That sharp buyer pullback comes at a less than ideal time for U.S. homebuilders. See, a combination of pandemic-related supply chain constraints and a surplus of eager buyers during the boom, saw the total number of units under construction reach historic levels last year. And that historic backlog, along with spiked cancellation rates, means buyers finally have some negotiating power over builders.
To find out how buyers might be able to strike a better deal with builders, Fortune reached out to John Downs, a certified mortgage advisor and senior vice president at Vellum Mortgage.
The first trick is to simply employ raw negotiation tactics, like offering low, or using outside lenders “to keep builder lenders honest,” Downs says. The second trick is to see what incentives builders might be able to offer.
Unlike homeowners—who are less likely to give up the equity they have—builders are just dropping profit. So when the market shifts, builders can drop prices and/or throw out incentives like paying closing costs (which can amount to between 2% to 5% of your mortgage loan), offering mortgage rate buydowns (builders pay lenders a lump sum of money to reduce mortgage rates for prospective buyers), paying homeowner association dues, or making upgrades throughout the construction process.
“For builders, it’s a business,” Downs said. “Which is very different than regular homeowners where it’s their network savings. So for a builder, it’s just a raw business decision—am I still making money? And if I’m losing, what am I gaining by losing?”
Still getting builders to offer those incentives can vary depending on the market, the season, individual builders, and whether a buyer is looking to purchase standing inventory versus asking for a house to be built.
And as for individual builders, they can have different mindsets regarding inventory. For example, in the first few months of the year, one may prefer to hold onto a home until getting the price they want because there’s time. Meanwhile, another builder may be fearful of the future and offer aggressive incentives.
There’s also a clear difference between small builders and bigger builders with larger financial backing, and that can translate into the incentives they’re able to offer. Therefore as a buyer, it’s important to understand the market, the inventory, and the homebuilder you’re working with—to start, at least.
As for home improvements or upgrades, builders sometimes use the fact that “they can build stuff cheaper and the perceived value to the [buyer] is bigger,” Downs told Fortune. He gave an example: if a buyer is quoted $50,000 to build a patio but the builder could do it for $15,000—as a consumer it checks out, and the builder basically uses “inflated values to give the perception of bigger savings.”
So improvements like those, tied to the physical house, aren’t considered seller concessions by lenders. Lenders instead look at anything that is cash changing, like covering closing costs or offering rate buydowns, as a seller concession. But that doesn’t mean builders can’t still use those strategies to entice buyers—rather the buyer just needs to qualify for those incentives and that can depend on the type of loan.
However, incentives aren’t forever—it generally depends on the market, which is cyclical. There are times when builders don’t need to offer incentives (typically in a competitive market when there’s several offers over the asking price).
But Downs told Fortune that he thinks we’re in a “sweet spot of deal making,” at least for a few more months until the market rebalances and becomes more aligned with the pre-pandemic norm. Even so, affordability is still a problem, Downs said—meaning that sweet spot could potentially last a bit longer.
“When I quote payments, people still choke when they hear them,” Downs said.
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If you are looking for a better deal on homebuilding, the key is to prepare and negotiate. While the process may feel intimidating and complex, the following steps can help ensure you get the best deal possible.
First, understand what you are looking for. Research the types of homes available and the general cost of home building in your area. What features do you need in a home and what is the maximum budget you are willing to allocate for it?
Second, compare the prices offered by different home builders. Talk with friends, family and local real estate agents to get an idea of different prices the builders offer. From there, make a list of the five to seven best deals available and narrow it down to the two or three that meet your needs the most.
Third, make a wish list of items to negotiate. If you want to get the best deal, look at the bigger picture. Are there architectural designs you want, green building initiatives you want included, or other tertiary details you are interested in? Taking all of these into consideration when negotiating, you may get a better deal.
Fourth, research the homebuilder you want to do business with. Knowing a bit of their history, as well as reviews from any previous customers, will give you an idea of how the process may go and what kind of deal you can expect.
Fifth, set up a meeting with the builder and start negotiating the deal. Don’t be afraid to argue your point or bring up any issues you may have with their product or service. Once you have discussed all of the details, begin to haggle for a better price. Make sure you have all the facts and figures on hand so you can make an informed decision.
Getting the best deal on homebuilding takes preparation, research, and negotiation. By following these steps, you can ensure you get the best deal available and make the home of your dreams a reality.
