You’ve visited fifteen master planned communities, seven stand-alone subdivisions, toured dozens of models, narrowed the list of possible builders and floor plans to three finalists, and made your considered decision. Now you’re ready to sit down with a builder and discuss a sales contract.
At this juncture, you need to have the players on your team lined up, if you haven’t done so already. If you didn’t engage a buyer’s agent to help you in your search, you can still benefit from his or her expertise at this final stage. An agent can fill you in on the building firm and the location, help you sort out what’s an option and what’s not so that you are very clear on what you are getting and which options will make a difference from a resale perspective. More important, a buyer’s agent will help you negotiate both a sale price and financing details—for example, if you’re not going to use the builder’s lender and you want to apply his financing incentives to a flooring upgrade.
At this point you also need to engage the other players on your team—an attorney to review your sales contract, a landscape architect to help you choose a lot if you’re buying a production-built house, an arborist if large, mature trees were the reason you are willing to spend thousands extra for a particular lot, and a private home inspector to check your house at critical construction points.
This is also the time to look down the road and prepare for a few what-if scenarios. What if your house isn’t finished when the builder says it will be? You need a backup plan so that you have somewhere to live until your new house is ready. What if you are so freaked out that this project will flounder or are so afraid that you will hate it that you can’t sleep for a week? What if you feel great about the whole enterprise, but the house really does fall down? Your builder may offer a ten-year limited warranty, but it may not provide as much comfort as you think. The only prudent and realistic way to protect yourself from such a disastrous outcome is to do your homework and check on the builder’s reputation. If he has been building houses for fifteen years with 1,213 completed houses under his belt and legions of satisfied buyers, it’s unlikely that you, as his 1,214th customer, would experience anything untoward. If the builder has been in business for only one year, has built only 37 houses and you’re his 38th buyer, his track record is much shorter and you might be well advised to look at another builder who’s been in business for at least three years, and preferably five.
negotiatingstrategies
When you’re finally ready to get serious about a sales contract with a production builder, how negotiable is the price? When the economy is booming and there are lots of buyers out there, most home builders are not amenable to any protracted horse trading. When buyers are scarce, they will talk.
In good times and bad, however, you can always get the lowest price if you are the first or second buyer in a brand-new project. The builder is eager to gain credibility and wants to get some houses up in a hurry. He will intentionally undervalue the house to get a sale, and his lot costs at the beginning of a project are usually lower than they are at the end. Most land developers who sell finished lots to production builders have escalator clauses in their contracts with the builders that dictate a higher price for each successive parcel of lots purchased by a builder.
Being the first buyer, however, means buying off a floor plan, because the model hasn’t been built yet. Unless you are very good at reading floor plans (surprisingly, even many builders can’t read them well), you should wait until the model is built so that you can see what you are getting. However, if the home-building firm is fairly large, it may have already built the same model somewhere else that you can visit.
Similarly, at the end of a project, when a builder wants to close down operations and start up a new project, he may have a close-out sale. The last houses will be higher priced than the very first house was, but the builder may be willing to give you a price break.
You can also get a discount on an “inventory” house—a house that is finished or under construction but has not yet been sold. A builder can intentionally have a few inventory or spec houses to sell to buyers who want a house in 30 to 60 days instead of the 120 to 150 usually required to build one from scratch. A builder may also have inventory due to a deal falling through because of a sudden change in a buyer’s circumstances, such as a job transfer or, less often, when interest rates go up. If a house is not finished on time, a buyer’s lock-in on a specific mortgage interest rate may expire and he may not qualify for another loan at a higher rate.
The time of year can also affect a builder’s desire to sell off inventory; getting unsold properties off their books will produce a better financial statement at the end of their fiscal year. Selling off inventory at the end of the fiscal year also increases their gross sales volume, which can affect their stock value. However, the fiscal year for a home-building firm may not necessarily coincide with the calendar year. After you narrow down your search to three or four home-building firms, ask each one when its fiscal year ends.
It’s easy enough to learn if a builder has any inventory houses at a particular site—the sales rep there will always know. Inventory houses do have their downside, however. The floor plan, flooring finishes and colors, and cabinetry will already have been selected and you will have to live with someone else’s taste—the very reason that many people decide to buy a brand-new house in the first place.
There is another situation where timing can affect the price. If you are buying a townhouse, being in the right place at the right time can mean a price break. A builder’s lender may insist that he sell five in a row of nine to get his construction loan. If you are that fifth buyer, you are in luck.
Bear in mind, however, that a price break on the base price for a brand-new house does not mean big bucks, because the net profit for most production builders is not that great—nationally, according to the National Association of Home Builders, it averages about 6 to 7 percent. If you demand a price reduction of 5 percent, you’re basically asking the builder to build for free. Pushing him to negotiate away most of his profit can be shooting yourself in the foot—if there is no profit, the builder won’t be around to service your house after you move in. Beating him up to get the best price means he may not be around to service the warranty and all those niggling little problems that every new house will have in the first year.
