Partner With an Agent When Buying New Construction
But make sure your agent is experienced and expert in new construction. Just because an agent has sold it, doesn’t mean they understand it. You’ll want a buyer agent with training and first-hand experience in the building and sales processes. To be really effective, they’ll need to understand building quality, timetables, building sequences, construction and sales strategies as well as potential pitfalls so they can let you know if something is a-typical. Knowledge of DC developers, their history and projects is also beneficial. Ideally, your buyer agent will have actually worked for developers in the past, as we have. They’ll know how to protect your interests and set realistic expectations.
Did You Know?
Making a first visit to a development sales center or meeting with a developer’s sales rep without your agent present can allow developers to refuse to pay your agent’s commission? Always let your agent make new construction inquiries for you and be sure your agent accompanies you on your first visit.
Research ‘Preferred’ Lenders & Title Company
Who are the lender and title company working for? Lenders handling a developer project will be adept at working with the developer’s title company. They will understand the project and have all the necessary information to approve a new construction loan on the project in question, something that’s not necessarily true of another lender. But that doesn’t mean you should blindly accept the developer’s lender & title companies, even though they will offer you incentives. Research costs and quality before making a decision.
They’re a great idea for developers, but what about you? ‘Preferred lenders’ don’t always offer the best programs, rates or customer service to buyers. They’re chosen by developer because they understand new construction and are willing provide services at a profit to the developer in exchange for bulk business. Your service may not match the developer’s. Your loan programs may not be as advantageous than they would be from a lender of your choosing, and your interest rate may be higher. Close your ears to the siren song of closing cost credits and other incentives until you evaluate how the ‘preferred lender’ programs fit your needs. By law, buyers have the right to choose their title company and lender. If the developer is punitive in a quest to force buyers to work with preferred lenders and title, perhaps their development is not the best choice. What can you do? Get apples-to-apples estimates and worksheets from three lenders in addition to the ‘preferred’ lender. Ask your agent about running concurrent loans. Find out if you’re able to obtain a loan commitment letter prior to purchasing. Do the math to make sure you’re not making a disadvantageous 30 year decision to save a few thousand dollars today. We help buyers make smart loan comparisons and offer strategies for developer negotiation, timing and loan alternatives. We guide our clients through the process in order to assure as much as possible that the lender delivers the loan as promised, and that service is not inferior.
Lenders aren’t the only entity affecting your new construction purchase. Title companies can have an effect on your transaction, too. Developers select a ‘preferred title company’ because they need their company information and project-specific material under one roof. Otherwise, they’d be spending all their time keeping dozens of title companies informed instead of building your new home. BUT…. because the developer is referring a large amount of business to this title company—usually for multiple projects over time–loyalties tend to lean towards the seller customer, the developer–not you, the buyer customer. And there’s the service issue again. ‘Preferred’ title companies tend to be among the least expensive and they’re likely discounting for the developer…so your service may suffer. It’s unlikely you’ll be able to change title companies since developers started tying DC’s 1.45% transfer tax payments to the use of their title company and/or lender. That’s a significant amount of money. But your experienced buyer agent should know how to keep your interests at the forefront with both title companies and lenders.
An agent experienced in new home construction will be able to identify red flags in developer contracts. We’ll recommend you consult an attorney if it seems necessary, and try to negotiate some beneficial provisions for you. A few things to watch out for: Are EMD funds being held outside of escrow, or with an escrow company controlled by the developer? Does the contract prohibit any inspections or visits during construction? Is the developer funding a reasonable percentage of association fees? Is there a scope of work Addendum describing specs and materials? What are the warranties and guarantees? Is the project held in an LLC? If so, is the LLC transparent as to the name of the person controlling the LLC? Of course there are dozens of clauses in developer contracts. These are just a few of the things to research.
Research the Developer’s Reputation
Developers, like all of us, have different styles, priorities and work ethics. Want ‘the best’? That may be a subjective term. Unfortunately, there are home builders everywhere whose quality is poor and whose attitudes towards their customers match. Ask your experienced new construction agent to share first-hand information about their experiences with local developers and builders. All have a few unhappy customers, but if a developer or builder has a reputation for poor product and customer service, you’ll want to know before considering their projects.
