I recently represented my clients in purchasing a new build in Peoria, Arizona. This transaction reminded me, yet again, why it is CRUCIAL to have realtor representation when purchasing a new build. I saved my clients $15,000 that, without an agent, would have come out of my client's savings accounts (without even being properly informed) or they would have lost their $12,500 earnest money (and potentially double earnest money!).
So, listen up! Here are 3 reasons every buyer needs representation when buying a new build along with my personal experience as a REALTOR:
1. It's FREE
First and foremost - did you know realtor representation when buying a new build is FREE? This goes for almost every buying situation (unless you're in a CRAZY uniquely rare seller's market). However, when buying a new build, the builder should always cover the buyer's agent's commissions.
2. No one has YOU in their best interest
If using an agent for free doesn't convince you, then this #2 should.
The builder's agent who works out YOUR deal works for the builder (not you).
The builder's lender who will structure YOUR mortgage loan also works for, you guessed it, the builder (not you).
NO ONE in this transaction will have YOU in their best interest. In fact, your needs are pretty low on the totem poll. For the builders, this is just another transaction - like buying milk at the grocery store. If you won't buy it at their price and their conditions, someone else will.
In my most recent new-build transaction, we ran into a hurdle at the appraisal state that made me lose faith in these builder companies.
For simple numbers sake, let's say the purchase price was $600,000 our down payment would have been be $120,000 (conventional loan with 20% down payment) and the remaining $480,000 would be their mortgage loan.
Unfortunately, the appraisal came back 50k lower than our agreed-upon purchase price. The home was valued at $550,000!
SIDENOTE: If you don't know what an appraisal is, let me explain. Before the bank agrees to loan out a mortgage, they need to confirm the price value of the home. They don't want to lend out more than what the home is actually worth. So, the bank sends an appraiser and they assign the home a value. If the value comes back lower than the agreed-upon purchase price, they will still only lend out a percentage of the appraised value leaving a deficiency for the buyers and seller to figure out.
Normally, when the appraisal comes back low, you would negotiate a new purchase price; ideally in this situation, the sellers and buyers would meet in the middle at $575,000. The seller comes down 25k in price, and the buyers come up with 25k in cash (in addition to their down payment). Unfortunately, with a new build, they have a clause in their purchase contract (that is 80+ pages long) where the buyers agree to make up ALL the difference of any low appraisal and the sellers (the builders) will not lower the purchase price or provide any credits to make up the difference.
The builder's lender calls my clients (not me - he never once called me... so shady) and told them the appraisal came back low, but no need to worry they will cover the PMI fee and it'll all be good, nothing will change.
When my client told me this - I immediately asked, who is making up the 50k difference in price? To which she was never informed.
I call the lender and he just kept saying, "You don't need to worry! The builder will cover the 5k PMI fee and the loan, down payment, and purchase price will remain the same."
Without getting too technical, the latter part of that statement is numerically impossible. They cannot all 3 remain the same, the numbers don't add up.
Red flag #1: There is a 50k deficit, who is paying that?
Red flag #2: Why is there a PMI fee?
The lender and I went in circles trying to hash this out. I was trying to get him to be upfront and honest about how he was structuring my client's loan and he would NOT give me a straightforward answer. He danced around everything and used vague terminology.
The lender was even more vague ith my client telling them, "Nothing has changed, we've worked it out." My clients were so confused and felt lied to.
Even worse, I called the builder's agent and she had no idea what was going on. She said, "That's a lender thing, I don't really understand it." I had to explain all this to the agent and she still didn't understand that there was a 50k deficit let alone who the heck was paying it. To some extent, I understand when agents are uninvolved in the loan side of things. Agents are not lenders and lenders are not agents. However, this is simple math and is within an agent's responsibility to understand and be made aware of.
Let's address Red Flag #2. The lender kept saying, "The builder will be covering the 5k PMI payment," (as if they were being a hero in this situation.)
SIDENOTE: If you don't know what PMI is, let me explain. If you have to put less than 20% down on a house, you will have PMI. It's basically an additional interest payment tied into your loan for being a "riskier" buyer.
If my client's down payment of 20% remains the same, then why does a PMI fee need to be paid to avoid PMI? There shouldn't be any PMI...
Fishy business, I tell ya!
I finally (after much persistence) received a document from the lender with every dollar line-itemed out. Granted, builders use totally different language so it's a puzzle for even an agent to decipher. After looking over this document, which was still vague in some areas, with my trusted lender of choice, James, we were all finally able to see clearly how the builder had structured the financials of this transaction. Let me break this down for you:
My clients were initially prepared to pay a $120,000 down payment based on the $600,000 purchase price. But the lender was only going to put 70k of that 120k towards the down payment and keep the remaining 50k to make up the difference in price. My clients were essentially coming up with 50k cash to come in over appraised value, and not having a full 20% downpayment. Which is what triggered the PMI payment fee.
How sneaky?! I was in flames.
It would be totally different had the lender called me/my clients and laid out the options for them with all the pros and cons; as every lender that has you in their best interest would.
But to lie and say their "downpayment is the same," that's shady. It's not the same. Sure, their "out of pocket" is the same, but most defiantly not their down payment - two TOTALLY DIFFERENT things.
Please note: This appraisal hurdle was one of many red flags throughout this transaction that I had to pump the breaks on in order to ensure my clients were aware of what was going on as well as course correct to ensure their best interest was put first.
I would always recommend getting your own lender to represent you, but builders use large incentives (20k discount in this case) if you use their lender. And you wonder why? Hmmm...
Moral of the story... The builder's lenders and agents do NOT have you in their best interest.
They skirt around hurdles and do what they wanted with my client's money in order to close the deal. I was SHOCKED at how the situation was handled, especially with the builder's lender.
Unless you have a background in contracts and negotiation, having a realtor represent you in purchasing a new build is a must. Builders have a "proven process" and negotiations throw a wrench in their plans. They do not like it. It's hard enough for realtors to negotiate during this process, I can't imagine a client having to go against Goliath while being represented by Goliath's realtor. It's their way or the high way.
At this point in our transaction, my clients were ready to walk away from the deal. But, we can't! Do you know why? Because they have it written into their 80+ paged purchase contract that if a buyer walks away, the builders will keep the earnest money (15k) my clients paid upfront and there was a possibility that they would actually keep DOUBLE earnest money. (In a normal transaction, earnest money is negotiable.)
For fear of losing double earnest money, my clients told me, "Jessica, let's just close the deal."
I will add here that I didn't quite agree with the low appraisal - it really could have been higher. If my clients sold the home in 1 year, they would still make a profit even after paying over value for the home. It really wasn't a total loss and we still felt like we got a decent deal for the 600k.
But my job is to advocate for my clients and I couldn't give up that easily, especially when I feel we didn't have a fair transaction. I was able to use my client's desire to walk away, and the lender's untrustworthy tactics as some leverage to negotiate the impossible: Lowering the purchase price (a week before closing, mind you! Which is INSANE!)
We went back and forth and up to management and back down again with this request. I used every negotiation skill I've learned over the years.
After all was said and done, I was able to save them a total of $15,000. This felt like a major win considering the circumstances.
ALWAYS have an agent represent you! If anything, to have someone there to transparently explain what you are opting into. It's a no-brainer.
If you have any questions about anything discussed in this blog post, please comment, email, text - reach out! I'd love to hear from you! I live for this stuff :)
Jessica Doberneck | Arizona REALTOR