Many production builders flat out refuse to negotiate the base price. When a builder does negotiate, it is often when he artificially pumped up the price in the first place. One way to find out if a builder deals on the base price is to ask the residents who are already living in the subdivision if they got a deal on the base price or if the sales agent said, “This is the price.” When you’re asking, try to talk with residents who worked with the same sales agent you are talking with.
When a builder deals, someone may actually get a deal, but you can’t be certain that that person will be you. Besides the financial issues, dealing can poison relations among neighbors in a new community as some discover that they paid more than others.
In a stand-alone project, dealing is less likely. But in a planned community with four or five builders grouped at each price point, the competition can become fierce, and dealing can be common.
a price break on options
Negotiating on option prices is a different story from the base price. With options, a builder’s markup can range anywhere from 25 to 50 percent, and sometimes even more. There is plenty of room for maneuvering, unless the market is very hot. If buyers are lining up to sign on the dotted line, most builders will say, “The price is the price” for everything, including options.
The high markup for options, however, explains why builders often use them as incentives when things are slow—they’re actually not giving that much away when they offer ten thousand dollars worth of options “free to buyers who purchase before the end of the month.” As a Virginia builder said, “If a buyer only takes two thousand dollars worth of options, no money is made. But if the buyer takes twenty-five thousand worth of options, I make more money so I have more leeway.”
As you bargain for options, though, strike for prices that reward both sides—you get some price reduction but the builder gets some reward for the extra work and cost. If you want the fifteen-hundred-dollar upgraded kitchen cabinets shown in the model, offer the builder eight hundred to cover the extra work plus some extra profit.
Most options must be built into the house as it goes up. But flooring is one that can readily be changed after you take possession. Before you sign up for the builder’s upgraded carpets or hardwood, price out what several flooring stores would charge. The dimensions given in the builder’s brochure may be sufficient to get a price; otherwise the flooring salesman will have to measure the model. You may find that the flooring dealers offer a better price, even if they must move your furniture after you have moved in.
When the builder is ready to move on, he will be selling his furnished model. Purchasing it is rarely a good idea, however, because it will be loaded with options and it will be wildly overimproved compared to all the other houses in the neighborhood. Unless the builder is offering a very large price reduction, you’re better off buying a house and improving it to a degree commensurate with the other houses in the subdivision.
When negotiating anything, you have the most leverage before the contract is signed. Some home builders want you to order the options after the initial contract is ratified and construction has begun. But by that time, you’re too far into the deal to back out, and you will have to accept the builder’s prices on optional upgrades.
abuyer’sagent
Some people enjoy haggling over prices, whether it’s carpets, cars, or houses. But you may dread it, and want an experienced negotiator on your side when you are finally ready to sit down with a builder’s on-site sales agent and negotiate a sales contract. Enter the buyer’s agent, the first person you should engage for your new-house team. A buyer’s agent is a real estate agent or broker who offers advice as you go through the process of visiting models, comparing features, sorting out options, picking a floor plan and a lot, and ultimately agreeing on a price.
Unlike the builder’s on-site sales agent, who can only discuss the product he or she is selling, a buyer’s agent will point out the pros and cons of many builders and communities. Moreover, the buyer agent’s services are usually costless—in most cases, the builder pays the agent a sales commission, even though the buyer agent’s loyalties are with the buyer and not the seller. (In the past, a real estate agent’s “fiduciary responsibility” was always to the person paying him or her the sales commission, which traditionally has been the seller. That meant that an agent was legally obliged to disclose to a seller any financial information that you disclosed even when you enlisted the agent to work with you. Today, however, an agent must disclose at the time you engage him or her who she is representing. If this is you, her fiduciary responsibility is to you and not to the seller, even if the seller is paying the commission.)
But there is a caveat here: Most production-home builders stipulate that a buyer’s agent must accompany you the very first time you visit a model and sign a visitor card in order to receive a sales commission. Some are slightly flexible on this point, and will still honor a buyer’s agent and pay the agent a commission if the agent faxes ahead or communicates with the builder’s sales agent within a short time of your visit.
If you like to go off on the spur of the moment and cruise models, this will put a crimp in your style. But balanced against what an experienced buyer’s agent can offer, the loss of spontaneity is worth it for most buyers. A major advantage is a much more efficient housing search. Rather than spend several weekends just getting a sense of what’s out there, you can quickly narrow the field in only one or two hours at the agent’s office. An experienced agent will be keeping tabs on all the new communities in his or her sales territory, which in some parts of the country can easily number thirty-five or more. She can readily match the appropriate ones with your location, price, size, and feature preferences. Moreover, the agent should have brochures from all the new communities in her sales territory. If you are just starting out and clueless about the market, the agent can outline what size house to expect in your price range, what to expect in closing costs, and how you should get started in obtaining financing. If you are relocating, buyers’ agents offer another advantage: Some will regularly check on construction progress and even take pictures for their clients.
