Help! How do we negotiate best?

km34567March 3, 2011

Hello all,

After much time spent researching and comparing proposals of 4 different builders, we think we have settled on the one plot and builder we would like. We are a newly married coupled and have never bought anything this big and have no clue how to negotiate. Our parents are not close by enough to help us and bought their homes >20 years ago for much much cheaper. We are looking at a custom home for about $500+. The builder's first offer seems reasonable to us, but we don't want to be naive. We think maybe we should either ask for more on allowances or an overall price reduction. Any thoughts on which route is better? Or any other negotiating idead would be greatly appreciated.

Thanks,

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linda117117

Did you get a list of allowances from all the builders? This seems to be where most people spend a good portion of their money. Allowances on lighting, kitchen, landscape, flooring can all cost alot more money then most people think. I've seen lighting packages for $750. You can't buy exterior lights for that these days, then you still have to do the interior! I would pick the builder you like, then tell him another builder offered a much better allowance to see if he will match it. I'm assuming by your email that not only have you never built a home, you have never purchased one? PLEASE talk to some people that have. Electrical outlets,(how many are included, cable, how many, phone etc) sink types, switch plates,cabinet hardware, these are all things that have to be thought about before you sign a contract.

As far as negotiating, most builders right now are pretty hungry. Dont let them pressure you to sign because someone else is looking at your lot or prices are increasing etc.

Also, sometimes you make changes along the way,(as you start to see the home come alive, you see things that may work better) find out how much they builder will charge you to do that.

Go to the "build a home forum". Those people over there have some great tips! Good Luck!

    Bookmark   March 3, 2011 at 7:28AM
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bedfordfred

The most important detail to consider is APPRAISAL. The overwhelming odds are that this 500k house will appraise for considerably less.

Assuming you are financing this house and putting 20% down, that's 100k. Let's say the house ends up appraising for 400k. The bank will finance 80% of appraised value, which is 320k. Instead of a 100k down payment, you will need to provide a 180k down payment in order for financing to go ahead.

I would recommend you have some iron clad appraisal contingencies in your contract, unless you are willing and able to make up the appraisal shortfall. I'd also say that builders are going to HATE having this type of language in a contract, and I'd guess that most won't agree to it. In order to protect your financial interests though, you should stand firm.

    Bookmark   March 3, 2011 at 8:11AM
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km34567

@ Linda: yes we have never owned anything more expensive then our cars! Heck I'm about to google switch plates now as they don't sound familiar. Thanks - We find this whole process to be overwhelming and very time consuming but hope we will have a personalized home that we love in the end.

@fred: We have met with a few banks and they said most appriasals in our area have not had much of a problem (or so they say). Both of our neigboring homes are 650 and 700K so we feel like the neighborhood supports these higher prices.

    Bookmark   March 3, 2011 at 8:31AM
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Billl

At risk of being the wet blanket, why are you trying to build a custom home in this market? Right now, it costs much more to build a home than it does to buy an existing one. In short, it is pretty likely that when you finish building this house, it will worth less than you paid for it no matter how well you bargain.

Custom building is great for people who know exactly what they want and have the means to pay to get it. I obviously don't know anything about your finances, but if you are first time homebuyer you probably don't know exactly what you want in a home. No matter how much research you do, there is really no replacement for experience. Most people discover that there are things they "absolutely had to have" that they never use and other things that they never even considered that would make their day-to-day life much easier.

    Bookmark   March 3, 2011 at 9:39AM
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Carol_from_ny

If you've never owned anything larger than your cars why on earth are you building? You don't even know what a switch plate is and you want to build a house!
Sorry but if you were my kids I'd suggest BUYING a exsisting house first and learning about home ownership before you leaped into building a custom home.
There's alot to home ownership. Not every one likes it or takes to it. Till you really know what you are getting into I think you are nuts to build.
Never having lived in a house together of your own you have no clue how much space you need nor how the spaces should be built for your use.
IMHO it seems to me you are trying to run before you've learned to walk. I have my doubts that a bank will even loan you the money you are seeking. Have you actual talked to a bank yet?

