builder may offer can be used towards a price reduction instead of the “soft” costs (design center upgrades, landscaping, etc.) they hope you’ll use it for

• if the market forces them to minimize their risk and sell at lower margins

Let’s examine price reduction over design center upgrades for this “play money” the builder sometimes offers. Let’s say that the builder throws in a $7,000 incentive. This is usually given to you in the form of a credit in escrow to be used towards options and upgrades at the builder’s design center and/or towards non-recurring closing costs, and can be linked to your use of the builder’s preferred lender. At today’s interest rates, that same $7,000 taken off your loan amount amortized over 30 years may make a difference of only $30-$50 per month in your monthly payment, depending on the kind of loan program you use.

But $7,000 used at the builder’s design center may buy you your granite kitchen countertops and upgraded appliances, or your backyard patio, or your home theater and security system – items it may take you years to buy separately if you decide to do so. True, that extra money taken off your monthly payment may be meaningful to you. But ask yourself what you can spend $30-$50 dollars on each month without even thinking . . . a “grand-e cappuccino” every day before you go to work? A few movies out? Or, perhaps, a modest dinner out with your spouse? These are the things to think about before negotiating how the incentives will be used if any are offered.

$7,000 (or more) can put a big dent in your cash to close in the form of closing costs as well. If the builder has a larger chunk of money to use or you feel like asking for it, however -- why not ask for a "2-1 buydown" on the loan program that interests you? Coudn't hurt. So what is a 2-1 buydown? It means that the seller (builder) effectively buys down the interest rate of the loan for the first few years by throwing money at it. It subsidizes your payments for the first two years. For instance, a 6%, 30-year fixed rate loan can be bought down to 4% the first year of payments, 5% the second year and for years 3 through 30, it wil remain at 6%. Your payments are significantly lower while you have "hole in the pocket" syndrome, and if you know your income should rise to meet the 6% interest rate payment by year three, it's a big win for you, but it can cost a builder $10,000 to 15,000 dollars or more. Still, in a buyer's market, it sure doesn't hurt to ask if mnthly payments are the biggest factor in your purchase.

Whatever loan program you decide, however, do yourself a favor. Look at the HIGHEST payment you can possibly have on your mortgage instead of focusing only on the lowest one, no matter if you get a seller-paid buydown, or settle on an adjustable rate after five or seven year fixed periods -- whatever. It is because people did NOT think they would ever reach that high payment and counted on increased equity in their homes to bail them out in a refinance down the road that there are so many foreclosures happening all over the country.

Because of the mountain of disclosure and contract paperwork builders must present these days, it’s a good idea to set aside up to two hours for the actual purchase appointment. Find sitters for children and take time off from work if you must, but dedicate 100% of your focus to journey upon which you are about to embark. Your attention to the detail that will be explained to you at this point is of the utmost importance, since the investment you are making is a big one.

Purchase agreements for new homes look different in every state and with every builder, but most contain the same basic elements:

• the property address and floor plan you’ve settled on

• the parties to the contract

• the type of financing to be used and the loan program intended by the buyer

• the settlement or title and escrow companies to be used

• the base price of the home (sometimes with already agreed-upon architectural options added on)

• deed restrictions and survey

• title conditions

• substitution of materials and buyer selections

• risk of loss responsibility and coverage limits

• distribution of proceeds

• warranties by the builder

• the initial deposit, to be increased along the way based on certain benchmarks that will be explained as the buyers attach themselves more and more to the property over time.

• the estimated date of completion ( a calculated guess in the beginning), and

• legal instruments for protecting both buyer and builder regarding cancellation of the contract

• dispute resolution verbiage (use of arbitration or mediation if necessary)

• notices and defaults

• acceptance and --

• attachments (addendums)

If the salesperson is a licensed real estate agent, their fiduciary duties in representing the builder as the sellers’ agent will be spelled out. We are generalizing here, as you’ll find variations on this theme in different geographic areas.

There are many more paragraphs of the disclosures and within the agreement you are entering into that must be explained to you by your salesperson, which may include:

• the home you are purchasing will not be exactly like the models (paint colors, fixtures, upgrades, etc., since it is impossible to duplicate everything) -- but that the builder will use diligence in providing the same quality of the workmanship the models represents.

• a builder release of liability from guaranteeing a particular school for your children, indicating that it is your responsibility to call the appropriate school district for more information

• an explanation that the builder’s preferred lender may be owned by the same parent company that owns the builder may be presented (sometimes called affiliated business disclosures)

• soils conditions or natural hazards disclosures sometimes on separate forms may accompany the purchase agreement

• the presentation of a statement of identity for you to complete, indicating your names and addresses over the past ten years. This is used by the builder’s title company or attorney to begin its title search in yours and/or your spouse’s names, so that any title anomalies can be cleared up long before the home is complete and escrow is about to close

• verbiage that states that although being regarded as the “entire” agreement, the terms can be altered with more agreements (called addendums) by builder and buyer along the way

States like California have a litany of clauses and disclosures within their builder purchase agreements because of the litigious real estate atmosphere that has been created there over the past few decades. Other states may not have as many protections for both buyers and builders in place. If there is any question in your mind as to what you are getting into, we recommend that you have your own attorney review the builder’s purchase agreement before you apply your signatures. Reputable builders will not shrink from offering copies of sample contracts to your legal counsel, since they would rather not begin building your new home if you have reservations about the purchase.

If you have not been in touch with a lender or pre-approved by the builder’s preferred lender, the purchase agreement may indicate a date by which pre-approval must be accomplished. This means that it will be up to you to dot every “i” and cross every “t” with the lender by that date so that the builder can feel confident about building the house with the amenities you have chosen in mind. Any documents, such as bank statements, profit and loss statements for self-employed buyers, W-2 tax statements, verifications of employment from your employer(s), gift funds letters from family members, spousal and child support agreements, etc. – all must be submitted to the lender’s satisfaction and formal pre-approval must be accomplished before ground is broken in most cases.

Get copies of everything you have been asked to read, endorse, approve and sign – no ifs ands, or buts here. If the builder’s paperwork is faint or unreadable, insist on good copies. The escrow company or attorney usually sends more copies after they receive the paperwork, but get your own anyway.

The salesperson may also make an appointment with the builder’s design center for you to browse its selections, pending your official design center meeting. Even if this is not suggested, there is no reason not to ask for the opportunity to take a look before you feel the pressure to decide on cabinetry, carpeting, fixtures, appliances, and all the other little bells and whistles that may become available to you to deck out your new home. We’ll talk about the design center experience in a later chapter. For now, however, make a list of the largest ticket items you’ll want to look for that you know you can’t live without; a secondary list of items that are “possibles” ; and a list of “not-right-nows” so that you stay on track for the budget considerations you may have already determined must be adhered to. Otherwise, because the design center exists to whet your appetite for the gleaming and the upgraded, you may not rid yourself of the deer-in-the-headlights demeanor you’ll want to avoid when you first set foot into the facility.

It should be said that the order with which each element we are discussing here takes place may be different from builder to builder. Some builders will not set up an appointment to complete the purchase agreement until after you have received formal loan pre-approval. After that time, your deposits may become non-refundable. Others may offer pre-emptive reservations only – which means that their formal ability to sell may not yet be approved, forcing the builder to accepting reservations only. They base this on a predicted price range for each floor plan, pending more official bureaucratic green lights. Reservations deposits are usually easily refundable, but it’s wise to ask about the parameters being set by the builder if you get into this kind of agreement.

Visit Dena Kouremetis' web site at www.customhomesunlimited.com