Best Value in Home Buying

On the Clark Howard radio show, a caller asked about buying a foreclosure house.  Clark said that the best buys right now are in brand new homes.  Today’s news reports that Beazer Homes had 68 percent of their buyers cancel sales last quarter.  That two-thirds of their customers backing out!  No wonder new homes offer the best bargains.

A little background on the housing industry:  the homebuilder borrows money from a bank to cover most of the cost of construction.  When the house sells, the homebuilder repays the bank construction loan and pockets some profit.  But if the house does not sell, the homebuilder keeps paying interest to the bank.  The bank starts to get antsy when the loan is not repaid on schedule.  There’s no more credit for the homebuilder until the old loans get repaid.  In short, it’s an ugly situation.  Most homebuilders hedge their risk by starting construction only after they have an order with a deposit.  But obviously customers are walking away from their deposits rather than buy a house or condo.

How do you negotiate with a builder in distress?  First, as in all negotiations, you have more power if you’re willing to walk away from the deal.  You have more power if you are talking to multiple builders.

Second, understand the other guy’s problems.  Sale prices are usually public information, because the transaction is recorded at the county.  The builder may be willing to cut you a really great deal, but doesn’t want the rest of the world to know how deeply he’s discounting.  (Several good reasons for this.  His doesn’t want to offend yesterday’s buyer, and he doesn’t want to offer the same great deal to the people who walk in the door tomorrow.)

Third, fashion an offer that works for both of you.  You want a steep discount, but the homebuilder wants a high official transaction price.  Ask him to throw in some extras.  If the house doesn’t come with something you want, ask for it.  Think appliances, landscaping, furniture, hot tub, deck, etc.

You can also ask the seller to buy down your mortgage rate.  That is, the homebuilder will pay your mortgage lender extra points, and the mortgage lender offers you a lower interest rate.  Completely legal and ethical.  This is probably the easiest way to extract a big discount, unless you really have a hankering for a $100,000 hot tub.