How about help with the price of the house? This is entirely dependent on the market. When it’s booming, the builders won’t budge on the price at all. Even the occasional incentives such as “$10,000 worth of options for $5,000” or “free upgrades on appliances” that are common in slow times will disappear. If the market is so hot that builders are holding lotteries, as has happened in Southern California, some builders won’t cooperate with buyer’s agents at all. If that’s the case in your area and you still want to use an agent, you will have to pay the commission, which is usually 2 to 3 percent of the purchase price.
When the market is slow and buyers are scarce, there’s some latitude in the price, and the experienced agent will know how to ask for it. Most builders will still hold fast on the base price, but they will knock a bit off extras. “The more extras you put in, the more you can negotiate. If you put in twenty thousand dollars of options, you may get the builder to knock off five thousand,” explains buyer’s agent and Realtor Sandra Kessler of Montgomery County, Maryland. When sales are slow, a buyer’s agent can also look up the sales record for a project and gauge how hungry the seller is.
There are two exceptions to a no-price-breaks policy, even in the hottest markets, for which a buyer’s agent can be especially helpful. If someone else’s deal falls through and the builder has an inventory house sitting on the ground, he’ll negotiate on the base price as well as the options. The other exception is in large planned communities with four or five builders competing at the same price point. One of the builders may be willing to adjust the price or amenity package or pay some of the closing costs—whatever it takes to get the buyer to sign a contract. An agent who sells frequently in the same planned community will know which buttons to push for each builder.
Whether the market is hot or cold, a builder will always offer lower prices at the very beginning of a project, when there’s no model. Many buyers are hesitant when there’s nothing to see, but an experienced and resourceful agent will know how to get around this. “Since builders tend to use very similar floor plans, I may know of another builder’s model that is very close, or a resale house that is very similar,” explains Miami Realtor Dennis Hoffman.
At the end of a phase in a large development, a production builder may also give a price break to close out and get financing for the next phase. A well-connected buyer’s agent in frequent communication with a builders’ on-site sales agents will often know before the general public when a builder is at this point and what buyers should expect. “If a builder has three or four houses left in phase one that he must sell before beginning phase two, he will very likely give a concession. To get a deal, you must take the house and lot that’s available, and these may not be the most attractive. You must also have a loan preapproved and no contingency or house to sell first,” says Los Angeles, California, Realtor Meredith McKenzie.
Another important service that a buyer’s agent provides is clarifying exactly what’s included in the standard, base price and what’s an upgrade. This can be essential in markets where the buyers are so numerous the builder’s on-site sales agent may not be able to give you all the time you need. An agent’s clarification is especially helpful when the options are unusual. Buyer broker Sally Kelley of Ann Arbor, Michigan, says that in her market, upgrades not only include the finishes such as flooring, but also structural items such as the size of floor joists. Even the material used for interior trim around doors and windows at the base of the wall can be an upgrade. The standard trim in mid-market houses in Ann Arbor is plastic; wood trim is an upgrade.
Agents can also offer advice on options that will enhance resale. These vary from market to market, but on one point, buyers’ agents agree: Colors should be neutral—beige, taupe, or stone—and steer clear of blue, which is always hard to resell.
Most production-builders have a sample room in the model where buyers can pick flooring finishes, cabinet styles, and upgrade features such as polished brass faucets. In some markets, however, a few of the national builders have large, centrally located design centers with many more items. But, cautions McKenzie, “In either case, the builder’s salespeople are there to sell the best and most expensive upgrades. Buyers can get carried away and throw all common sense out the window. In five years no one wants to buy a bathroom with fuchsia colored fixtures. Resale buyers will take one look and knock twenty-five thousand off the price to redo it. A good agent will accompany buyers to the design center, rein them in, and advise, ‘Here’s how you can make the house your own but keep it more neutral for resale.’ ”
In addition to the house itself, a buyer’s agent can offer invaluable advice on choosing a lot. “If it’s a bad lot, resale is tough,” Realtor Dennis Hoffman points out. “If a builder offers an incentive on a lot, it’s usually because it’s harder to sell. And if it’s hard to sell the first time, it may be hard to resell.”
areal-estateattorney
The second player to draft for your new-house team is a real-estate attorney. You may regard spending a few hundred dollars for a review of your sales contract as unnecessary. But prudence dictates a thorough explanation of the terms of a contract for a purchase of this magnitude, with bankrupting potential if it goes awry.
