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Marketplace Homes Reviews New Construction Home Negotiating

Posted By Mike Kalis in Marketplace Homes Open Mike on October 16th, 2013

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Did you know that prices in many new construction home neighborhoods have risen this year? With home values beginning to grow again, builders have increased prices anywhere from $20-$100k. Due to these price increases, many of Marketplace Homes’ clients have been able to gain equity in their new home prior to even closing on it!

You might be wondering, “How can I get a “good deal” in this type of market?”  Fear not!  At Marketplace Homes, we believe that a great consumer is an educated consumer. We’re here to share the inside scoop on how you can negotiate on a new construction home!

Would it help you negotiate on a new construction home if you knew the costs to build?

In order to understand the value behind the home you are buying, it sure helps to understand the cost structure that it takes to build the home. Knowing what the builder’s costs and profits is one of the best assets to have when trying to negotiate home pricing.  Below are simply observations from heading up a company that has sold half a billion in new construction homes and is the largest broker of new homes in the US. These tips may or may not apply to a particular neighborhood, but can provide some basic insight.

50%/25%/25% Rule

An old rule of thumb in building says that your build should cost about 50% of the end price of the home. Your land should cost 25% of the end price.  Your profit as a builder should be 25%. While this is obviously not true in all cases, it is true in many!

Land

If your home is $400K, the homesite that it is built on should cost the builder about $100K.

It costs approximately $20-$40K to develop a lot.  The rest of the cost in a lot is in the purchase of the raw land and profit to the developer and interest.  Lots purchased between 2008 and 2011 sold for as low as $5-$200K or under the replacement costs. Land prices are rapidly rising right now and this is a driving factor in pushing new home prices up.

Build Costs

If your home is $400K, the build costs could be around $200K to the builder.

Builders have cost structures that can range from $40/sq ft to $100/sq ft depending on how they build and what they are building.  Many larger production builders are able to stay closer to that $50/sq ft number as they have value engineered the build process and home plans over the years. If you build the same home 100 times a year for 10 years, you get good at it.  If you are building a custom home, you could see your builder costs around $100/sq ft.

Builder Profit

If the home is $400K, the builder will attempt to make around $100K profit on the sale.

After adding the cost of the land to the cost of the build, you have the “Total Costs” of the home.  The difference in your purchase price, less the cost to build, is what the builder is profiting. It may surprise some that the average builder margin on a home is 20% to 30%. This means that on a $400K home the builder is going to have a profit margin of around $100K.

“OH MY GOODNESS MY BUILDER IS RICH!!!”

Well, yes… generally builders are really quite wealthy and this is good.  If they are not, then they will not be able to finish your home!  Working with successful people is a good idea! It’s good that they are making something on your home!  It’s important to realize that the builder must cover a lot of overhead from the profit margin they make from a home sale. These costs can include interest and carry costs on the land, the model home, maybe even hundreds of staff members. The building industry and land development world is complicated. The successful builders and developers have great vision and probably a lot of cash!

However, you as the individual can stand toe to toe with the big builder and both walk away with a home at a great value.  Here are some good things to consider that we have found to be effective over the years in order to have a successful transaction where you and the builder win;

 

1)    Know the builder’s profit on the home – if you read above, you’re a step ahead of most!  GREAT WORK!

2)    Understand the value of options – typically options are marked up 50% to 100% of costs. In other words, $30K of options may only cost the builder $15K to put in.  Perhaps there is an option or two are things you would really love?  Discounts on options may be easier for the builder to agree to then a straight price reduction.

3)    Lot premiums – Often lot premiums are used as fluff on nice lots to push buyers to purchase a less desirable lot.  Why would anyone buy the home backing to power lines?  Well if the other lots are $25K more expensive, you may like the price!  However, that $25K premium is often added for no reason other than to make the less desirable home site look better and drops straight to the bottom line.

4)    Builder Affiliations – Often the builder will be “affiliated” with a mortgage company, title company or real estate company.  Generally, this means that the builder makes more if you use these affiliated companies.  This is good news to you as a savvy buyer!  If the builder wins, maybe you can too!  Perhaps you would offer to use these affiliated companies in return for a discount!

5)    Understand the Builder Sales Cycle – Yes, the end of the month really can get you a better deal.  Deals seem to surface around the 30th of the month more regularly then you would think. The end of the year may bring even bigger deals.

6)    “We don’t negotiate on price” placard in the model is sort of true. The builder may not negotiate on price, but there are many things that are not price.  A deal is a deal, and no two pieces of land on earth are exactly alike. It is pretty darn near impossible for everyone to get “the same deal”.  As a result, look for things that are outside of price that would help you feel comfortable with the home.  The builder may not negotiate on price, but that doesn’t mean that terms or other intangibles are off the table.

7)    For the love of all things holy, work with someone that knows the building industry!  If the 6 points above are news to you, then you definitely don’t know the next 100 points that we haven’t had space to mention here.  Find a company that specializes in new construction homes and understands the industry… perhaps even, oh I don’t know, MarketplaceHomes.com!

Yes, prices are rising. Yes, builders are getting tighter on negotiating.  However, if you buy smart, work with professionals, and understand what is important to all the parties in a deal, you can get the home of your dreams at a fair value for all!

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