Why Hire an Agent When Buying New Construction?
Many home buyers mistakenly treat shopping for a new construction home like shopping for a new car. You follow the signs posted around town or visit the builder’s website to see what they have on the lot, and then head over to see the product in person. Taking a tour of the model home is similar to test driving a car, and if you like the ride you start talking numbers. And, like with a new car, you can place a more expensive custom order with a long wait, or you can opt for the convenience of what’s currently available. Like buying a new car, when it comes time to talk finances you’re often at a disadvantage in the negotiation because you don’t know what the last dozen buyers under contract have paid. Homebuilding is even less transparent than car production about the builder’s costs or profits.
So how do buyers get the best deal on a new construction home and enter the process armed with information? Like 87% of home buyers did in 2022. They used a REALTOR®! According to the National Association of Realtors 2022 Profile of Home Buyers and Sellers, homebuyers overwhelmingly choose to work with a REALTOR®. Why would a home buyer abandon that resource just because they’re buying from a builder instead of a private seller?
Usually, it’s ignorance of the home builder’s policies, or it’s a lack of planning. They just wander in and get swept up in the moment.
Many people assume they can’t bring their own REALTOR® to a builder showroom, but we work with builders all the time. Builder representatives know we are the direct link to great buyers and they are happy to compensate us for bringing a buyer. Often, the catch is the buyer has to bring their agent on the first visit, so be sure to communicate with your agent while you’re out looking! Otherwise, there can be conflict over who really is responsible for attracting the buyer.
Three Things Your REALTOR® Can Do, But a Builder’s Representative Can’t
Represent Your Interests
A builder’s representative is exactly that. They are employed by the builder to sell the builder’s homes. They’re often not even licensed agents. If they are, they owe you, the public, honesty and fairness, but they have a fiduciary responsibility only to the builder. A REALTOR® working on your side knows the contract, can help point out opportunities, and can help hold the builder accountable.
Show You More Homes
A builder’s representative is knowledgeable about one product, the one they’re trying to sell. If you want to look at re-sale homes or new homes by other builders, only your REALTOR® can help with that.
Negotiate With Knowledge
A builder’s representative works in one development full-time. They are not out shopping with their own buyer clients, taking the pulse of the re-sale market and other builders’ communities regularly. Your REALTOR® is more likely to know when there is an opening to negotiate, whether that be on price, terms, or additional inclusions. Does that mean you’ll get a deal? Maybe not, depending on the market’s pace, but if there’s a deal to be had, your REALTOR® is likely to know.
If you’re considering buying a new construction home, DO work with a REALTOR® throughout the journey. There’s no cost to you, and you deserve someone representing your interests throughout the deal.
Buyer Strategies for a Low VA Loan Appraisal
First, I have to thank groups of ill-informed people on the internet. Since I’m in the business of educating people about buying real estate, they give me tons of material to work with. Often, it’s people who bought a home (once) or sold a home (once) and now are resident (and residence 😜) experts.
Sadly, sometimes they’re real estate agents who have seen a thing or two and think their experience is universal. Fortunately, I’ve learned the answer to any real estate question is almost always “it depends” or “ask your broker.” So, when a buyer posed the online question of if she should pay more than the appraised value for a home, a lot of people posted strong opinions, but most lacked analysis.
Quirks of VA Appraisals
VA appraisals get a bad rap. Some of the prejudices are leftovers from the past, like seemingly nebulous Minimum Property Requirements that derail transactions, and the myth that appraisals stick to a property for months, reducing the potential buyer pool for a home.
I’ve personally had an appraiser call a particleboard false bottom in a bathroom cabinet “structural” and require its replacement. But a trip to Home Depot and $25 was the easiest way to fix that problem, even if my head hurt from rolling my eyes at the ridiculousness.
Mostly, though, hurdles of VA appraisals are about the value of the home, not the condition. It’s not that VA appraisals are particularly tougher than others. It’s that the VA addendum to a sales contract allows the VA buyer to walk away if the appraised value of the property is even a dollar less than the contract price, and a lender usually will not lend more than the property’s value. In some states, the terms for a conventional loan are also written with similar buyer exits.
The appraisal clause provides a giant, gaping loophole through which a VA buyer may choose to escape the contract. And that’s unsettling for a seller who wants 1. money and 2. certainty.
Tidewater Notice
VA appraisals do have one huge advantage over a conventional appraisal- the Tidewater Notice. If an appraiser believes the property value will be lower than the contract price of the home, she is required to call the designated point of contact and allow him the opportunity to provide more information to support the value. This route can often avoid a problem. A few years ago, an appraiser compared a condo of the same floor plan adjacent to one my buyers were purchasing, but the photos of that unit did not show it had a 1970s kitchen and bathrooms while ours was completely remodeled. The appraiser issued a Tidewater Notice and once we could provide more information on the differences between the units, there was no concern.
Low VA Appraisal Options
If the appraisal is lower than the contract price, the buyer has a few options:
1. Cancel the contract.
2. Ask the appraiser to reconsider the value.
3. Ask the seller to reduce the price to the appraised value.
4. Negotiate a new middle-ground price with the seller and contribute some cash toward the deal.
5. Pay the full difference in cash.
Does a Reconsideration of Value Really Work?