Equally important, along with the buyer’s agent, you need another person on your side of the table who will be protecting your interests. Almost without exception, a contract is written to favor the writer, in this case the builder. You need to insure that this favoritism is not at your expense.
The attorney you hire, however, must have the appropriate expertise. Within the area of real-estate law, there are a number of subspecialties such as commercial leasing, landlord-tenant relations, and title searches. You want someone who specializes in residential real estate and new-home construction and who is knowledgeable about production-builder sales contracts or custom-home-builder sales contracts, depending on which you need.
If you plan to buy a new house in the same jurisdiction where you live now, you can ask friends or a buyer’s agent for attorneys’ names. If you are buying a new house in a different location, you should ask the bar association in the new place for a referral. The lawyer you hire must be familiar with the law in the jurisdiction where you are purchasing the house. Contract law varies from state to state and even between jurisdictions within the same state.
When you get two or three names, you should contact each one by phone. Your first question should be, “Does your firm represent my builder?” If the answer is yes, then you have to call another attorney, since an attorney who represents both sides of a contract has a conflict of interest. Your next question should be, “Have you previously reviewed contracts from my builder?” If the answer to this is yes, you may have found your attorney.
“If the attorney has already reviewed contracts with your builder, he will have already gotten as good a compromise as he will get. The attorney must review the contract every time for any changes, but with prior negotiations he knows how much the builder will accept,” says attorney Robert McNees of Carol Stream, Illinois.
Bear in mind, however, that the attorney’s job is to come up with compromises that are acceptable to both sides. To do this, the attorney must know what the builder will or won’t do. “The builder can just get upset if you try to give the nth degree of protection for the buyer. No builder will accept that,” McNees says.
An experienced real-estate attorney should be able to review a sales contract with a production builder in about an hour, especially if he or she is already familiar with those written by your proposed builder. A custom-home-builder contract is much more complicated and requires more time to review. But since your risk is much greater, it’s that much more important.
The time to have an attorney review your sales contract is before you sign it. If waiting means losing out on a builder’s about-to-expire sales incentive such as the twelve-thousand-dollar finished-basement upgrade included in the base price, you need to write in this critical phrase: “This contract is subject to review and approval by purchaser’s attorney for [X number of] days. If the purchasers’ attorney disapproves of the contract, it will be canceled. If the attorney approves the contract, it will be enforced.” You fill in the number of days—insist on at least five business days. This clause will enable you to get the special deal and still meet with an attorney to get his or her input.
theprivatehomeinspector
On that final walk-through before signing the papers and taking possession of their brand-new house, observant buyers will catch paint drips and scratches on a hardwood floor. Thorough buyers will know to check all the doors to make sure that they open and close tightly. Very thorough buyers will check all the windows to see if they open easily and if the tilt feature really works on the double-hung type that makes the outside surface easier to clean.
But only an experienced hand with years of construction under his belt would know to look up the chimney flue—a favorite place to stash scrap lumber—or take note of shortcuts that can compromise the structure or the owner’s comfort—missing air seals, shortchanged insulation, or skimped nails for the vinyl siding (if there aren’t enough nails, a strong wind will blow it off). Enter the private home inspector, another key player, whether you’re purchasing a production or a custom-built house. Once a rarity on a residential construction site, private home inspectors are increasingly common.
Most buyers who engage a home inspector do it at the end of construction, when the house is finished. You would be better served hiring one before construction begins. A home inspector’s expertise and experience can be invaluable as the house goes up. If a defect is found early on, it will be much easier and less costly to repair—fixing the foundation soon after its poured is a lot easier than after the roof is on.
If you are working with a custom or semi-custom builder, bring an inspector on board when the house is still in the planning stage and there’s an opportunity to modify the design or specification list. While you may be well versed in cabinetry and flooring finishes, how knowledgeable are you about product reliability when it comes to framing materials, roofing, windows, and all those other items that are critical to structural integrity and comfort? A home inspector can also review the building plans for those prosaic details that can be overlooked, such as flashing, on-site runoff, and a good airflow in the house. Your custom builder’s design and specs may require only minor modifications or none at all, but having an outside review can have a calming effect.
If you’re working with an architect, he or she will have ironed out the construction details, specified all the materials, and made the call on quality issues. However, if you are not paying the architect to monitor construction or if you want more frequent monitoring than the architect can provide, you should hire a home inspector to make regular on-site visits.
If you are buying a production-built house, once the house begins to go up you should have a home inspector review the construction at four critical points:
♦ The first review should be done after the footings, foundation walls, and drain tiles are in, but before the dirt is backfilled against the basement foundation walls, which will cover all this up.
