Tips and Traps When Negotiating Real Estate: What You Can Negotiate

Negotiating with a Builder: What You Can Negotiate

With a builder you can negotiate price, terms, options, and extras. Keep in mind, however, that often an individual owner on a resale has more flexibility than a builder. An owner may have been in the house for years and built up a considerable equity. If you offer 15 percent less than asking price, the owner may be willing to con­ sider it.

However, tract builders usually work on much thinner margins. They may have only 10 or 15 percent into the property after all costs are accounted for (including the costs of holding inventory). Thus, if you offer 15 percent below asking price, the builder may not be able to comply with your offer, even if he or she truly wants to. On the other hand, builders frequently have a huge mark up on options— and particularly upgrades. They can often be very flexible when negotiating these.

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Sometimes you can find a home in a development that already has the upgrades/options put into it. Perhaps they were put in for an earlier buyer whose deal fell through. The builder will very likely be anxious to get rid of this home and may be very flexible when negotiating for those upgrades/options.

Understanding the Builder’s Costs

When dealing with an individual on a resale, you as a buyer often want to know how long the house has been on the market, under the often correct assumption that the longer the time, the more des­perate the seller is to get a sale.

With a builder, the situation is even more extreme. A builder must pay interest each month on unsold homes in inventory. Typically the spec builder will have included an allowance for this—say three to four months. If the homes get sold sooner, there’s an additional profit. But, even if it takes four months, there’s no loss.

Problems for builders arise when their inventory sits there unsold for long periods of time. Their holding costs can eventually drive them into bankruptcy. Therefore, the longer a fully constructed home has been sitting there unsold, the more your leverage increases. If it’s been finished for six months, you should have lots of leverage.

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You can determine how long the house had been com­pleted by going into the garage and finding the build­ing permit sign-off sheet. Usually these are tacked to a wall inside and remain there until a buyer is found for the property. They will contain dates and the signature of building inspectors. Look for the word final and the sign-off date.

When you find a builder who is under pressure from unsold homes, feel free to apply more pressure. Check back into the early chapters of this book and begin negotiations for price and terms. You may be surprised at how much you can get.

Negotiating for Options

Frequently, while builders may have little flexibility when it comes to price, they have enormous flexibility when it comes to a home’s options. These include everything from carpeting upgrades to installing fences.

The basic rule when negotiating for options is: You can’t get what you want until you first know what that is. In order words, as opposed to buying resales, where you spend a great deal of time trying to find something existing that will fill your needs and desires, with a builder you can often get it built to suit.

No, that doesn’t mean that the builder is going to dramatically change his or her construction plans to accede to your every whim. But it does mean that if you get involved with a builder during the construction process, you can often choose the color of the interior of the home, the quality of the carpeting, kitchen counters and cab­inets, and frequently a few design features such as whether a basement or attic is built out or left rough or whether a kitchen has recessed ceiling lights or a window planter is built in. In other words, unlike a resale where what you see is what you get, with new con­struction there is more flexibility.

Note: There’s not as much flexibility as some people think with regard to changing options. Speculative builders (those who build first and hope to find a buyer later) typically will have a set of basic plans that have been approved by the local building department and by lenders for a certain mortgage amount. Further, the builder knows, sometimes to the dollar, how much everything will cost in terms of labor and material. To vary from these basic plans would mean delays and potentially very high extra costs for the builder.
Hence, it’s unlikely you’ll get a builder to, for example, agree to change the basic layout of a home. A builder won’t want to add a nook here or a bedroom there. You won’t be converting a one story to a two story or the other way around. Yes, you can make minor changes, but very often not major ones. If a builder does agree, you can be sure it’s going to cost you megabucks.

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If you want to make changes that involve “design,” you’re probably better off buying a lot and then cither hiring an architect and builder to create just what you want or doing the design and construction work yourself. But be prepared to pay more, lots more. Custom work always costs more than ready built.

Making a List of

What You Want. Before getting directly involved in negotiating with the builder, it’s very useful to create a list of exactly what you want. Remember, you won’t get it unless you know what it is. Here’s a partial list of items over which you would typically have some choice in new home constructions.

Indoor Options

  • Appliances (quality, color)
  • Cabinets (material, quality, color)
  • Carpet (quality, color)
  • Carpet padding (quality)
  • Countertops (material, quality, color)
  • Doors (hollow or solid core, material, quality)
  • Finishings (railings, handles, light switches, etc.)
  • Flooring in entry, kitchen, bath (material, color)
  • Light fixtures (design, quality)
  • Mirrors (location, size, quality)
  • Paint (color, quality)
  • Plumbing fixtures—toilet, sink, etc. (quality, color)
  • Rough or finished extra rooms
  • Windows (quality, planter box)

Outdoor Options

  • Driveway (material, width)
  • Fencing (complete, partial, or none)
  • Insulation (more)
  • Lot (location and/or size)
  • Roof (material, quality, color)
  • Walls (material, quality, color)
  • Yard (landscaped front/back, quality)

As you can see, there are many choices. It’s a good idea to visit sev­eral developers’ models to get an idea of what’s being offered in your area. As you go, note those items that appeal to you, then add them to your list. When you finally come to the builder whose home you want to purchase, you should have a fairly complete idea of those items that you must have, those that you would like to have, and those that you can live without.

