Everyone is looking for a great deal. Whether you are buying a new car, clothes shopping or building a new home, you want to be sure you get the right product at the best price. After many years of watching the “back and forth” between buyers and sellers in the real estate market, I would like to share what I’ve learned. This experience comes from buying and selling numerous (60 plus) personal real estate properties, and from working for a home builder here in Utah (J Thomas Homes – a fantastic builder to work for btw). If you are in the market to buy a new home in Utah (or anywhere for that matter), there are some recommendations I would make to help you get the best price during the negotiation phase. These recommendations come from watching the results of countless offers come in and get accepted or rejected. So, if you love negotiating, willing to put in a little work and have realistic expectations, you can definitely get a great deal on your new home.
Realistic Offers
The days of low-ball offers are coming to a close. Most housing markets throughout the country are beginning to rebound (Utah real estate is no exception) and demand is increasing. This means that buyers need to be more realistic about the offers they present to sellers.
Contrary to public opinion, submitting a low-ball offer typically does not result in a price reduction. You need to display to the builder or seller that you are serious before they will even consider the offer. How do you show you are serious? Submit a realistic offer – builders (even more than typical sellers), follow the housing prices in their market – they know what a home can and will sell for. Offering substantially less than the market value will not yield any results for you and will only make a seller less likely to work with you later. This does not mean you can’t submit an offer lower than the asking price, I see many offers accepted at lower prices – but I almost never see a drastically lower offer accepted – even though many (too many) are submitted. Home builders have worked with enough buyers to know who are serious and who are just “tire kickers”.
However, if you put some effort into reviewing the length of time the home has been on the market, you may be able to offer less depending on how eager a builder is to move the home. Conversely, a newly listed home is less likely to sell for a reduced price.
When preparing your offer, either on your own or with a Realtor, put some time into determining a fair and realistic offer and you will be surprised how open a builder will be to accept it.
Real Estate Agent
There are great Realtors and there are lots of bad Realtors. Unfortunately, for you it can be difficult to tell the difference. I have worked with many types of real estate agents, some of them were not worth the commission check they received and others went above and beyond to guide their borrowers during the sales process.
When choosing a Realtor, or whether or not to even work with one, you need to be aware that there is a fee for their services. As a buyer you may not be directly placing a check in their hands, however that fee will be paid by the sellers and in many cases that will result in a higher purchase price for you. For instance, a $200,000 home sold with a listing and buyers agent will cost the sellers $12,000 in realtor fees (based on the standard 6% commission). A savvy seller could list the same home for $188,000 (less the realtor commissions), net the same amount at closing and give the buyer a reduced sales price (much to the chagrin of the agents). Let me be clear, there is absolutely a time and place for hiring a good realtor. If you are not sure of the buying process, moving to a new area or are lucky enough to work with one of the few high producing agents then it may be worth the added costs.
So, how does this apply to negotiating with a home builder? Most builders are more willing to work on price when there is not an outside agent. While that statement may upset some realtors, the fact remains that most non-realtor offers I have accepted or seen builders accept are lower than those with a realtor commission. Again, let me be clear, an agent may very well be worth the fee for the services they provide – just be sure to find one that goes above and beyond and don’t be surprised when a builder is less likely to reduce their price.
Know the Market
The most important part of preparing a strong offer is to first research the market. You need to know exactly what a home is worth and what it should sell for. This is not as difficult as it sounds. If you are working with a good agent – this is a huge part of the commission they are earning – make sure they take the time to research this for you and explain their findings. Even if you have an agent, I still recommend taking the time to understand your local real estate market. Fortunately the Utah real estate market is fairly straightforward, other states can be very difficult to determine with huge pricing swings from one neighborhood to the next.
It is now easier than ever to get a picture of housing values by looking online. Here is a list of several fantastic resources to find real estate in Utah. If you are in another state, be sure to search for your local online MLS listings service. The list contains the top real estate website for Utah MLS listings, the top classified listings, and several more focused sites for townhomes or new homes in Utah. Take the time to see what similar homes are listed for – but be aware that a list price does not necessarily reflect the value of a home. You need to evaluate the amount of time a home has been on the market to determine whether it is competitively priced. If you are buying new construction, visit other similar builder websites and compare pricing – remember to factor in location when comparing pricing across home builders to get a more accurate price. Researching market values will not only help you prepare a stronger offer, but allow you to make more educated decisions throughout the entire home buying process.