♦ The second review, generally referred to as the “pre-drywall” visit, should be done after the framing is up, the windows are in, and the electrical, plumbing, and heating and cooling systems have been installed but are still exposed. The exterior grading should also be checked at this time because a builder will be a lot more willing to fix it before any sod or landscaping have been planted.
♦ The third review is an insulation check; some inspectors do this and others instruct the home owners on what to look for.
♦ The fourth review is the final walk-through.
In the course of checking the construction, home inspectors may pick up building-code infractions that a building official may miss, especially since they work at a slower pace than most municipal building officials, who frequently perform as many as thirty inspections in a single day.
An experienced home inspector can also help buyers in negotiating repairs with the builder. A code violation must be fixed, but in many cases the things that an inspector finds are workmanship issues that a builder may or may not agree to address. Knowing this, a good home inspector will help a buyer prioritize and decide “what is worth going to war over,” said home inspector J. D. Grewell of Silver Spring, Maryland.
Many home inspectors have had hands-on experience in construction, and buyers should insist on it. Some have college degrees in fields related to construction such as engineering and architecture. A few have passed the same code-certification examinations that the building-code officials are required to pass. After fifteen years in construction and fifteen in home inspecting, Joseph C. Walker, a home inspector in the Maryland suburbs of Washington, D.C., observes that it also helps to have strong diplomatic skills, a thick skin, and an eye for the telling detail.
“A good home inspector needs the skill of a diplomat to deal with the site superintendent’s frequent hostility, the skin of a rhinoceros—you can’t be afraid to look stupid if you encounter a new product, and you have to be able to take the heat if a superintendent vigorously disagrees with you—and the eye of a detective. A subtle clue often belies a significant problem, and one clue often leads to another. Since you don’t have time to check all of the million and one details in a new house, you have to look for clues to tell you where to focus your attention. For example, a visible, basic mistake in a furnace installation probably means the installer didn’t know what he was doing, and the whole system needs a closer look,” Walker says.
A credential to look for when hiring a home inspector is membership in the American Society of Home Inspectors, known as ASHI. This credential indicates that the individual has completed at least 250 home inspections and passed a rigorous exam. ASHI members are also required to take continuing-education courses to keep abreast of new products, construction techniques, and research on building and product failures. Though some home inspectors and ASHI members specialize in new construction, buyers are better served by those who routinely look at both new and old houses. Such a person will know which items will cause problems in the future if not addressed immediately. Another less widely held credential to look for is membership in NABIE, the National Academy of Building Inspection Engineers. NABIE is affiliated with the National Society of Professional Engineers, and its members are licensed, professional engineers.
The working style of home inspectors can vary. Some provide a checklist of their findings, some write a narrative report, and some do a combination of both. Before hiring one, you should ask to see several of his reports to get an idea of what to expect. You should also ask how soon after an inspection you can expect to get the report. Some look at everything and some leave cosmetic issues like gauged floors, scuffed paint, and nail pops to the home buyers. They check appliances, the building systems—structure, plumbing, electric, heating and cooling—and the exterior of the house, including grading and paving.
Some inspectors charge by the hour and some by the size or price of the house. The inspection of the footings, foundation walls, and drain tiles, as well as of the insulation, will be short because there won’t be much to see. But the pre-drywall inspections and the presettlement “punch list” can take three to four hours, depending on the size of the house.
Centex, Kaufman & Broad, and US Homes, three of the largest home-building firms in the United States, and many other builders welcome a home inspector as another set of eyes that gives a buyer a peace of mind. But not every builder embraces this idea, so you must discuss it before you sign a sales contract and include the details such as the number and type of inspections you want in a contract addendum.
You should also note that getting your home inspector there at the right time for each inspection is your responsibility, not the builder’s. You need to monitor the progress of the house so you can tell the inspector when to come and take a look—nothing is more disheartening than to find that the foundations have been covered over with the backfill before the inspector had a chance to inspect them.
protectyourselffromconstructiondelays
When you’re flush with the heady decision to buy a new house, you’re not entertaining the possibility that it won’t be finished when the builder said it would. But your builder will allow himself plenty of time and then some to build your house. And this will be stated in the sales contract. Although the actual time required to build the house may only be four months, the builder will usually give himself a year to cover all possible contingencies. However, in some jurisdictions, a builder may legally give himself as long as two years or face no time limit at all. For most production builders, the delivery date stated in the sales contract is non-negotiable.
If you tailor the sale date of your present house to the builder’s verbal promise of a delivery date of your new one, but the builder hasn’t finished yet, he will consider this your problem, not his. If you are saddled with extra expenses for storage, temporary living quarters, and having to move twice, that’s too bad.
