WEDNESDAY’S OBJECTIVE: New Construction Hurdles
Today we want to help you avoid potential pitfalls when dealing with new construction. Setting expectations are key. Items specifically to pay attention to are contract dates, financing, and making sure you get paid!
Selling new-construction isn’t without its own set of unique hurdles, all of which can prove to be sufficiently challenging.
In Idaho challenges arise largely from the differences between the builder’s contract and the normal re-sale contract that agents are more familiar with. Many builders to circumvent the normal re-sale contract provided by our REALTOR® association, and substitute a proprietary contract of their own instead. These proprietary contracts are typically crafted by the builder’s attorneys and they normally contain extensive language that heavily favors the rights of the builder. Additionally, a typical builder contract is often 20+ pages long, compared to the 7 pages found in our re-sale contract.
A smart agent should always ask the builder’s sales person for a copy of the contract a day or two in advance so that they can carefully read it in its entirety—highlight any crucial dates or clauses that a buyer should be particularly aware of. Also remember that you are not an attorney in all new construction scenarios encourage your buyers to seek the counsel of an attorney before signing a contract.
Financing can be particularly tricky when dealing with builder transactions.
Most mortgage lenders typically cannot cost-effectively lock-in an interest rate for more than 90 days in advance of a closing. Therefore, when dealing with an unfinished (or dirt-start) home that likely won’t be completed for 4 to 18 months, this can pose a substantial risk. If a buyer’s debt-to-income ratios barely qualify them to purchase the home at the time it’s contracted, then there’s a risk that they may no longer qualify to buy it at all if mortgage rates increase before they’re eligible to lock-in their rate.
Because none of us own a crystal ball to predict which direction the rates may go, it’s always very prudent to make sure your buyers will still qualify even if the rates increase. A good rule of thumb is to make sure they would still qualify even if the rates climb by 1 percent. If not, then they are taking a major gamble buying new-construction. If a buyer barely qualifies for the amount they are trying to spend, then it makes more sense to find that buyer a home that they can close on within the term of their rate-lock. None of us wants to hear the lender tell our buyer that after waiting 13 months, they no longer qualify for enough to close on their new home.
Most builders also have an ownership stake, or affiliated business arrangement of some kind with a lender and a title company. Additionally, most builders will tie their incentives and/or discounts to the requirement of using this lender and title company. While they cannot force a buyer to utilize these service providers, they will routinely withhold discounts and incentives from buyers who insist on using an outside lender or title/escrow company. Often, these incentives are substantial enough that most buyers will comply with this requirement in order not to lose them. Therefore, it is prudent that the buyers understand this in advance, so that it doesn’t cause issues if they are particularly loyal to their current bank or lender.
Make certain you understand exactly how the builder will compensate you for bringing them a qualified buyer.
Builder co-op commissions are often structured differently then re-sale commissions, so you need to be clear on how you’ll be compensated. In most instances, builders only pay a disclosed percentage of the home’s base price, but do not pay any commission on the lot premiums, structural upgrades, landscaping, or design center options. This is important to factor in, because these costs can reach as much as 50 percent of the final price on some homes such as former “model homes.”
Make sure you clarify in advance whether a builder pays commission based on the home’s base price, or on the home’s final purchase price. Also clarify the percentage they intend to pay as well. In most cases it’s slightly higher than the percentage paid on a resale to compensate for the fact that we aren’t paid on the home’s entire price. However, in some instances builders do pay on the complete amount, and there are some instances where the percentage paid is slightly higher than the area average for resales. This typically occurs when a development is selling too slowly, the builder has too many completed spec homes in inventory, the market is declining, or the builder is closing out the development. In these instances, selling new-construction can be particularly lucrative!
Make sure your client has never registered in the past while touring model homes without including your name on the registration card.
The builder’s salespeople are tenacious about pressing everyone who enters the model homes to fill out a registration card. Much like an open house on a re-sale, they want to capture the buyer’s information for follow-up purposes. However, those registration cards also serve a more insidious purpose as well. There are questions on the card that ask the buyer how they found out about the development, and whether they are represented by an agent or not. If your buyer previously visited the sales office without you (even if it was before they started working with you) and they didn’t put your name on their card, the builder now has a record of it. If you bring that buyer back later and attempt to register them as your client, the builder may not allow you to. The builders only intend to pay you if they determine that you were truly the procuring cause and initially brought the buyer to them. If they determine that the buyer found them on their own, without your involvement, then the builder will most likely refuse to pay you a commission. So be careful and ask your clients early in the process if they have registered with any builders before hiring you!
As long as you do your homework, the pros outweigh the cons.
Selling new construction can be very rewarding, and it can provide you with precious inventory in a market where re-sale homes are in short supply. If you take the time to tour all the builders’ models in your area, and learn as much as you can about their homes and policies, it will be time well spent. Get to know the sales people and their floorplans, because a solid knowledge of the builders in your area will be a benefit to both you and your clients. Be confident in your abilities and go sell some new homes!
- Do some research on which lenders do new construction. Interview one and learn the different ways a home may be financed.
- Does the builder finance the home? Or does the buyer?
- Become knowledgeable enough to convey this info to a prospective buyer.