Throughout the Twin Cities, metropolitan area buyers are turning to new construction homes for convenience and for the fact that there is some inventory to look at. As of today, there are 541 new construction homes in the Twin Cities for sale under 500K and 477 properties for sale higher than 500K. With a shortage of overall houses on the market, new construction has been a common turn for many buyers in recent months.
Before building a home, builders have a baseline goal of somewhere around 11% for profit on any given build job. This is after all closing costs and fees to build are paid out. On a typical 500K house, an average builder should be somewhere around $55K in profit. There are many factors that can swing this profit one way or the other such as lot pricing, supplier pricing, municipal building permit costs & water/sewer access charges, state and local building codes and so forth. I have personally worked for builders who made far more of an effort to "put the screws" to buyers by profiting as much as 25% on new build jobs.
By far, builders typically make the most amount of money on "pre-sold" homes. This is where you sit down with the builder and draft up your dream home. When doing so, the builder has very little carrying costs and a distinct timeline for when the project starts and ends. Buyers need to be very careful when pricing out their dream home. Builder's profit margins increase dramatically with the word "upgrade". From knockdown ceilings to exotic hardwood floors, builders are profiting off of your extras and wants in a huge way.
Here are absolute key items to know when going the new construction route:
- Only reputable builders. Builders are trying to make as much money as they can, period. There is the old saying that you get what you pay for and this rings true with new homes. Some builders simply do a better job and have a proven track record. Moral of the story, do your homework. How long has the builder been in business? Has their name always been the same, or did they change it? (red flag) Check the BBB site and "google" for all information. Only go with reputable builders with a proven track record.
- Look for quality finishes throughout. What type of finishes are in the houses? In recent years, builders have used woods such as poplar and alder to get prices down and increase profit. They sell this as the latest trend and make it look nice. They use dark stains or painted cabinets to cover imperfections. Wood floors are cheap and don't even have the ability to be refinished. Buyers should look for quality products that will last over cheaper flashy items that "look good".
- Basements and decks. You typically do not find these items finished in new construction homes. Builders routinely do not put on decks or finish basements to "you guessed it", increase profit. But the fact remains, who doesn't want a deck on their home? Basements are sometimes partially finished by builders to add square footage or bedrooms to a home, often times leaving a bathroom unfinished. Basements are typically finished at a cost of $30 or less per square foot compared to $150 or more for the main and upper levels.
- Appraisal issues. Builders are always trying to push the top end price of homes, and this can sometimes lead to appraisal issues. Buyers need to know their areas pricing and try to stay within area guidelines. You do not want to be the most expensive home in the neighborhood!
There is a multitude of additional tricks that builders use in new construction to maximize their profit. The bottom line for buyers is to be knowledgeable prior to walking into the model for the first time. If you ask me whether you should be represented by a realtor (other than the builders) I would say an emphatic yes! Some buyers think that if they don't have representation they will get an automatic 3% in their pockets. This is true about 1% of the time. A good buyer's agent will know what to look out for, know the area, know the builders' reputation, and know the ins and outs of the process. Most builders gladly pay co-broke agents.
Contact us for a free new construction consultation prior to heading to the models. Be prepared! Don't go at it alone!