The only way to avoid this scenario is to make a contingency plan before you sign a sales contract, either for your new house or your old one. “Put yourself in a position to stay in your old house until the new one is ready,” advises Gaithersburg, Maryland, attorney Jim Savitz. “Add a provision to the sales contract for your existing house to delay settlement if your new one isn’t finished. Otherwise, if you agree to be out by July 1 and then the builder says, ‘August 1,’ you are stuck.”
One way to stay in your existing house is to sell it to your buyer as planned, but then lease it back for a specified period of time. If you want to do this, a residential lease-back agreement should be included with the sales contract, advises Los Angeles attorney Paula Reddish Zinnemann, who is currently the commissioner for the Department of Real Estate for the State of California. While such a lease-back proposal helps you, it can discourage potential buyers for your house, points out Miami attorney Dennis Haber. “People move because they have to move. Not too many want to buy your house and rent it [back to you]. They’re buying because they want to move into it.”
Counters Zinnemann, “This can be a question of ‘what will the market bear?’ If you have a buyer who won’t accept a contingency relating to the possibility that your new house won’t be ready, is there another buyer right behind him or her who will? It is also possible that the buyer of your old house could offer you such a great deal that it’s worth a move to an interim place until your new house is ready.”
If the move-in date is very important, another strategy is simply to buy a house that is close to completion. You’ll have fewer choices, but it will be completed on time.
Even if a builder gives every appearance of refusing to negotiate on anything, the contract is not written in stone, and you can always ask. For example, you can add a clause stating that if the house is not finished by the builder’s expected completion date, you as the buyer have the option to cancel the contract, getting back both your initial deposit and any additional deposit moneys given for options and upgrades. Since this could leave the builder with an unfinished house that he has to sell to someone else, he’s more likely to agree if you do not select wild colors, unusual finishes, or anything else that will have limited appeal to other buyers.
At this point, you might well be asking: How long does it normally take to build a house and what factors can delay completion?
Although three or four months is the standard time frame for constructing a production-built house, if a market is very active, a builder may have a long list of houses to build before yours, as well as problems with labor and material shortages. The most common reason for delays, however, is the weather. The 120-day time frame already takes this into account, but if your new house will be built in an area with severe seasonal weather conditions, the builder might tack another two months onto his verbal estimates. The additional six months to a year or even longer that he builds into the sales contract is just added protection against any unforeseen contingency.
Besides the weather and the vagaries of the market, a builder’s own circumstance can affect his ability to deliver a house in a timely fashion. Before you get very serious about a particular house and a particular builder, a few simple questions can help clarify when the house will be finished, and whether to move forward with the deal or move on:
♦ Have you built in this jurisdiction before? If not, there may be unanticipated delays because building-permit and inspection procedures may differ from what the builder is used to.
♦ Does he have a building permit for your house? If he does, he can start to dig the hole tomorrow. If he doesn’t, there can be a significant delay, as some jurisdictions can take four to twelve weeks to issue a permit.
Once a sales contract is signed and the house started, buyers themselves can have a hand in causing delays. Deciding to alter a wall or add a closet can throw off the schedule; so can foot-dragging on items such as cabinet selections. Although most buyers assume these go in at the end, it still takes another thirty days to finish the house after the cabinets are installed.
While the builder protects himself in case of delays, he is as eager to finish building as you are. The clock on his construction loan starts ticking as soon as he starts digging. Any delays will cost him and eat into his profits.
third-partyten-yearlimitedwarranties
Many production-home builders offer third-party ten-year limited warranties on the houses that they sell. This can have a tonic effect on anxiety-laden buyers, about to make the biggest purchase of their lives. But with a careful reading of the fine print, you will realize that the emphasis should be on the “limited” aspect of these warranties, not the “ten years.”
A quick look at the money numbers also indicates that these warranties won’t cover much. For a $200 thousand house, a builder can pay anywhere from two hundred to fifteen hundred dollars for a limited ten-year warranty. Since the warranty has a “ten-year tail,” as they say in the insurance business, it’s clearly not going to cover much.
During the first two of the ten years, the builder is responsible for the warranted items. The warranty companies will step in then only if the builder refuses to make a repair, doesn’t repair it to the buyer’s satisfaction, or goes bankrupt. The warranty company becomes directly involved only in years three through ten.
Over the ten years, the coverage decreases dramatically and quickly. During the initial year, a long list of workmanship items such as leaking gutters, warped doors, and loose or buckling carpet is covered. In most states, the builder is legally required to warrant these anyway. The threshold for repair by the warranty company, however, is generally much higher than a builder’s. For example, some warranties state that a drywall crack will be repaired only if it is more than 1/8 inch wide. When you realize that a crack this wide may be visible from twenty-five feet away, if the wall is a light color, you begin to understand what “limited” means.
