Want New? A Finished Home Is Your Best Bet!

Today, when it comes to new construction, there is only one way to buy: a finished home, not a pre-sale wherein a home might just be getting started, or is still a vacant lot. Why? you might ask. Consider the following:

1. Nothing is more costly to a homebuilder than an unsold finished house. He is paying interest every day that a house is under construction. The interest rate and fees that builders pay is substantially more than homeowners pay for a mortgage. The meter starts running the day the builder closes on the building lot. But the interest is not accruing on the finished project, only on those monies that the builder has taken from the lender in the form of “draws”. The first draw may take into account the building lot, architectural and engineering fees, building permit and mitigation fees payable to the jurisdictional authorities. The second draw usually would be for clearing, excavation and foundation. As draws are taken from the construction loan the builder is paying interest the growing balance. When the house is done, he is paying interest, sometimes as high as 9.5%, on the finished product until it is sold and closed.

2. Builders do not have the luxury of living in their homes like the average home seller. He HAS to sell, and in this market will price finished homes to get rid of them.

3. If a builder sells a finished home, and doesn’t have too much unsold inventory, his lender will let him start another home. If a builder sells a pre-sale, most lenders in this market are not impressed. The pre-sale will not count as a sale in the lender’s eyes until it is finished and the sale closed, which could take months. A pre-sale offers little relief to most builders that have finished inventory with the interest meter running.

4. Not good: your pre-sale starts out OK, but the builder’s other finished houses are still not selling. Your house is coming along nicely in the middle of 50 vacant lots. The builder’s lender forecloses on the entire plat. Your house construction stops cold. It may take months for the lender to decide who to turn the construction over to, or who to sell it to. Your earnest money deposit, your $30,000 non-refundable deposit, and all of your non-refundable upgrade deposits are gone. The builder had formed an LLC for protection just in case such an event should occur. Your options for recourse are few.

So think twice about picking the perfect house for the perfect lot. It rarely turns out that great. Besides, once most builders have your money, your house gets all of the “B” crews, while the “A” crews continue to work on the unsold spec homes.

April 28, 2008 - Posted by Bill and Diana | Buying Concerns | | 4 Comments

4 Comments »

Thank you for this article

Nice Article.

Comment by samak | May 3, 2008 | Reply
I am a builder and I find this article offensive. It seems to me that your advice is a little self serving. You as a Realtor are more interested in selling houses quickly. It is not in your best interest to have your prospective client wait for their home to finish. Because you in turn will have to wait to get paid. No quick cash in your pocket.
Let’s take your article point by point:
1. “Nothing is more costly to a homebuilder than an unsold finished house”. When a builder puts his trust in a Real estate agent to sell the home that he has worked hard to complete and the agent fails to sell his home, that is what makes it costly to a builder.
2. ” The builder HAS to sell”, I would return to my earlier point that it is up to the builder to build the home and the Realtor to SELL the home. If the Realtor was doing his or her job then there would not be unsold homes in your imaginary development.
3. I am not sure what this point has to do with the overall theme of this article. The article is correct though, lenders do not look at a pre-sold as a sale until it has closed.
4. This is a worst case scenario, I would like to see some statistics as too how often this happens. I particularly like that the builder is a LLC. Builders do not incorporate or become an LLC to defraud the consumer. Most builders do this to protect himself and his family from the government. Labor & Industries, IRS, and others who work hard to assess penalties and bleed the builders until they have to go out of business.
The final paragraph in this article is incredibly untrue and slanderous. I always have my “A” crew on every project. My ultimate goal, as a builder, is to give the consumer the best product possible. I take umbrage at your putting this on your website and deceiving the public.
This is not a “nice article”.

Comment by Scott | August 4, 2008 | Reply
Scott the builder has some valid points as do you, Bill. You’ve pounded your own nails and I’ve seen firsthand the results of your labor–it’s beautiful. I’ve personally worked for a large builder and, for the most part, found your article true. There’s one point of distinction that should be made and it’s most likely where Scott the builder is taking offense: production builders are not like smaller in-fill builders. Builders who are closer to their projects take much more pride in their craft than those who delegate construction management to someone who knows how to pinch pennies more than they know how to rack a hardwood floor. And while I agree that there are many reasons to work under an LLC; the biggest reason I can find is because lots of builders create ticky-tacky tract housing (I’m sorry…is ’subdivision’ more PC these days??) where the nails pop in under a year and they don’t like getting sued any more than the next guy.

Comment by Teresa | October 13, 2008 | Reply
I recently sold a new (and completed) home in a completed plat in Stanwood. I was attending the walk through with my clients and the superintendent. My clients were commenting on how nicely the house had been completed when I made the statement “Builders always use their “A” crews on specs and the “B” crews on presales” and the super was nodding his head in agreement. Small builders have only an “A” crew, but large production builders have an “A”, “B” and probably even a few “C” crews. The buyer also got a very low price because the house had been sitting in inventory for too long due to two failed sales.

Lastly, no matter who you want to point the finger at for a house not selling the bottom line is this – the only reason a house does not sell is because of Price – when the price reflects the condition of the home AND the condition of the market then the property will sell. As one very experienced high end (1.5M and up) agent said to me once – “No amount of fancy advertising will sell an overpriced home.”

Comment by Diana MacDonald | November 25, 2008 | Reply