Buying a New Home from a Builder

New developments in League City and Galveston County are at a all time high. It has been going on for close to 7 years with no end in sight. Some consumers are learning hard lessons about what can happen when purchasing a new home direct from a builder without representation. This year I have met with many homeowners that purchased a home 3-5 years ago from a home builder cannot afford to sell there homes. Many of them are stunned and rightfully so. You hear many times that you cannot lose money in real estate? The reality is many buyers are overpaying for new construction which is costing them when its time to sale.

Resale vs. New Construction – Why is new construction different?

Resale Homes – Properties are owned by Consumers. When you purchase a home from a consumer in an established neighborhood typically only 2%-9% of the total homes in that area or subdivision are on the market at a given time. Of that 2-9% they are all owned by different people. Most of the homes are occupied with homeowners. Most of those homes are bought and sold through Realtors which is documented in MLS. Most consumers have only one or two homes. When Realtors are involved all parties (buyer & seller) have representation.

New Construction – Properties are owned by corporations. Depending on when you purchase a home there can be between 100-1% on the market. All of those homes are owned by the same builder or by a few builders. All of those properties are vacant costing builders thousands of dollars a day. Very few if any of those homes are listed on MLS with no documentation of what homes sold for. Builders own hundreds or thousands of homes at any time in different developments, cities and states. The vast majority of new homes are sold by the builders own sales people who only represent the builders interest. Most hold no real estate license so they are not held to the same standard as licensed real estate agent.

Pricing

During the development of a subdivision homes are sold at different prices, that is not a shock to most people, but many assume that prices go up as a subdivision is built out. That scenario happens in a hot sellers market, but in a balanced or buyers markets typically that is not the case. What I see is more of a pricing curve, with the lowest sale prices being the beginning and end of a development. Builders initially want to get people in a subdivision because it is more appealing to the eye so they offer low prices. (People want to feel like there are making a good decision and they feel better when they see that other people purchased homes there.) Once they get enough development to look like growing community, they raise the prices. The first 20% of homes normally get lower prices. The next 70% of homes sold the builder continues to raise prices until they get close to closing out a subdivision. Then the last 5-10% of homes that are on the market they discount, sometimes deeply discount in order to close out the subdivision quickly. Why do this? It doesn’t make good financial sense to have sales people, constructions managers and trades all working on a few homes when they could move on to other larger subdivisions. In cases were subdivisions/developments are unsuccessful or have marginal sales some builders will liquidate there lots to other builders. Its not uncommon for them to be lesser quality builders.

The other issue is that builders give different prices to different people. The price sheets builders have are normally their dream price. Many times the price in MLS is 5-20% less. It’s not uncommon for me to contact a sales associate and I am immediately told they will knock $20,000 off a price in MLS. The reality is a property is only worth what comparable homes have sold for in the past 6 months. So when builders liquidate homes for 6 months your home value can drop significantly.

Builders make decision based upon their current need at the time. They make so much money on the 70% of people who buy homes at higher prices that they can afford to discount and liquidate property at the end of a development. Also they make an extraordinary amount of money on people who walk in and simply pay the builder’s dream price for a property. Homeowners typically have so much money tied up in their home they cannot afford to deeply discount their property just to move.

Using an agent will solve most of these problems. Agents can get the rock bottom price from the builder before negotiating. They can assist with negotiating for the lowest possible price and best terms. Agents know what builders have selling properties for. Builders welcome agents and will pay there commission. Builders know that an agent will simply take a customer to another subdivision or builder so are more likely to negotiate. An agent can also recommend or discourage upgrades based upon there resale value. There are many outstanding home builders in Clear Lake and Galveston County. They are like any business trying to make money, but that doesn’t mean you have to help them. There is no Blue Book value for new homes. You have something even better, a professional Broker with years of experience who will guide you through the process for free. You just need to call him. 281-450-8689.