During both the first and second years, certain parts of the mechanical systems such as air ducts, electric wiring, plumbing pipes, water supply, and clogged sewers are covered. For the entire ten years, only the failure of components with “major structural defect potential” deemed to affect the safety of the building occupants are included: roof-framing members, floor-framing members, bearing walls, bearing columns, headers or lintels above doors and windows, girders, load-bearing beams, and foundation walls and footings. Some load-bearing elements, such as roof sheathing and subflooring, are excluded because, contrary to what you might think, these are not considered major structural elements. Other elements that most buyers would consider integral to the house such as interior partition walls, doors, windows, drywall, and any type of exterior siding are also excluded because these are not load-bearing elements.
Even elements with “major structural defect potential” are not covered unless they pass the structural-defects test. Some of the warranties have criteria based on an “unlivable, uninhabitable” standard, rather than a precise measurement. The damage must:
1. occur to one or more of the specified-load bearing elements
2. be sufficient to cause the load-bearing element to fail
3. render the house unsafe and uninhabitable
These can be hard standards to meet. It can be difficult at times to discern if an element has failed, and “uninhabitable” can mean it must be condemned by a local jurisdiction.
Some warranties give precise warranty tolerances. Although this would seem to give the buyer more protection, it can actually end up protecting the builder and the warranty company more than the buyer, because the allowable tolerances, like the ⅛-inch-wide crack, can be to the far side of acceptable.
There are other aspects of the warranties that can further limit the protection offered. For example, the warranties clearly state that they cover only completed dwellings. “If a window leaks in the first year because the builder failed to install flashing or did it improperly, the warranty company may say that the house is not a ‘completed building’ and therefore is not covered,” said John Nethercut, an assistant attorney general with the State of Maryland who handles consumer complaints about builder’s warranties.
Given the obvious limitation of the warranties, what happens in practice? In the real world of home building, reputation and referrals of satisfied customers are everything. A reputable builder will repair items at lower tolerances than warranties may specify. For example, toward the end of the first year when the house has gone through a complete cycle of heating and cooling, many builders will repair all the visible hairline cracks in the drywall resulting from settlement or shrinkage of the wood framing. They know that if they fixed only those cracks that exceeded 1/8 inch in width, their buyers would be screaming. Likewise, warranties cite tolerances for bows of walls, but a reputable builder knows that if you can see it, you should fix it.
Clearly, the reputation of the builder is the best warranty of all. Richard Rivin, vice president of LIFE, INC., a Chesapeake, Virginia, construction and consulting firm that investigates building failures, says that in his experience, “Historically, a good builder is more important than the words in a warranty. But even with a very reputable builder you could still have trouble with one unit, a freak occurrence; just like with cars, you can always get the lemon.” As one Maryland home builder puts it, “Some houses just have bad karma. We don’t know what it is; all the houses were built the same, but something happened to one.” In such an unhappy event, you need to know that the builder will stand by you until the problem is fixed.
A reputable builder will not only stand behind his product, he will go back and fix structural defects that occur after the warranty expires. To find out how firmly the builder you are considering stands behind his product, ask some of his buyers. If you want to be really thorough, visit a project that is four or five years old. Many of the original purchasers may have moved, but you should still be able to find enough of them to get an idea.
Since a reputable builder will often exceed and certainly match what is offered in the limited warranties, why do they offer them at all? In a few jurisdictions, they are required by law. But the more common reason is that the ten-year limited warranties are a good sales tool that can help calm nervous buyers. In some instances, builders offer them because the competition does. Unstated but certainly advantageous to the buyer: If the builder goes bankrupt, the warranty provides initial coverage for workmanship, materials, and mechanical systems and longer-term coverage for big-ticket, catastrophic structural failures.
Absent the ten-year limited warranty, the only warranty protection you have is the legally required one that in most jurisdictions is only twelve months (in some states, certain parts of the structure such as the foundations may be warranted for a longer period). If builder errors are not caught in the municipal building inspections, or by your private home inspector, or within the first twelve months, your only recourse may be to alert the local building department and hope that they can put “practical pressure” on the builder. If he is still active in your jurisdiction, he has an incentive to cooperate because the local building department issues the COs—the certificates of occupancy. Without a CO, a builder can’t sell the house to you and get his money out. Absent this pressure, however, you can have a real problem.
This lack of consumer protection is yet another reason why dealing with a builder with a proven track record and a rock-solid reputation is so important.
buyer’sremorse
After you’ve finally signed on that dotted line, you may find yourself nearly incapacitated with buyer’s remorse—unremitting doubt that you will like the house, that you got a good price, that your friends and family will like it, that you will be able to sell it. Most people get over this and go on to enjoy the process, and experienced sales and buyer’s agents can offer reassurance. But you may be one of the few who has a hard time trusting your judgment in making the biggest purchase of your life.
