Recently I was working with a client who decided to buy a condo unit directly from the builder. We negotiated a good price and signed the forms and sent everything off to the lawyer. Two days later we find out that we will be unable to close the deal as the builder had recently received a $200,000 judgement against the building and as such, he would be unable to transfer title.
That was unexpected. I suppose it could have happened with a resale home (though it never has), Lots of things can go wrong in real estate. I’m always waiting for the surprise.
Of course dealing with a builder is completely different than dealing with a regular resale seller (and his agent). The process is different. The forms are different. The timelines are different. The balance of power is different.
Fortunately (for homebuyers), most builders these days are happy to cooperate with realtors and their clients. Buying from the builder is a very popular choice, especially it seems, with first-time home buyers – the ones who need realtor’s help the most.
Statistics show that nearly one third of all homes that sell in a given year are brand new. It is easy to see the appeal. When you buy from the builder it means:
You can customize your dream home to your exact tastes
Your new home will have higher efficiency ratings than older homes
You will have lower maintenance costs, at least for the next 15-20 years.
Everything will be to today’s building code. You won’t have to worry about galvanized plumbing, aluminum wiring, single pane windows…
But there are a great number of drawbacks to buying from the builder. There are a number of mistakes that home buyers make in making their most important financial decision:
The top 13 mistakes that new home homebuyers make
#1 They do not seek independent legal advice.
I know a local developer a few years ago who had all his salespeople suggest a certain law firm and a specific lender to potential buyers. He told them to explain to the buyers that the preferred firms “understood the project”. This would make it easy for the buyer to get the legal stuff and the mortgage out of the way without delay and a lot of running around.
The “builder forms” that new home buyers and builders sign are nearly 50 pages long. It is surprising that some buyers sign it without legal representation.
“Skip legal advice and you could end up with an electrical utility box on your front lawn that you can’t do anything about, or no side door on your garage, regardless of what the plans looked like.”
#2 They do not research the builder’s reputation
The Kitchener Home Builders Association lists about 60 builder/developer members. Some build a lot of houses and have high name recognition. Others maybe build a house or two a year. It does not matter. What matters is the quality of the build. Sometimes reviews can be found online. Other times you have to find people who bought from the builder and then casually interrogate them.
#3 They think they are getting the model home
Model homes are tricked out with all the bells and whistles. It is not unusual for the model to have all the upgrades, and be professionally decorated with the latest and greatest colours, styles, furniture and decor.
The builder of course, wants to show his house in the best possible light. But just like at a restaurant where the entrees, drinks and extras carry the highest profit margin, the same is true for the upgrades. The builder might throw in some “free upgrades” to get you started, but once you start you can quickly add a year’s worth of salary to the cost of your new home.
#4 They don’t negotiate
Builders lead buyer’s to believe that the price is the price. They offer free granite counter tops or stainless appliances to take away the need to negotiate. Of course there is lots of room to negotiate. Builder’s have loans to manage, contractors and other staff to pay. Margins are sometimes fat and competition fierce. Negotiate hard and then come back and negotiate some more. Negotiate on the upgrades, the lot premium, ask for extras and you will get them.
#5 They trust the floor plan
I like floor plans. That’s the way my mind works. Other people aren’t so lucky. They have to physically see the rooms. Either way, it does not matter. Builders are allowed to change things within reason and without your permission. Also the floor plans and “artists rendition” will ignore certain realities both inside and outside the house.
Unless you really know what you’re doing, you’re going to miss something in the floor plans as well. One of my clients was surprised that her basement did not come with a cold room. Turns out that is a $700 upgrade that we all missed.
#6 They don’t understand the market value
When you buy a new car, so the conventional wisdom states, as soon as you drive it off the lot, you lose 20% of your value. The same is true with new houses. If you try to sell your new house within three to five years, your chance of making a profit, no matter how small is low.
Furthermore, many people who buy brand new homes have no idea of market value. They have not looked at similar resale homes in the neighbourhood. They don’t know if prices are rising or falling. They don’t have a clear picture about what is going on in the real estate market at all.
#7 They don’t know that completion date is a moving target
Generally speaking, builders are getting better at hitting their targeted completion dates. However, they are permitted as part of the contract to extend a couple of times so long as notice is given. Of course, condo high-rise projects like this one are notoriously late. Buyers should not be counting on the fixed date actually being the move in date. The completion date is merely a goal, a moving target. When you shoot for the moon. You might land on a star.
#8 They don’t consider that they are moving into a construction zone
There is an area in the north-west corner of Waterloo called Vista Hills. In ten years, there will be more than 500 homes there. There will be a shiny new school, new streets and new parks. The first homes there are now being completed and moved into. The people moving into those homes will have to deal with the dust, mud and noise of construction vehicles, the pockmarked landscape of works in progress. Their kids will have to be driven to an inner city school. They might even run over a nail.
#9 They think they have a warranty
“The Tarion Warranty”, a real estate lawyer friend of mine says, “was written for builders, by builders.” It is hard to understand what is covered and what isn’t. There are time limits and allowable defects. It is not the “be all and end all”, “no questions asked” kind of warranty that consumers think they are getting, and they are lucky to have that. Many provinces don’t have any warranties at all.
By the way, condo conversions (old factories converted to loft space) are not covered as they are not consider to be “new build”.
#10 They don’t know about the hidden costs
Many new home buyers are responsible for additional costs that appear unexpectedly upon closing. Things like bringing the services from the street to the house, most think should be the builder’s responsibility, but they aren’t.
“You may find large charges that suddenly materialize for hooking up gas and electricity meters, plus mortgage discharge fees, development fees, deposit verification fees…there are even fees for “public art contributions” to cover the cost of a sculpture by a building’s entrance.
#11 They buy at the wrong time
When a new project is announced, the insiders buy up all the best properties. This happens all the time with pre-construction condominium projects. There will be a short series of pre-sales VIP events open only to those who have signed up or have been otherwise invited. The best properties get scooped up, often at a reduced price. Then and only then, after the players have taken their turn is the sales office open to the plebs, proles, rank and file and the historical third estate.
#12 They buy the premium lot
I was dealing with a builder recently who had put a lot premium on all of his lots.
All of his lots! “How can they all be premium lots?” I asked.
“They are all great lots”, he said, “and some are greater than great”.
That is a scam, mostly.
Sure everyone wants a pie-shaped lot backing onto green space, but as a realtor, I’m telling you now that you are not going to get the $40,000 premium back when you sell.
#13 They don’t use a realtor
I’ve had clients ask me, “I don’t want to offend you, but what value do you have, if I buy directly from a builder?” It’s a great question, an honest and direct one. I like it. Besides the 12 points mentioned above, as I said near the beginning of this blog post, I’m always waiting for the next surprise. There is often something unexpected coming down the pipe, and you need an independent trusted advisor to turn to when you need good advice.
Furthermore, anyone working in real estate for more than five years has acquired insider knowledge on buildings and builders, on projects with problems, and problems with projects. Besides the example above of the builder with the $200,00 judgement against him, there is project in Kitchener being built without enough parking – you get one spot, you just don’t know which one it is and it might not be there when you get back from shopping. There are new subdivisions with overcrowded schools, or no school sat all, clogged roadways or living miles from amenities…there are a lot of things that new homes buyers fail to consider on their own.