    Bookmark   March 3, 2011 at 10:33AM
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km34567

@carol and bill: We are not worried about getting a loan. We make more in 2 years then the home costs. We have already lived together and have a good idea of what we want/need in terms of our current townhome (rented) and seeing our parents and syblings homes. We are building a home because we like a "contemporary" style. The area we have moved to is very french country. We would pay the same amount for a home of the size/features we are looking for but the design would not be to our tastes. We have looked at comparable used homes and our budget for construction is in line. The market we are looking in does not have a lot a new construction going on (I presume not as many people to afford the homes we are looking at) and the used home of similar size have retained their value. So we think the deals are similar.

I was asking for negotiating advice as that is something we have not done for something of this size. I just presumed the first builder offer had room to adjust but didn't know how to go about it.

    Bookmark   March 3, 2011 at 10:49AM
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lyfia

Keep in mind that with a mortgage a lower price will mean you'll pay less in the end when you add up interest etc. versus allowances,

Now allowances is probably easier to negotiate than money off as the builder can always send you to pick your fixtures where he gets a good discount. Also find out what happens if you are under budget on the allowances, do you get the money back or does that go to the builder. In our case we paid more if we went over and less if we went under - they were just a guide. Depends on your contract. If it is like our case then negotiating on allowances doesn't make a difference as you save nothing with this.

I suggest you look at the allowances you have for example lighting and then look at all the rooms you have including closets/pantry/outdoor spaces etc. where you need a light and/or ceiling fan and look and see what you want and add up all those to see how the allowance compares.

Do similar exercises for the other allowances. Price the style kitchen cabinets/bath cabinets you want, price appliances you want, faucets, sinks, countertop/sq ft for everywhere you need it, flooring, door styles (solid vs. hollow core, flat vs. door design), front door, garage door, patio doors, windows (huge range of pricing depending on type/quality/shape, energy efficiency) etc.

Also check and see how many paint colors you want to use. Generally there are 3 colors for interior - 1 for ceiling, one for trim, one for walls (some do just 2 - one for trim one for drywall). Different color walls in different areas generally are much higher.

Have you toured homes that each builder have done? Talked to other customers that have used them to build their home. Ask about issues what happened if mistakes were made, how changes from the plan were handled (you need this clearly spelled out in the contract), any surprise costs, other things that would matter to you such as building site theft prevention. All things you should also ask the builders, but it helps hearing from others who used the builder to hear how things were handled from their perspective too.

    Bookmark   March 3, 2011 at 11:58AM
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Billl

"The market we are looking in does not have a lot a new construction going on "

I'm not sure you are grasping what that means in terms of the economics. Builders make money when they can construct a home for less than it costs to buy a new one (including the premium that people pay for that new house smell.) If nobody is building in your area, it means that they don't think there is that profit margin between their costs and what the market will support as a sales price.

"We have already lived together and have a good idea of what we want/need in terms of our current townhome (rented) and seeing our parents and syblings homes."

Well, it sounds like you have convinced yourself. However, the longer you live, the more you will admit that there isn't a substitute for experience.

As for negotiating, ask for the stars. Builders are desperate at this point because of the underlying economics.

    Bookmark   March 3, 2011 at 12:15PM
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spf5209

"We have met with a few banks and they said most appriasals in our area have not had much of a problem (or so they say). Both of our neigboring homes are 650 and 700K so we feel like the neighborhood supports these higher prices . . . We are not worried about getting a loan. We make more in 2 years then the home costs. . . . The market we are looking in does not have a lot a new construction going on"

We have similar circumstances and had two banks say the same thing, then they were shocked, shocked when the appraisal came back. Check out the threads on the building forum for more stories on getting a construction loan. If the homes in your area have not fallen in value, especially in this range, then you are in a very unique part of the country. Are those $650 and $700K recent sales? If not, doesn't matter what they are listed for or the tax appraisal. With no new construction of this type, the only comps will be recent sales and it doesn't take many short sales/foreclosures to blow your appraisal. It is not uncommon for current appraisals to be $100K+ below build cost based on comps. I had one appraiser use an 18-year-old house and not adjust the value b/c "there is no discernible market value reaction between new and good condition". The bank doesn't have to take the average, they are basing the appraisal based on what they think they can sell it for in the worst-case scenario where they end up with the property.

Not trying to be harsh, but given your inexperience, you may not have a realistic view of all the variables that affect the loan process. If you have great cash flow, just save for a couple of years and pay cash, avoid the uncertainty, and save a ton in interest charges. Good luck!

    Bookmark   March 3, 2011 at 6:52PM
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sweet_tea

Here is an easy way to negotiate in general (job offer, car , real estate, construction.)

