Friday, October 5, 2012

Buying from a Builder - The Price of the Home

I wanted to share a post a saw, with my response below. Home buyers usually want to get a "deal".  Buyers look at resales homes and make offers, usually 5-10% below the listed price, if not more.  Then the negotiate  from there.  However, it is a totally different experience when you have a home built.  Read below, and let me know if you think my response was correct!

The Mrs and I put an offer down on a "to be built" house with a builder yesterday... They countered with our asking price, $3k in nonrefundable option money, said we needed to drop $5k worth of upgrades we requested, and said we would have to sign something saying that if the completed home was appraised for less than the sale price, we would pay the difference up front in full along with our down payment and closing costs...

Of course we countered back, but I'm just curious if this kind of thing is normal...

I own a mortgage company and have primarily worked with builders over the past 8 years, so I'll try to tell you what I see happening here.

Usually, builders have set prices on the houses they build.  They know the comparables and the value that can be obtained. Builders in this area ask that the upgrades be paid upfront , and not added to the price of the home.  Again, your house, your choices.  Plus, all appraisers look at upgrades differently.  I once had a VA appraiser give $0 value for the following upgrades:  $8,000 worth of backyard landscaping including grass & irrigation system, numerous plants & trees, and a stone walkway, $5,000 for plantation shutters throughout the house (instead of one each metal blinds), and $3,000 for high end stainless steel appliances.  The builder looks at it like this, if he builds you a $250,000 home, you add $15,000 worth of upgrades, and the house appraises for $250,000, then it is your problem, not his.  The reason,  because this is a condition of your loan/financing.  Since you can't pay cash, then this is your problem.  If you could pay cash, then this would be a non-issue. 

Nonrefundable option money, or earnest money, is standard when the house is being built "for you".  If you back out, the builder will be able to resell the home, but not the next day.  They have to pay the subcontractors when the work is done, not when the house sells.  The builder probably has a loan on the land, etc, and would have extra expenses if you back out.  Plus, if someone else buys the house, they may not like the colors you chose, etc, so there would be repainting, etc.  All those expenses add up.

If you are doing and FHA or a VA loan, there is a disclosure that says if the house does not appraise, then you don't have to buy it and you get your earnest money back.  If it's a conventional loan, then it is understood that you will pay the difference, because conventional loans have no such disclosure.