One solution for some buyers is rewriting the contract for a smaller house or cutting back on some of those pricey options. But some buyers just get completely derailed. When this happens, usually before the contract has been ratified—that is, signed and dated by all parties—some builders will return the deposit check upon meeting with the customer. They know from experience that trying to work with someone who is that unhappy is impossible for both parties.
Of course, you are not going into this with the expectation that you will become unglued when the contract is signed. Nonetheless, you should ask the sales agent what the builder’s policy is regarding buyer’s remorse, or discuss this with a buyer’s agent if you are working with one.
In addition to the individual builder’s discretion, new-house buyers in some states such as Maryland and Virginia can legally cancel their contracts under certain circumstances. In both states, if the property is within a development with a mandatory homeowner’s association that all buyers are obliged to join, the builder must furnish buyers with pertinent and current association documents detailing all property restrictions (for example, no fence in the front yard) and regulations (for example, shoveling snow is the individual homeowner’s responsibility). The buyers have a stipulated but brief period to review these documents. During this review period, they have the right to cancel their sales contract.
How do you find a buyer’s agent? Some agents work exclusively with buyers. Most represent both buyers or sellers, but not in the same transaction. You can look in the Yellow Pages for a “buyer broker” who specializes in representing buyers, call a traditional real estate broker and ask for an agent who represents buyers, look on the Internet, or get names from friends and neighbors.
Since purchasing a new house differs significantly from a resale, confirm in that first phone call that the agent regularly works with such buyers. And since much of the agent’s advice will be about resale issues, you also need to confirm that the agent regularly works on resales that are two to ten years old. Agents and builders both say that projecting trends farther than ten years is iffy. If you expect to be in your house longer than that, the resale aspect is less critical.
Finding a buyer’s agent who has worked as an on-site sales agent for a builder and understands a builder’s mindset is a definite plus. A credential to look for is ABR, Accredited Buyer’s Representative. This means the agent or broker is a graduate of a certification program run by the National Association of Realtors.
Arrange to meet the agent at his or her office so that you can check out the support services as well as the agent. If the office appears disorganized and there’s no receptionist to promptly answer the phone, the agent may not be able to give you the service that you need.
To gauge whether or not you and the agent are a good match, what questions should you ask? Meredith McKenzie, a Realtor in Los Angeles, California, for more than twenty years, offers these suggestions: “Your first question should be ‘How long has the agent been in the business?’ The more experience, the better; but agents generally agree that it takes at least two years to be effective. Next, ask how many buyer transactions the agent closed in the last six months, and of these how many were resales and how many were new houses? If you already know what area or builder you are interested in, ask if the agent has worked with builders in that area. If the agent says no, ask for a referral for someone who does. Since the agent makes money on a referral, he should be happy to give you one. Next, ask for a list of previous clients who bought houses within the last year and call at least three of them.
“When you talk with the former clients, ask them, ‘Were you happy or unhappy? Would you choose this agent again?’ The more specific you can be in your questions, the more you will learn about the level of service the agent provides, which is what truly differentiates one agent from another. For example, ask, ‘Did the agent walk you through the paperwork and explain the loan process? Did the agent walk you through the sales contract? Did they bring up negotiating points? Did they help explain the financing terms and what other costs would be involved in the transaction, such as closing costs? Did they discuss other costs that you will likely incur in furnishing the house, such as window treatments? Did the agent accompany you to the builder’s design center to help you pick out stuff? Was the agent there at the preclosing walk-through when you assessed the condition of the house and drew up a to-do punch list?’ ”
On this last point, McKenzie says that she always recommends that buyers hire a private home inspector for the walk-through, but he tends to focus more on the guts and structure while agents look at the practical and aesthetic. “Do all the doors and windows open and close? Is there caulk around the bathtub? You can’t have too many eyes to look at a house, and we all have our blind spots.”
Most buyer’s agents request that their clients sign an exclusive agreement for a fixed period—usually sixty days—and often within a certain fixed geographic area. Many agents prefer a more formalized contract that also states that any houses shown to you by the buyer’s agent must be purchased through the agent’s broker to ensure that the agent gets the commission. The contract may also stipulate that if you visit a model home on your own and don’t make clear that you have a buyer’s agent (and hence the builder’s sales agent won’t honor your buyer’s agent), you will owe your agent a commission if you buy a house from that builder.
Some contracts also address the possibility that you may not find what you want in the new-house market and decide to buy an existing house. If you elect to purchase one directly from the owner (otherwise known as a FSBO—a “for sale by owner” transaction), you will owe the agent a sales commission.
A buyer’s agent may ask you to sign a contract on first meeting, but some prefer to sign a contract after an initial outing and a sense that a comfort level on both sides has been established. If the agent that you decide to work with requires a contract, read it carefully before signing.