The dramatic shift in the market with sky-high prices and low inventory isn’t just limited to resales. As many areas across the country are experiencing, there are extreme shortages in new construction.
Interest lists, waiting lists, and lotteries are all part of the process these days, along with low builder inventory and lower commissions. What used to be is simply not anymore.
Selling new construction in the current climate is uncertain, ever-changing and expensive. What was available days ago is no longer, or it has gone up in price substantially. Many buyers coming into the marketplace don’t fully understand the realities at play or what led to the challenges in the first place.
Buyers who were on the fence about buying a new home three months (or even one month) ago are in for sticker shock and disappointment when what they wanted might not even be available. Of course, there might be a new release of homesites in the future, price and timing to be determined. Take a number, and when the builder has something, they’ll call you, along with 100 other people.
With the average cost of a new home increasing by $36,000, according to the latest report by the National Association of Homebuilders, due to high lumber prices and a shortage of building supplies, real estate agents have to work harder than ever to identify, negotiate and seal a new construction deal for their clients.
As if all of this wasn’t difficult enough, the market shift has caused many builders to tighten their reins on contracts, procedures, policies and commissions. Here are 10 things to watch out for when crossing the builder threshold:
1. Customer registration
Who came first, the customer or their real estate agent? Ah, the million-dollar question as far as the builder is concerned. Given the increased building costs and tight supply of available lots and spec homes builders have to sell, some builders might not be as agent-friendly as they once were.
We all know that some builders have always honored the relationship between agent and buyer, even if the buyer engaged in conversations with the builder’s site agent before getting their agent involved.
Given today’s climate, you can never be too sure.
Carefully let your buyers know that if they even have so much as a random thought about wandering into a builder’s model (many do because they are curious and don’t think it calls for a full-blown appointment at that stage) to make sure they mention that they are working with an agent upfront and to write your name on any form the site agent asks them to complete.
If they aren’t sure what they are being asked to fill out, ask them to take a picture of the form and send it to you to walk them through the needed information.
Some builders have never played nice in the sandbox with agents even before the pandemic, and those same builders probably won’t be inclined to work with agents at all now. They might go so far as to encourage the customer to deal with them directly with promises of additional savings by not using a real estate agent and paying a commission.
If this is happening in your market, don’t be afraid to bring it up with your buyers. It’s better to have this discussion upfront. Explain that the builder represents itself and that you will not be able to assist if they will not allow a buyer to involve their agent.
Although there might be nothing you can do, the buyer should understand what this all means and the potential ramifications that could result in them engaging in a process they don’t fully understand. Only when armed with the pros and cons can they decide how best to proceed.
Speaking of commissions and representation, research the commission policy ahead of time — don’t assume that the builder will offer any compensation to an agent. Every builder is different. What one builder does might completely differ from another — you could have two builders in the same community with different commission policies.
Many builders are no longer offering 3 percent commissions, with no signs of changing any time soon. One sizable national builder in one of the markets where I’m licensed in Florida recently announced that it would only be paying 1 percent commission. A few months ago, it was offering 2 percent. A few days later, another prominent national builder put out a communication reinforcing its commitment to real estate agent relationships in this market and said it would continue paying 3 percent commissions.
Find out what the commission paid is based on:
- Is it the base price and structural options at the time of contract?
- Is it reflective of the home’s final price, including upgrades and selections made during the design process?
Many builders have quickly whittled down the total commission paid to the base price and structural options chosen at the time of contract. Given the cost of interior upgrades, such as flooring, cabinets, countertops and all the other fancy accouterments, this adds up to a substantial amount of money left on the table for agents.
Although the answer is likely no in this climate, also find out if the builder is offering any reimbursement for relocation referral fees. It pays to do your homework upfront, so you can plan accordingly and not be in for any surprises when going under contract or at the time of closing.
3. Fine print
Given today’s climate of uncertain construction costs, you need to read the fine print and look for any addendums that give the builder the right to increase the price of the home by the time the property closes.
There could be some hidden language that the price at contract signing is not guaranteed and could change based on market conditions and cost of materials.
When builders lock into a price today on a new construction home, they could be losing money compared to what they could sell that same home for in the near future. Given the long wait times to build, limited availability of homesites, and strong demand, the builder could substantially increase the home price and sell it for much more within just a few months of going under contract.
It’s best to tackle this uncomfortable topic and ask the site agent point-blank because it’s probably something they won’t freely bring up for discussion. It’s best that the buyer knows early on so they can decide if they’re willing to take on such a risk or not.
4. Closing costs
Most builders have pulled back on incentives offered to buyers for paying closing costs or prepaids. They have either significantly reduced them or completely wiped them away.
