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Smart Developer Negotiations

Master the art of buying new construction with expert strategy.
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EXPERT BUILDER STRATEGY

Negotiating with Developers

Negotiating new construction usually requires looking beyond the list price to find more creative ways to get the best deal. There are a number of factors that motivate developers to stick to their list price. Developers are likely to stick to their guns because if they sell too far below the list price, future buyers in the development will have a comparable sale to use as leverage in their negotiations. Developers also have expenses that change over time as the price of building materials fluctuate. Do some research on current building material costs before you attmpt to negotiate. If the builder is facing significant overhead increases, they are unlikely to cut into shrinking profit to get the deal done.

This doesn’t mean that you should abandon negotiations. Look at current market conditions to determine how much leverage you have. If there is high demand and limited housing inventory, you won’t have much leverage. In most cases, you will be better off asking for things that will not impact the recorded sales price such as upgrades, financing terms, assistance with HOA dues, or credits for closing costs.

MARKET METRICS ANALYSIS

Housing Market Conditions

The first step to any negotiation is understanding your leverage. If housing inventory is abundant, you will have much greater leverage than in a seller’s market with a housing shortage. You will want to look at key statistics in the development where you are looking to purchase. If you are among the first buyers in the community, this can be difficult without sufficient data from previous sales to draw from. If this is the case, you will need to look at other new construction developments in the area with similiar home features and amenities, but this will carry far less weight. If there are no truely comparable sales, you can look at city or zip code statistics to get a general idea of the market so that you aren’t going in completely blind. Pay close attention to the following statistics:

Absorption Rate

First, you will want to take a look at the absorption rate in the development. The absorption rate in real estate is the rate at which listed homes in a given market will sell over a defined time frame. An absorption rate above 20% indicates a seller’s market. A rate between 15 and 20 percent is considered to be a balanced market, and a rate below 15% is a buyer’s market.

Median Days to Contract

Second, look at the median days to contract in the development. This will be a good indicator for the level of buyer demand. If homes are going under contract quickly, you know that demand is high and you will have less leverage in negotiations. On the other hand, if the developers homes are sitting on the market, then you are likely to have better luck getting a good deal because usually developers need homes to sell in order to have the funds on hand to continue building.

Average Sales Price

Third, you’ll want to look at the average sales price in the development. If it is a cookie cutter community, look at the average sales price for the model you are looking to purchase. See how the prices have fluctuated over time. Remember that it is common for the first few buyers in a development to get the best deals. Aside from the fact that they need the funds to continue building, they want to sell quickly early on to show future buyers that their product is in demand. Taking introductory pricing into account, analyzing how the prices are trending in the development will reveal how much leverage you will have.
CREATIVE NEGOTIATION

Negotiating New Construction Requires Creativity

As mentioned above, developers are usually more likely to negotiate items that won’t impact the final recorded sales price. Consider negotiating the following:

Upgrades

Common negotiated upgrades include better appliances, light fixtures, smart features, and landscaping. If you select a less expensive lot, the developer will be more likely to include upgrades.

Financing Terms

Most developers will provide incentives if you work with their preferred lender. You should still shop around for a mortgage. If you find a better deal through a different lender, see if the preferred lender will beat or match the rate and terms.

Closing Costs

The developer can give you a credit at closing to cover your closing costs without impacting the recorded sales price.

HOA Dues

You can request for the developer to cover your HOA dues for a specified period of time. If there is a strong sellers market, this request probably won’t fly… but it never hurts to ask.

TIMING THE PURCHASE

Smart Purchase Timing

It is easier to negotiate new homes that are already built because the developer is aware of his bottom line without having to factor in unforseen expenses that can arise during construction. Purchasing at the end of the year when the developer is looking to reduce financial liability for the next fiscal year also helps.
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