What’s in the Contract
When evaluating an offer – sellers consider more than just the offer price. I have accepted lower offers over much higher offers simply because of other variables in the contract. Home builders are no different, while price is definitely the main aspect in the decision process, here are some of the other important factors to consider when preparing you real estate purchase contract (REPC):
- Type of funding: There is an opportunity cost to accepting an offer and placing a home under contract. What if the financing falls through? What is the time it will take to close the home? These are important considerations that every builder has when reviewing your purchase offer. If you have a weak financing plan (i.e high likelihood it will not be approved) or a very long closing period, you may have less room to negotiate on price. Conversely, if you are fortunate enough to offer cash or a large down payment, a seller may be more inclined to work with you on price. Take advantage of a new home builder’s preferred lender program (if available), many will offer incentives to work with them and they will be more confident accepting your offer.
- Concessions: If you are wanting to negotiate the price, then you may want to limit the amount of seller concessions you request in your offer. Concessions are a set dollar amount or percentage of the purchase price that the seller agrees to contribute to the buyer, towards closing costs. However, if you are needing concessions to help cover these closing costs, you need to recognize that they are effectively already a reduction in price agreed upon by the seller.
- Dates: There are many dates and time frames in a real estate purchase contract. You need to set realistic times for these that both allow you adequate time to perform your due diligence and will satisfy the seller. Asking for a month to perform the home inspection may not be a wise idea, or setting a closing date several months beyond what your mortgage broker recommends may hurt your offer’s strength. Keeping these dates quick and realistic will help you submit a much stronger offer.
- Addendums: Keep the offer clean and simple. The more addendums and custom requests you include the more complicated and therefore frustrated a seller becomes. Unless it is necessary, try to keep the number of small requests to a minimum. This will give you more ability when negotiating on the larger points – price, concessions.
Preferred Lenders
Many home builders (J Thomas Homes included) work with preferred lenders. Basically this is a 3rd party (some builders have their own in-house department, not us) mortgage company that the builder has worked with in the past and seen good results with. Similar to Realtors, mortgage brokers can be good or bad. Some can work miracles to get your mortgage through quickly and relatively painlessly and others have a disappointingly low success rate (not to mention low customer satisfaction rate). A home builder wants every contract they accept to close without issues – this is why they recommend home lenders who have performed well in the past. In most cases, I recommend working with the builder’s preferred lender – not only will it make the builder happy (happy builder = better offer for you), but they typically offer free incentives to work with them (win-win for everyone). If you are set on working with another lender, make sure they communicate well with the builder before and after accepting the contract. This show of good faith will place any seller at ease.
Hopefully these tips have been helpful as you begin the negotiating process with a new home builder or any seller with real estate for sale. If you have any comments or other suggestions for successful ways to negotiate with a builder, be sure to leave them below.
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You say, “if you are fortunate enough to offer cash or a large down payment, a seller may be more inclined to work with you on price.”
How does this work? We are looking at putting down over 50% and would like to get as much out of the negotiation process as possible. I’m not sure however, how that works since the seller would get a check from my lending bank anyway.
The reason that a cash offer is more appealing to a seller is that it reduces some of the risks of the buyer qualifying for a mortgage – and therefore not closing on the home. Anytime a seller accepts an offer they are taking a risk by removing the home from the market and potentially losing another solid offer if the accepted offer falls through (due to loan approval, inspection or other variables). An offer with a strong cash down payment, can ease those concerns and make a seller more willing to accept your offer and work with you.
The most attractive offer is one which does not involve a loan at all (i.e 100% cash). This allows for a much quicker closing time, no need for loan qualification or bank appraisals and may be enticing enough to a seller that you can negotiate a better price.
Great post, thanks for sharing!
I’m in the Utah area, looking seriously at some brand new construction West, off of 146th and I-15. No lots have been sold and no building has started yet. Because of several factors, I’m looking for a great deal (living in dust and construction for a potentially long time, risks with being the first in the community, etc). Base price of the home (~3k square feet, 5 bedrooms) with the land is about $325k, with many upgrades included. I have a list of about 50k in additional upgrades. Our first offer: We’re thinking of asking for the builder to pay ~75% of the upgrades (37k) which would be an effective ~12% less than asking +upgrades.
Am I up in the night here?
I’d love some insight from your perspective.
It is becoming more and more a sellers market. Utah builders have been increasing prices over the last year and as land, material and labor costs continue to increase so will sales prices. Demand for new homes is up as well…all these factors together make it less feasible to present a highly discounted offer. That being said, upgrades are a great place to negotiate with a builder. 12% is a very aggressive discount, in the market today. However, you may be surprised – it really depends on where the builder is coming from in this new development. Good luck!
Thank you! If it doesn’t work out, I just may have to start looking at homes available through jthomashomes.com.