Does the thought of a new construction home entice you? How would you like to spend an unnecessary $69,000 when you buy your next home? It almost happened in a recent situation. Let me tell you a story about a very recent client home buyer experience.
I’ve been helping a client with his home search. One of the favorites on his list was a new construction home, especially enticing to a first-time home buyer with limited funds for potential repair or maintenance. Many new builds are represented by sales people and not necessarily Realtors or licensed agents.
Who is Representing YOUR best interests?
I went through the process of registering my home buyer when I scheduled the showing. A required step, not just to protect my interest, to get paid at closing, but also, and as you’ll read shortly, super important to my client to have representation. You see, with new construction, if the client is not registered by their agent with the builder or sales rep prior to the 1st showing or even point of contact, the agent may not be a part of the transaction or be able to advise his or her client.
Are you already thinking this doesn’t sound like a big deal when you’re dealing directly with the builder and a sales rep?
This may change your mind.
I’ll remind you…
1) A sales rep is not necessarily a Realtor or even a licensed agent, still two very different things and…
2) If they are representing the builder, they cannot also represent YOU, they can merely draft the documents.
But the cost is the cost, right? There’s no negotiating anyway! While that last part may be true in some cases… here’s how I just helped my client avoid a very costly mistake.
Avoiding the New Construction Trap
Like many other “big builders” of spec homes, this company offered an incentive if you went through its preferred lender. In fact, before we even left the showing, this sales person handed me a worksheet which detailed what his monthly payment would look like.
This was an impressive breakdown, to a buyer or a novice, of everything from the required down payment to mortgage insurance, property taxes, and insurance. Like any seasoned agent, I made sure my client was pre-qualified before I even took him out.
New Construction Contracts and the Fine Details
My duty is to my client and not to myself. I owed it to him to see if this “too good to be true” scenario was really in his best interest because, in that case, it would make complete sense for him to go with their preferred lender.
Additionally, I love numbers so I asked a ton of questions. To my lender friends in the business… did you notice that I did not mention anything about an interest rate or term used to calculate payments or term?
Not mention of the type of financing or even the value of those “free closing costs”. How then did someone calculate a payment schedule?
My initial feeling was “Why on earth would a builder push a specific lender and offer thousands of dollars in concessions unless they were making it up on the back end?”
Bingo. You see, if you’ve ever worked with me, you know that I may be sweet, but I am a bulldog when it comes to numbers and business. I take representing the best interest of my clients very seriously. I also have this weird love for business math.
Some might say I “geek out” over numbers. I’m also OCD and take numbers very seriously. I finally got all my answers and, after clearing this up with my home buyer, the next thing I thought was “I absolutely have to share this exact situation with the general public”.
Why on earth would a builder push a specific lender and offer thousands of dollars in concessions unless they were making it up on the back end?~Michelle Richard Broker/Owner Share on XGetting the Answers to Your Questions
It honestly took quite a bit of back and forth, and I am excellent at asking questions to get the answers I want. I will not quote the exact numbers, but I will tell you the following: The standard interest rate with this builders’ lender floats about 1% higher than market rate. This means that if todays rate is 3.00%, the rate with the builders’ lender will be 4.00%.
The price point of the home was around the median home value for Lee County, Florida. At this price point, these numbers are extremely relevant for the majority of the home buyers in this county. Can you image how drastic the potential savings can be as the price point increases?
Doesn’t sound like a lot, but I did the math.
I always do the math. The monthly payment may not be a big difference. The compound interest, my favorite thing to compute, at this price point, is a difference of $69,000 over the course of the 30-year mortgage!
I checked with my lender, who is amazing at being available all hours of the day, to find out what estimated closing costs would be to go through him. We’d be looking at $4,000-$5000.
The builder exaggerated “benefit” to my buyer was, “builder paid closing costs of $8000.” So, to use his current lender, my client would simply have to pay, or wrap in, his closing costs rather than have the builder pay them. If you subtract the $5,000 from the $69,000 over the course of 30 years, still a savings of $64,000!
But wait, there’s more!
I went to the salesperson with these numbers when we went for a second showing. His answer? Oh, yeah, I hear that often. Most people get into the loan so the builder pays the closing costs and then refinance in 6 months to get into a better rate.
For about a ½ second that made sense.
Except, guess what?! I absolutely did the math again. In 6 months, that buyer has to pay closing costs AGAIN to refinance. They also have to qualify for refinance. This is 2020, so who the heck knows what can happen. We don’t know what the rates will look like in 6 months. Let’s not forget, in Florida, you pay the tax stamps at time of refinance!
Additionally, the buyer will have paid $4800 in interest vs $3500 at todays rate with his lender. This rep is simply trying to close a deal. “Let’s entice with a great sounding deal. No one looks at the back end.” I, on the other hand, am trying to create trust and a lifelong relationship, oh…and sleep at night knowing that I did everything possible to represent my client to my fullest capacity.
Representation for a New Construction Home
I ask you. Now do you see a value in having representation when buying new construction?
Can you see how going right to the seller representative or builder is NOT in your best interest?
Do you see how having a lender who is accessible to answer questions outside of bank hours is important?
I do not get paid by the home buyer. My services do not cost the buyer a thing. Not using me can instead COST the home buyer more. In this case, by more than $60,000.
Be informed.
There are other examples that I will review in future blogs. I’ll cover for sale by owner, home buyer going directly to homeowner, home buyer going through listing agent, home buyer choosing upgrades and finishes with builder.
These are all instances where the home buyers and homeowners thought they could save money by. Buying or selling on their own, not realizing the potential savings earned by using an extremely well-educated professional. Stay tuned!