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The “Upgrade” Trap

Builders, of course, understand exactly what you, as a buyer, are doing. They know that you are looking around at this model and that and arc aware that you are making a list of your options. They know you are doing it, and they are pre­ pared for you. It would be hard to find a builder of spec houses who didn’t have his or her own list of “upgrades” and “options.”

The options are design changes that builders have anticipated buy­ers might want and for which they have already received building department and lender approval. They also know their exact cost. You want a love seat in the family room, no problem. They can put it in. You want a skylight in the master bedroom, no problem. You can have it. All for more money, of course.

Similarly, there are upgrades, a list of items the builder can change in terms of material, quality, and color. You want thicker carpet, again no problem. You want granite countertops instead of tile, it can be handled . . . all for more money.

What should be obvious is that there are actually two issues here. The first is the breadth and depth of the builder’s list of options and extras. The second is cost. We’ll deal with each separately.

The Builder’s List

As I noted earlier, the builder must get approval for most changes from the building department and the lender. Further, a good builder will have penciled in all the costs for labor and material for the basic plan, as well as any options and upgrades. The number of items and the variety offered will differ from builder to builder. A good builder, however, will have a lot of options and upgrades available. Typically, the higher priced the home, the larger the list.

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Arguing over the Builder’s List

Although builders are normally quite willing to grant you any item on their lists—at a price—as noted earlier, they are extremely unhappy about adding something not on their lists. This can result in some strange arguments. For example, this actually happened to a friend of mine. The builder had a series of colors from Sherwin-Williams. But the color my friend wanted was from Sears. For some reason, the builder just didn’t have the right shade on his list. My friend suggested that as a solution, the builder get the paint from Sears, but the builder insisted it had to be from Sherwin-Williams. (Note: the roles of the two paint companies could just as easily be reversed. The point here is not that either has better paint or more colors. They both offer excellent products.) As it turned out, the builder was probably locked into a price and had already agreed to purchase a certain amount of paint. He or she never acceded to my friend’s wishes.

This can occur with any option or upgrade. You want a particular brand of carpeting. But the builder offers a different brand. For the same reasons, getting the builder to switch brands is going to be very tough.

In short, if what you have on your wish list coincides with what’s on the builder’s available options/upgrades list, your chances of negotiating for it are excellent. On the other hand, wherever the two lists differ, you’re in for a fight.

Negotiating Costs

The other part of this equation is the cost to you. This will often become most clear with regard to carpeting. Today, many new homes offer wall-to-wall carpeting. However, often the padding is very light and the carpeting is of a low quality. Many home buyers want to upgrade both.

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If you want to upgrade, the builder may smile and direct you to the “design center.” This is usually a showroom at either the model homes or sometimes at a commercial store located off site. Here you will be shown a variety of colors, patterns, and qualities. The trouble is the price.

In my experience, the price at the design center is often two or three times higher than what you could get the same carpeting for elsewhere on your own. It may quickly become pretty evident that the builder has added a significant profit to the upgrades.

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Just as when cars are sold, there may be more profit in the add-ons than in the basic product.

At this point, many would-be buyers will say something like, “We don’t like your choice of carpeting. We’d prefer to get our own.”

“Fine,” the builder may reply. “However, you’ll have to get your own after you move in.” In other words, you’ll have to take up and discard the builder’s carpeting to put in your own, a costly and wasteful procedure.

“No,” you may protest. “We want to put our own carpet in place of yours . . . and since you won’t be putting in any carpet, we’d like a credit.”

At this point, the builder may snicker and say something like, “Not on your life!” The explanation may go something like this: In order to sell the property, the lender requires that it be completed, and that includes all carpeting down and in place. The builder cannot sell the home and you cannot get a new mortgage without carpeting down. This is usually very true.

As a consequence, if you want to put your own carpeting in, it would have to be done before you buy. This has some serious complications. What happens, for example, if at the last minute you can’t complete the transaction? Do you lose the money you paid for the carpeting? Does the builder need to pay you back? (Unlikely.) Further, if you buy it yourself and pay for it to be laid yourself, there is the question of mechanics’ liens that the builder has to worry about. (If it turns out you have a disagreement with the carpet people and don’t pay, will the builder be liable for the costs even after you buy?)

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As you can see, there are many roadblocks that the builder can raise in front of you. It will seem so much easier simply to go to the design center and pay the outrageously high price for upgrades or options.

It doesn’t have to be that way. You could have the builder buy the carpeting you want and install it. There would be no problem with mechanics’ liens that way. Further, you could give the builder a non-refundable check to cover a large portion of the amount between your discount on the builder’s carpeting and the cost of your choice. Of course, you would be at risk of losing your money if the deal didn’t go through. But if you only paid a portion, the builder would be at some risk too and would certainly want you to get the home. And you could get the carpeting laid at the last minute to reduce the risk of the deal’s not going through.

Getting an Option Discount

The simplest method, of course, is to go with the carpeting that the builder has already selected (chances are you’ll find something there that you like) and insist that it be given to you at a discount. Don’t hesitate to ask for a huge discount, like 50 or 75 percent. Remember, the builder is getting it at cost and often has added enormous markup.

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It may be easier to get a huge discount on upgrades and options than a price reduction on the house.

It all comes down to how well you negotiate with the builder (see the earlier chapters) and how motivated he or she is to move the property. With a well-motivated builder—usually one who has a large unsold inventory—amazing things are possible.