According to my trusty lender guide at Guaranteed Rate Affinity, the veteran must request a reconsideration of value, and the maximum increase allowed is five percent.
Guaranteed Rate Affinity recently helped a VA buyer request a reconsideration of value on a property that appraised for $31,000 less than the contract price. The reconsideration raised the appraisal by $13,000, to a price buyer and seller could agree upon and the transaction proceeded.
Strategies to Negotiate Low Appraisals
When does it make sense to cancel the contract? Certainly, when you actually want out. If you believe this home is no longer the one, the low appraisal gives you the option you need. Otherwise, try to negotiate something else. If none of the other options work, you still have the right to exit.
Asking the seller to reduce the price to the appraised value can’t hurt. As long as there is no provision in your contract allowing the seller to kick you out of the deal in addition to refusing your request, ask. The odds of a seller approving that request depend on the market conditions and you should set your expectations accordingly. If a seller has a backup buyer ready to step in, he or she may have a great reason not to lower the price, or even to pressure you to exit. If the market has trended hotter since you went under contract and the seller thinks they can get even more today than just a few weeks ago, then they may say no. Conversely, if there’s no one waiting in the wings and the seller wants closure, you’re in a strong spot.
Proposing the seller reduce to the appraised value at least leads to the next step in the negotiation. If the sellers won’t reduce to the appraised value, maybe you can find a mid-point you can both digest.
When Is It OK to Pay More?
Appraisals look back at what has happened in the past, with the most emphasis on closed sales. So, in an ascending market sometimes appraisals just don’t keep up with what buyers are willing to pay. Think of a low appraisal as a warning light for a buyer in a fast market. In a slower or declining market, your prospects for renegotiating are stronger.
If your market is appreciating, is it really a risk to pay a little out of pocket to get the house you want? If you can look at comparable sales and the market direction and see that the money you may pay out in cash now will be made up in a matter of months and you have that cash available to spend, does it really matter? There’s no set amount over the appraised value that is ok to pay. It depends on your financial ability and the cost of homes in your market.
Also, don’t discount the emotional and situational value of the house. Do you love it? What is that worth? Do you not particularly love it, but having the matter settled brings peace of mind? Those intangibles are where you find the value.
Is Canceling the Contract the Right Choice?
Have you made other offers, but lost to buyers with more cash or more appealing terms? Or was it hard to find a home you even wanted to make an offer on? Those are indicators you should stick with the property you won.
Is the amount of extra cash you’d add comparable to the cash you’d spend to start over inspecting and appraising the next property and possibly having the same thing happen? If so, the certainty of this home may be better than what you’d find if you start over.
In 5 or 10 years when it’s time to sell will you even remember that you contributed some cash to make the deal work, or will it not matter at all?
You Should Also Know…
There are a few other points tangential to this discussion that should be considered.
1. I find VA buyers sometimes lose touch with the reality that everyone else actually has to put cash down to buy a house. An FHA loan, a program similar to the VA loan, requires 3.5% cash down. Most conventional lenders require at least 5% down and buyers putting less than 20% down usually pay mortgage insurance. The VA loan is an invaluable opportunity, but it’s not free.
2. Appraisals are one person’s opinion of value. Sometimes appraisers aren’t very familiar with the local area and use comparable sales that don’t make sense. Sometimes they have biases influencing their work, such as this recent case of discrimination. And sometimes there isn’t a lot of market data to use. Compare the data in the appraisal to what your REALTOR® can provide from the MLS to fact-check the appraiser and have a conversation about that.
3. There was a lot of catty talk in the forum about the agent of course wanting the buyer to go ahead and pay more, assuming the paycheck was the driving factor. The commission difference in this case, where a buyer was considering paying $6000 more, only amounted to about $120 in the agent’s pocket. If your agent is willing to throw you under the bus for that little money, by all means, fire her. But that’s probably not what’s happening. Most of us don’t want to ruin a relationship, risk a poor review, or jeopardize future business.
Remember, if you’re running into VA appraisal problems, the answers are “it depends” and “ask your broker.”
How to Use Zoccam to Send Earnest Money Deposits
Once you have an accepted contract, it’s time to submit the earnest money deposit to the settlement company. This triggers the settlement company to create your file and begin the title work. It also keeps you compliant with the terms of your purchase contract and in good stead with the seller.
These instructions apply to contracts managed by Mid-Atlantic Settlement Services. Other companies may use different apps, or not accept checks using an app.
DOWNLOAD the Zoccam app from your app store.
REGISTER with your name, email address, and mobile phone number.
ENTER the code you receive by text and tap CONFIRM.
CREATE and 8 digit passcode.
SIGN IN.
On the home screen, tap CAPTURE and then EARNEST MONEY.
SEARCH for the title company. Our in-house provider is Mid-Atlantic Settlement Services, Maryland Properties.
ENTER the property address, your contact information, your agent’s name, and tap CAPTURE.
Place your check on a dark surface and hover the camera over the front of the check until the image is captured. Repeat with the back of the check.
Look for an email confirmation in your inbox.