We’re going to talk about some of the practices new home builders use. They are getting sneakier and grittier. You may not even know what they’re doing. I’m going to talk about some of the things they do that you may want to know when you purchase or somebody you know is purchasing a brand new builder’s home.

So I’m going to give you some examples based on my own experience, based on talking to other agents, based on some stories that we hear through other brokerages out of state, in state. And I’m not saying that all home builders do this, but there are some home builders who do this. They are getting sneakier and grittier to maximize their profits. The thing is, the buyers, when they go there, don’t even know what is happening because you may be unaware of those practices, but you may be taken advantage of when you buy a home. So let’s get right into the crux of this video.

The first thing I recommend is when you go to a new home builder, please go with a realtor or a real estate agent because they will be very helpful to you, not only in getting the right price, the right terms and conditions, but even the right location within that neighborhood. As an example, new home builders were paying agents commissions like any resale homes. But lately, because the market is still heating up, and because the inventory not only of resale homes but the inventory of new homes is getting tighter and tighter, some of the builders, starting April of 2023 and May of 2023, have stopped giving commissions to realtors. All these years they have been giving commissions to realtors because they want them to bring to their neighborhood, to the grand opening to sell their home. Now that there’s a supply shortage and things are heating up, they don’t want to pay us commission. And this is nothing new. They do it all the time. Like I said, they are grittier and sneakier. They cut agents commission when they’re selling homes like hotcakes. But when homes are not selling and they need help selling, they will call agents. They will come to our office, they’ll send us email, they’ll send us letters and pay us to sell homes. That’s not fair, is it? Not only that, but let’s say they did cut commission. They can do what they want to do. But here’s the question. If you’re a buyer and you go to a new builder, let’s say it’s a million dollar home with an agent, they usually pay anywhere from two to 3% commission to that agent.

So let’s say in this case they pay 3%, which is $30,000 commission to the agent who took you there. Now, let’s say you went there alone without an agent. Are they giving you a price of 970? Or are they giving you a price of a million dollars. They’re keeping that money without telling you that. So they are sneaky. And one of the reasons the new home builders may not want agents going with buyers is because they negotiate the right terms and conditions. And I’ll talk some of the things that they door have done, and they don’t want the agents to negotiate down the price, especially when it comes to upgrades. So they know that when agents come there, the prices may drop a little bit, or they cannot charge you the max price. So if you’re a buyer for new homes, take a realtor with you.

In the last two weeks, I’ve shown a buyer some homes. So three weeks ago, I went to a new homebuilder, showed the homes, and they say, yeah, we’re giving commissions, but it’s only valid for 30 days. Understood? They’re putting pressure on the buyer to buy and putting pressure on me to sell that home, which I won’t do because the buyers are going to buy when they’re going to buy. Ten days ago, I went back to the same builder in the same price range because I had another buyer who flew in from out of state. Now, they told me they’re not offering commissions, so I can help the buyer without commissions. So there you go. They already cut off the commission because they have a short supply of homes in that neighborhood. It’s okay to do so, but it’s not fair to the buyers if they don’t give that cut in commissions to the buyers. So here’s a scenario I’m going to talk about that is not fair that the new home builders do to new buyers. I heard this story through another agent in Texas. This couple had bought a home, and they were approved because as you know, that before you buy a home, you have to be approved. And this couple was approved at about three or 4%. This was a year and a half ago. Now, for some reasons, the builder got delayed in construction because of whatever reason, it got delayed up to eight months. In the meantime, while the buyers were waiting for their construction to be completed, the interest rates went up to 7% in that area. So guess what? The buyers could not qualify anymore because the rates that they were qualified for at 4%, they could buy, let’s say, a $300,000 house. But now that the rates were 7%, because of the delay of the builders, not the buyer, they could not buy the home, or they could not qualify at 7%. So they wanted to cancel the contract.

But the builders were giving them a hard time, and for some reason, they’re in courts right now. So this is another way builders take advantage of buyers, so be cautious. Another thing new home constructions are doing, especially the large builders, you might have noticed that the lot size are getting smaller and smaller. Of course, if I’m a builder, I want to maximize my profit. Land is expensive, construction is expensive, labor is expensive. Totally understand. But what they’re doing is, let’s say they bought a ten acre parcel, let’s say it’s in Orange County, California, as an example. And let’s say they could build single family homes, about 100 of them. But what they will do is they will try to squeeze in 110 homes in there so they can build ten more homes. And they do this by making the lot size smaller and smaller. So instead of selling 100 homes, they can sell 110 homes or 120 homes. I showed homes, like I said, a couple of weeks ago in Irvine, and these were resale homes. They were $2 million homes, about 3000 sq ft. Asking prices $2 million. I was shocked when I went in the backyard. The backyard was like a patio. They had no backyard at all. Here you are paying $2 million in Orange County in a very nice city, and you’re paying $500 association fees, you’re paying lots of taxes. And when you go in your backyard, there is no backyard. Why is there no backyard? Well, one of the reasons is the builders made the backyard smaller and smaller so they can build more homes and make more profit. Sad to say this, but that’s a fact. One of the other practices that some of the home builders use is that when you go buy a house, whether you went with a realtor or not, sometimes they insist or they tell you that, hey, if you use our lender. That means if you use the preferred lender of the new home builder, they will give you a certain amount of credit towards closing cost or towards new home upgrades, what we call options in upgrades. I don’t feel that’s fair because one, they want you to use their lender. And some of the times the lender may charge you more on the interest rate when you can go to your own lender and get a better interest rate.