Quality is key and in that regard, show beats tell. Look for signs of quality—or the lack of it. Are the buildings well constructed? Holding up as expected? Do existing homeowners in recently completed projects seem happy? Nose through the records, too. Are the associations levying special assessments to cure issues? Litigating against the developer? Are the developer’s projects appreciating well or stagnating a few years down the road? Find out how long the build you’re interested in has been in progress. Have there been delays beyond the expected? Why? This may indicate some financial or other weakness on the part of the developer that could prove to be a problem. Have the contractor, subs and expediters been paid in a timely manner? Can the developer complete the project, and with the level of quality promised? Don’t stop at the developer. Is the contractor reputable? How have their previous projects held up? A recent example in Georgetown of a super-luxe building that had so many issues the uber-wealthy owners had to vacate for repairs is an example of new construction not meeting the standards promised–or possibly even building code. Regardless of price point, this can and does occur in DC. If purchasing a condo or townhome, you’ll want to invest in a healthy project because you’re not just buying a unit, you’re buying into the total project. Its reputation will help determine your home’s value long- term.
Collect anecdotal evidence. Talk to homeowners in one of the developer’s previous projects about their experience and issues following settlement–but be aware that the quality of some builders can vary from project to project–along with the price point and margins. Also understand that if the community is still selling, you may get feedback that paints an unrealistically rosy picture since buyers will want to protect their investment. For condo and townhome purchasers: Ask the sales rep how many units are being sold per month. Your agent won’t be able to get an accurate count on the MRIS because builders don’t list them all. You won’t know what they sold for, or what the monthly sales rate is without doing some investigation on your own. Bring your BS detector. We don’t want to say new home sales reps lie, but sometimes new home sales reps ‘encourage sales’ with less than forthright information and tactics. An experienced new construction agent will ask the sales rep for documentation and politely call them out when they are found to be omitting or embellishing. Ask how many investors are purchasing in the community. Low investor ratio is important to your HOA health and future resale value. If the ratio threatens the warrantability of the project or limits financing options for new buyers, a purchase could be a poor investment. Condo and townhome new construction purchases carry their own set of issues. Know what they are so you can make an informed decision.
Home Inspection: At least one
Builders often try to discourage outside home inspections, and they can throw up a lot of road blocks to the process if they want to. Don’t be fooled by the standard new construction rep’s phrase: “You’ll have an inspection prior to settlement with our construction supervisor (or an independent company contracted by the developer).” That’s not an inspection, that’s a walk-through conducted by someone who works for the developer and is not at all invested in finding issues–-especially if they’re major. In fact, they may be bonused if they find zero issues. An inspection should be performed by a qualified, licensed and experienced home inspector with the qualifications you choose–and the inspector should be hired by you.
Two inspections, possibly three, are recommended during the process: Pre-drywall inspection. If you purchase in the early stages of construction, a pre-drywall inspection may be possible, depending on your contract terms. This is the time when an inspector familiar with new construction can really see how the home is built and spot inferior or flawed foundations, framing, materials, wiring, plumbing, and so on. Some builders are reluctant to allow this inspection, or flatly refuse. An experienced agent will know how best to try to gain agreement if at all possible A final walk-through inspection should take place 3-5 days from settlement. This gives the builder time to make last minute corrections from your punch list Final inspection (if there are significant corrections listed at the final walk-through) It’s ideal to have all items completed prior to settlement. Builders will lobby to take it past that point and the contracts will say they can, but getting corrections made following settlement can be invasive, a communication time-suck, and a waiting game. In a well managed transaction, these issues will be addressed during the contract phase and before settlement.
Why are ‘Flips’ Worrisome?
Beware: The house you flip for may be a dog, not a unicorn. And that’s giving dogs a bad name. “Flips” are homes that have been purchased by a rehabber and “improved” for quick resale. Unfortunately, a good number of flippers focus more on cosmetic aspects of the home and less on its structural integrity or soundness of electrical, plumbing and mechanical elements. Their goals are speed and profit, not care and concern. And that’s the good news. Some unscrupulous DC and NVA flippers have been caught drywalling over serious structural issues that later became homeowner nightmares. While some flippers do a good job, flips are an area of great concern and should be approached with extreme caution. Their popularity has exploded in DC in the last decade, as have the number of serious construction issues and lawsuits.
With little regulatory oversight for permitted and unpermitted residential construction in DC, bad behavior can be commonplace. Remember, anyone can decide to start flipping houses, whether they are qualified or not. Permits may or may not be pulled, and in our experience, DCRA inspections are ignored. Often the properties are held in an LLC to limit liability, so there may be limited legal recourse if you experience problems. Flips are classified as renovations rather than ground-up construction, so they’re subject to spotty DCRA permitting and inspection rather than the much more rigorous building code new projects are expected to adhere to. For our clients considering buying a flip, we have an extensive checklist of items to research.