Let's say bldrX quoted $504k total with xyz allowance pckg. Just say this..."can you do it for $447 total with abc allowance pckg? " Then you shut up and listen for an answer. You don't have to explain why. And DO NOT tell them you like them best and picked them over anyone. This could be verbal or email.

Chances are they will not come as low as you ask, but possibly close but you will see movement in your direction.

This negotiation method is very easy because you are not outright refusing the original price (.e.g. not saying I can only go with you if you don't give me lower). You are just asking for better and not showing all your cards.

Trust me, it works very well.

    Bookmark   March 4, 2011 at 8:36AM
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live_wire_oak

You're not understanding allowances. Allowances are just "guesses" as to what a material costs. They aren't firm committments. If your builder has a $8 per square foot allowance for wood flooring from his supplier, that's just a guess. If you go into the showroom and don't like that $8 flooring but like a $15 square foot flooring, you're gonna pay the $15 plus potentially a change order if the flooring that you like has some different installation requirements or he's not worked with it before. And if you find you don't like any of his suppliers choices, and you want to find your own, be prepared to assume full responsibility for that choice, including dealing with any warranty situations.

If you have builder A giving you a 500K build price with slightly more "upscale" choices or builder B giving you a $400K price, but you don't like any of the allowances and pick 100K worth of "upgrades", then the house costs you the same, Except that that 100K probably comes with change order penalities plus additional time penalties and actually costs you 125K.

You really need to take a day or two and read every single post in the BUilding a Home Forum here. You're about to embark on one of the most expensive undertakings of your life, and you are woefully inadequate prepared. You could be throwing away a lot of money here. Or you could be getting a substandard constructed home for your "negotiated" price. You don't know enough at this point to even know what you DON'T know! Take the time to educate yourself. Please!

    Bookmark   March 4, 2011 at 10:07AM
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kats_meow

We are planning to build after our current house sells. We did build before with "allowances" and live wire is correct. Some of the allowances were nowhere near what it would cost to get something acceptable to us. So in addition to the cost of the house we had another about 10% extra that we paid for change orders, mostly on going over on allowances. Now, we had factored this in to begin with so it was no big deal but still important to understand.

Personally I prefer a firm understanding of what we are paying upfront. On the builder we are working with now, as we make changes to their plans they have firm pricing for every change. They don't do allowances. They can show me now exactly what tile for example is their standard tile. They can show me each available upgrade they have and price it now. If I want something that isn't something they do standard they are happy to get it and they will tell me now exactly what it will cost. So, for example, I want a handheld shower and they have a standard one and firm prices for upgrades. I asked them about another handheld and they priced it and told me what it would cost. I much prefer this to allowances. It is more work upfront -- before contract signing -- as you really go through every item in the house and price it and choose it at the outset. But we will end up with a very firm and clear price.

    Bookmark   March 4, 2011 at 3:55PM
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calliope

I am at a loss for words on this one. The indicators for a solid investment in a custom new-build for a young, first time homeowner is pretty frightening right now and all I can say is I hope you love what you get on the long-term because you may have to live there a long time or pay dearly for the privilege of moving in the foreseeable future.

    Bookmark   March 4, 2011 at 9:42PM
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gayled

We signed our contract to build about 30 days ago. This is my 6th new build (and my last!). A little background - we are building in a subdivision of 40 homes, 15 of which are completed. The builder is solid as a rock having built several other subdivisions, condo's etc in the same town. His son lives in one of the 15 completed homes.

Our new home is semi-custom. Meaning, we took an existing model and ripped it apart. With every change and/or upgrade we asked for an approximate cost so that we would land somewhere within our budget. In the end, there wasn't a whole lot of wiggle room on his part. He ultimately threw in some upgrades and we increased our budget (no surprise there). We landed at $50,000 over the price of the original model and we expect to spend another $20,000 upgrading the appliance/lighting/misc other selections.

Some builders really low ball their base price, and you get nickeled and dimed to death. Other builders price their homes with attractive features right from the start. So, most importantly you have to know what you're getting. Since this is your first home, you many not fully understand what you want. I think all of the other posters pointed this out to you, so I won't reiterate. What I will tell you is that I expected the builder to have a whole lot more wiggle room. The real estate market is struggling, so we figured we were going to get some amazing deal. Well, that's not how he works. He prices his homes fairly right from the start and doesn't play games. Trust is a major issue - good contracts help, but ultimately they are only as good as the parties involved.

