Negotiating new construction home prices with your builder
When it comes to real estate you've probably heard the old platitude that everything is negotiable. And when it comes to new construction homes, in some cases that may be true and in some cases there may be less room to negotiate prices.
For every home they construct, your builder has an expected profit for that home, frequently calculated by them as a percentage of all costs. If a price is negotiated, the builder is agreeing to take less profit on a home.
The critical factor to remember is that new homes pricing is tied to the overall market demand. Will Jenkinson at Carolina One Real Estate New Homes Division says that real estate agents and home buyers need to understand the market’s supply. When it’s a seller’s market, builders are going to be far less inclined to budge on prices as opposed to when it’s a buyer’s market.
Factors impacting pricing of your new construction home
Developer builders who purchase the land on which a new home is built have fixed costs which go into the pricing for the homes they construct. These costs include land, engineering and infrastructure. If a builder paid a high cost for the land, or had to heavily invest in the site’s engineering or infrastructure, they have a higher cost.
Also impacting the cost of building is the incremental cost of the design of the home’s floor plan, cost of permits and inspections, materials to build the base plan and the builder’s construction finance cost, sometimes called a “carrying cost.”
The majority of new home builders have their floor plans tightly costed — they know exactly how much each nail and board foot of lumber cost them to build your house. They purchase materials based on projections for construction capacity in the coming months. Volume builders operate more like industrial manufacturers, buying precisely the materials they need when they need them and when pricing is most advantageous.
Fixtures and finishes impact consumer home building costs
Builders of new construction homes build your selected house plan on the lot you choose. You decide your layout options, fixtures and finishes which are added to the base price of the home. While most builders negotiate pricing with their suppliers so they have a fixed price for the year on everything from toilets to tiles, you are the chief controller of costs when it comes to options — sometimes called upgrades. A great number of builders have base standards, frequently referred to a builder grade items, that they use in all their homes. When you choose finishes and fixtures other than the standard ones offered in all their homes, you pay for that upgrade.
When can builders negotiate their price or add more value to your purchase?
If a new community is just getting started, builders are often willing to give you, an early-bird buyer in the neighborhood a very good price. It’s to their benefit to get houses under construction. Some people don’t choose to be the first ones in a new development, but if you do opt to go this route, realize that construction will be underway for a period of time after you move into your new home.
On the other end of the spectrum, a home builder trying to close out a neighborhood may offer great value and negotiate prices to finish out a community. If they have only a few lots remaining, you may find yourself in the perfect spot to get a better price on a new home.
Sometimes a new home builder may have a house that was built on spec or for a client who couldn’t complete the sale. That home may be ready to be sold and may have already received a CO (certificate of occupancy.) In new home building terminology these are called inventory homes, move-ins, move-in ready, or quick sale homes.
When a builder has an inventory home available for sale he is paying interest on the cost of that home — and it is not returning any value to them. An inventory home can be a financial liability and there is a high incentive to sell that home as soon as possible. Therefore, they might be willing to negotiate pricing in order to get that house sold, meaning they forgo some profit in order to pay less interest on that home as it sits unsold. Sometimes rather than negotiate pricing, the builder will sell the home without charging you for the upgraded finishes and fixtures in the house. Or they may give you incentives to help make the price more attractive. Consult your Realtor® for their experience with a specific builder.
In a slow market or down season, builders may also be willing to negotiate prices on houses so that they can keep their construction crews busy. When the market is hot and there's a high demand for houses, there's not as much incentive for a builder to negotiate prices. That's because their crews are busy, in demand, and working all the hours of the day that they can.
Publicly traded home building companies have shareholders to keep happy. There is pressure on these companies increase the face value of their shares and pay dividends to shareholders every year. Jenkinson notes, “Public builders will often provide incentives and work with buyers in the 4th quarter of ‘their’ fiscal year.” If you’re purchasing a home from a publically traded home builder, you may have an advantage to buying as the public builders’ fiscal year is winding down. Ask your Realtor for those builder’s names and specific months when these builders close out their year.
Another way to get more value in your price is to use the home builder's mortgage company. Frequently, when you use the builder’s mortgage company you may receive paid closing costs and incentives or upgrades. Check with your home builder to see what they offer if you obtain your mortgage from their preferred lender.
Negotiating the price
You should rely upon your Realtor® to guide you with regard to negotiating prices with a new construction builder. You'll find that some real estate agents have relationships with builders and know which builders have more opportunity to negotiate pricing.
Your RealtorⓇ also understands factors which are impacting costs, such as seasonal demand and pressures in the marketplace.
You may indeed be able to get a price modification on the home of your choice, so it never hurts to ask, just be informed before you make that offer.
However, should you find a home you absolutely love and want and the builder is not able to negotiate, don't risk losing the home while holding out for a better price. In a hot market a buyer may come along and offer the full price and lose the home you really want. On the bright side, if the builder has additional homesites, it is more than likely the plan you prefer may be built on a different homesite or in another community -- the only downside is you'll have to wait and the price may be a little higher.
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