First Time Home Buyers and New Construction

solonglandlord-new-construction701First Time Home Buyers Need to Understand New Home Sales

When you are doing something as important as buying a home, you should not try to figure it out all by yourself.  That is what buyers agents are for, to guide you through the process and help you make good choices.   This is particularly true when you are buying your first home, because you do not know the way through the maze.  So why do so many first time home buyers go alone to the builder’s onsite sales office and buy a new construction without any assistance.  This is one of the top first time home buyer mistakes.

If you were going into court, would you go without your lawyer?  If you did go without your lawyer, would you rely on the other party’s lawyer to represent your best interests?  Then, why would you go into a sales office, meet with the person who represents only the builder, and expect to get the best result?

On site agents are generally good people, and they want to make the buyers happy.  But, they represent the builder.  So, at each decision point, they are trained to get to the result that favors the builder.  Since they negotiate for a living, and you probably do not, who do you think will get the best result?  If you have a buyers agent representing your interests, you get a professional negotiator in your corner and advice that supports what is best for you.

For example, some major builders have their own lenders that are part of their family of companies.  The builder will pay some of the first time home buyer’s closing costs as an incentive  if the buyer will use their lender.   Making the loan is a profitable part of the sale of a home, so this makes the builder some more money.  This arrangement works to everyone’s benefit if both sides are well represented and have equal bargaining power, as the buyer will get the closing costs paid and the builder will makes some profit from making the loan. 

 But, if the buyer is not represented, it is easy for the builder to give the buyer a loan that does not have the best rate and terms so that the builder will make an excessive profit from the first time home buyer’s mortgage.  The profit from making the loan can come from the fees charged to originate the loan, but there can also be a profit from selling the loan.  Most lenders do not keep their loans, they sell them to investors, and the price that they can sell them for depends on the terms of the mortgage.  Mortgages that have a higher than market interest rate can be sold for a larger profit for the builder.  But, there is a higher monthly payment for the buyer.  So, the buyer needs to be represented so that the terms of this incentive are worded properly in the contract in order to protect the buyer from getting a bad loan.

For example, there was a large builder in Cary, North Carolina,  that would pay $2,000 toward the first time home buyer’s closing cost if the mortgage was made by the builder’s lender.  The builder tried to give my client a mortgage that was 0.5% higher than the going rate, which would have made the builder much more than the $2,000 paid for the closing costs when the loan was sold.  Also, my client would have a substantially higher monthly payment and over the course of the 360 payments in a 30 year loan, the additional amount paid would be huge.  Since I had placed wording in the contract that the financing would be within 0.125% of any alternative loan that I could find, the lender revised the interest rate.

Some first time home buyers fail to get representation because they do not know that they usually do not pay a buyer’s agent for their services.  Since there is no charge to the first time home buyer, this lack of knowledge results in a poor decision to skip the services of a buyer’s agent. 

The classic first time home buyer mistake is to believe that the builder will give them a better price if the builder does not have to pay a buyer’s agent representing the first time home buyer.   You will not get a better deal without a buyer’s agent.  Also, since you are negotiating against a professional without your own professional, you will probably get a worse deal.  Builders have found that Realtors sell the vast majority of their homes, so they are not going to create a system to try to alienate the biggest part of their sales force. 

Instead of cutting out the buyers agents, many builders have incentives to pay bonuses to Realtors in order to encourage them to sell their product.  So that you will have all the information to make a good decision, the state of North Carolina requires that any bonus for the Realtor be disclosed at the time you are making a buying decision.   This requirement just went into effect, as the state did not want the buyers to be unaware of any bonuses paid to the agent.

Remember Winnie the Pooh?  “You can’t go down to the edge of town unless you go there with me”.  You can’t go to the on site sales office unless you go with your agent.

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