Make sure to clarify what closing costs are going to be the buyers’ responsibility. With new construction transactions, buyers typically bear more of the closing costs than the builder. Builders typically offset these costs with closing cost concessions offered and use of their preferred lenders in the past. Clarify this policy ahead of time so your buyers are prepared for all additional costs beyond the purchase price of the home and lot, which are likely to be relatively high before closing.
5. Price increases and bidding wars
When it comes to locking into a homesite and floor plan, all bets are off on what the price will be at the time of contract. Whatever it was a week ago no longer matters. While you are on a waiting list to hopefully get contacted about an opportunity to write a contract, be prepared for sticker shock, and prepare your buyers accordingly.
Stay close to the builders that your customer is interested in, and continually monitor where prices are, even if your buyer is No. 100 on the list. Many buyers fall off of these lists as fast as they put their names on. Continual communication will help give you a better idea of what price increases look like and a sense of the timing as they are happening.
As if steep price increases aren’t bad enough, many builders have switched to a multiple-offer selling style. They simply tell buyers to make their highest and best offer on an available list of lots or soon-to-be or newly completed spec homes.
Prepare your buyers for this possibility, and find out from the site agent if the builder has conducted a similar process in earlier phases or other communities in your area to gauge how much over asking prices the lots and homes ultimately sold for.
6. Floor plan swaps
When the time comes to finally write a contract, assuming the buyers haven’t been priced out, be prepared for the possibility of being told that to build the floor plan the buyers want, they will have to choose a different elevation than the one they originally wanted because it will need to look different than the identical floor plans that are nearby.
No big deal, right? Except for the fact that the elevation they need to have is the most expensive one with fancy exterior accents that will cost a few extra thousand dollars or so. The buyers’ backs are to the wall at that point after waiting several months just to have an at-bat.
7. Inspection and walkthrough fallout
Although builders allow inspections and walkthroughs to take place, get clear upfront on what items are considered fair game to be addressed. Given the current climate and challenges in scheduling crews and tradespeople, they might not be willing to address every drywall nick, dent, scratch or paint imperfection beyond a first or second pass. If there are still issues remaining before closing, they might push these to the buyers’ first year warranty period for correction.
Some builder contracts spell out the scope of what walkthroughs are designed to catch and what will or will not be addressed in detail. If this is not clear in the contract, discuss with the site agent and the assigned construction manager so that everyone is on the same page.
Find out what warranties the builder is offering. Some builders have outsourced warranties to a third-party company. Given the market dynamics, they might not warrant their work in the same manner as they used to as far as cosmetic, mechanical and structural warranties.
Everyone should understand upfront, so there is no disappointment post-closing when a problem occurs. Given that buyers are stretching the limits of their budgets to buy a home, they aren’t going to be too happy to learn that the builder might not warranty a home in the manner that they thought.
9. Deposits and cancellations
Coach your buyers to prepare for and expect delays. Despite the builder quoting a general timeframe to build the home, delays could be very likely given the current climate. Ensure the builder explains its cancellation policy and what happens to the buyer’s deposit money as a result.
Excessive builder delays are not grounds for a buyers’ deposit to be refunded, so impatient buyers need to beware. The buyer needs to understand that the builder would simply increase the home price based on the going rate at the time of cancellation and keep the buyer’s deposit to boot.
10. Home sale contingencies
Right now, it’s highly unlikely that any builder will consider a home sale contingency, no matter how far out the building timeframe is, unless the buyer’s current home is under contract with a scheduled closing date in sight.
Many buyers who need to sell their home to qualify to buy a new one might think they can do a contingent contract, even if they don’t plan to sell their home until it gets closer to their new one being completed if they built from scratch. These practices can prove difficult for some buyers to navigate and might not be possible.
Although no one knows what the real estate market will look like a year from now, the builders are functioning in the certainty of today’s current climate.
Selling now and moving into temporary accommodations (plus storage) can be costly, yet buyers waiting several months to try to sell their home might not bring in the same price it could today. Buyers might not be able to take the risk financially.
When real estate markets are challenging, builders love to be real estate agents’ best friends. When markets are booming, they can be a friend or foe depending on the circumstances.
Highly unusual times bring highly unique circumstances. Navigating new construction is like walking through a field of landmines right now. You can never really be sure of the ground you are setting foot on because all continues to change at a rapid pace.
As agents, it’s our job to arm our clients with all information to help them make the best decisions possible. At the same time, the clients’ choice of builder might end up paying agents substantially less or not at all. No matter what, we have to remain calm against a backdrop of skewed circumstances that are beyond our control.
In the end, we must support the decision of the clients to go whatever route they feel is best if they intend to pursue new construction. Even if we cannot fully assist them in the way we are accustomed to, arming them with a plethora of tools and resources to help them navigate the process will come back to benefit them and us in the long run.
Doing the right thing always yields various opportunities that come back to you by simply putting the right energy out there.