Do your due diligence. Review the contract with an attorney, speak to other residents of the community about their experience with the builder. Visit previous subdivisions that he's built, preferably 7-15 years ago. Speak to the building inspector in town.

You sound very determined and very accomplished professionally. If you have a good builder you should come out of this relatively unscathed.

Btw, my last house is the same price as your first house. I can't imagine where you'll be when you're my age. :)

Good Luck!

    Bookmark   March 5, 2011 at 6:46AM
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jamienorcross_comcast_net

We are in the same position as you! (With a smaller budget..lol) We are a young couple (25 & 27) buying our first home & having it built in a beautiful development. We house hunted for a while & kept falling short of what we wanted. After the changes we would have to make, we would of ended up paying the same price as new construction. We are determined to stick to our plan & budget. We have also done A LOT of research!! That's the biggest advice I can give so far. You must drive through at different times of day, talk to neighbors, go to home improvement stores & know what these upgrades cost so you know the ballpark of profit margins to the builder. And definitely talk to people who have recently built a home. As much as I thought the builder would laugh at our first offer, they didn't, and still took it into consideration. "Googling" sites like this have helped me ton!!

    Bookmark   March 25, 2011 at 4:11PM
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ColorfulLair

The area we have moved to is very french country. We would pay the same amount for a home of the size/features we are looking for but the design would not be to our tastes.

Made me laugh... my mother loves French country, and it drives me nuts.

If you build, maybe hiring an architect would be worthwhile for you... a good one could help clarify what you want and help you achieve it plus stay on top of the contractors regarding building materials and quality.

Or have you considered consulting an interior designer and/or architect about remodeling an existing home? Might be that some of the French country could be made to go away and existing spaces cleaned up and made more open much more easily and quickly than starting from scratch.

    Bookmark   March 25, 2011 at 6:06PM
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totsuka

We hired a consultant to check on the construction of our home. He cost 5k but was well worth it. He is a retired builder and very sharp. Considering the cost you might consider a 'extra set of eyes" to look at the little things.

    Bookmark   March 27, 2011 at 12:40PM
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theroselvr

Not all builders are hurting. Where I am they are still selling houses.

    Bookmark   March 27, 2011 at 5:26PM
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ColorfulLair

Honestly I don't understand plowing a half-million dollars into a project without hiring a professional to create the design and oversee the project. I'm not an architect, I'm just friends with one, and I've spent enough time flipping through his amazing books to realize how lame most houses are. If it were my half-million, I'd want the best. :)

    Bookmark   March 27, 2011 at 9:59PM
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jane__ny

According to the latest statistics, new houses are not selling. They may be building, but no one is buying. New home building is the worse since records were kept. 'Used' homes are selling, but its the new home builds which are suffering the most.

The article states that new home builders must lower their prices to compete with 'used' homes. Until they do, many will go under.

This is not the time to buy new builds.

Jane

    Bookmark   March 27, 2011 at 11:04PM
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LoveInTheHouse

Jane, maybe this is the time for a young couple like this to get a good deal if builders are having to lower their prices? Maybe this five hundred thousand dollar house would have been a six hundred thousand dollar house a couple of years ago? This young couple must be pretty smart if they're making two hundred and fifty grand a year. So she doesn't know what a switchplate is. If she buys an old home, she's going to be stuck with whatever's in there. She won't have ANY choice. Plus there's a whole different set of problems with used houses--there are always things that are broken or ready to break no matter what price range you're in. If she buys a new house, sure, she might make some mistakes and later wish she asked for this or that. But that's what she wants--a new house. And it appears she can afford it.

Km, sorry I've never purchased a new home so I don't have any ideas about how to negotiate the best deal. All I can tell you is that we do flooring and we work for a builder. He gives people flooring allowances and they often want to upgrade and this particular guy never charges the buyer any extra. He always eats it. Not because he's necessarily hurting. He always has a house in-process. He's busy. It's because he really cares about making his customer happy. Which I guess is the reason he's busy. I wish there was some way you could tell if a builder is like this before you choose. The only thing I can think of is word-of-mouth. Maybe you should Google the names of the builders and see if anyone is complaining about them or raving about them?

    Bookmark   March 28, 2011 at 12:54AM
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