So in one hand, you want that $5000 or $10,000 or $15,000 credit towards closing cost or towards upgrade options. But to get that, you may end up paying more in closing cost and points and underwriting fees and processing fees, and what we call junk fees. So at the end of the day, you are getting credit, but you may be ending paying more on closing costs and other fees. So be cautious when you get credits. Check all the numbers before you sign all the papers. Another reason why you want to take a realtor with you when you go shopping for new homes. By the way, last week I just did a video. The link will be provided at the end of this video. It’s called the home price surge. Our home price is going up in 2023 and 2024 our home price is going to go down. Check out this video where I say and give you reasons why they may go up. So please look for this video at the end of this video. So, another practice. I found myself with my own buyer when I went to the new home builder is, I found out that they don’t disclose everything upfront in detail to the new home buyer. So a few years ago, I took a buyer to an area in Orange County where the HOA was 500 a month. And the property tax, when you include the assessments and the Mellow ruse and the property tax was about 1.9% versus the regular property tax in Orange County is 1.1%.

So as I was there and as the new home builder’s agent was explaining and having my buyer sign the papers, she just breezed through everything when he came to the Mellows and the tax page, because I was monitoring, she had a screen so I could see what papers my buyer was signing. I could see it on the screen and I noticed that this was about the property tax disclosure in writing and she just wanted the buyer to sign. Now, my buyer was from out of state. It was his first home, never bought a house. He was 28 years old and by himself. His parents was not there or none of his members were there. Family members were there to help him. So when I was there, I noticed that the agent of the new home builder asked my buyers to sign it. And I immediately stopped and asked her, hey, could you explain to my buyer what those fees are? Why is it approximately 1.9% fees? And my buyers looked at me in shock because I had told him that the Mellow rules will be there, but they were not that high. So I had told my buyer that the property tax is 1.1% of the purchase price in Orange County, but the agent was telling him that it’s going to be close to 1.81.9. So when I explained that to my buyer, he was shocked to hear that at least I let him know he still went with the paperwork. But at least he knew now what the difference was, because he did not know any better. And he was paying all cash, so it did not matter when it came to his qualification. But if he was a buyer putting 20% down or 10% down, it could have impacted his purchase capability.

My concern was that the builder’s agent did not explain to my buyers, which she should have, that normal property tax is 1.1%. But in this case it was 1.9% for 30 years, which was a very important disclosure. She just wanted to breeze through it without explaining it. I know some of the buyers would not have bought that property if they knew it was 1.9%. And I know a lot of buyers who have not bought there because I’ve taken other buyers there. This was a big community in the Irvine area where a lot of the buyers that I’ve taken myself and other agents have gone do not purchase there because of the high property tax on a million dollar house. If your property tax was going to be approximately $13,000 a year, normal 1.1% property tax, if you pay 1.9%, you’re almost paying $18 to $20,000, which is 78,000 per year for 30 years in property taxes. So buyer beware, read all the disclosures and take somebody who knows about disclosures and everything. When you purchase a home or when you’re signing the contract, builders may not disclose everything as they’re supposed to, although they make you sign things they may not explain to you because most first time home buyers don’t know what is norm and what is not norm. In this case, paying 0.8% property tax more per year was not the norm. But fortunately, my buyer liked the house, he was paying all cash, he was in a rush for a relocation and he bought. But at least now he knew. So the other thing that builders do, and they kind of sneak this right into the buyers, is I’ll give an example, is they charge you premium fees for Premier lot. Now, what is a Premier lot? Premier lot is a lot that is bigger than all the other lots. So let’s say there is a lot on a cul de sac and it’s a pie shaped lot.

I had a client three years ago, I sold them a house, it was about $2 million base price. But when we went to the builder, well, I won’t mention the builder’s name, the house was base price was about $1.8 million. But my clients liked a certain location. So when they said we want this location, the builder said two things that shocked me and the buyers. The first thing is they said it’s going to be $75,000 extra on top of the 1.8 because it’s a bigger than normal lot. This lot was about 11,000 sq ft versus others were about 9000 sq ft lot. And it has view, not a fabulous view, but it did have a view of the hills and the greenery and some city view. So that was another $75,000. So they charged almost $150,000 for a premium lot, which my buyer bought because again, he loved the property. But here’s the question. If the lot was facing a major street, and I have shown homes and the lots were facing a major street with a noisy street, or there was an electric pole right behind it, or there was something not good about the location, would they have given you a $75,000 cut? What we call a non-premier lot or a C plus lot? No, they wouldn’t have. You would have paid the regular price. So they’re charging more for Premier lots, but they’re not charging you less for lots that are not Premier or not even normal lots. So again, be cautious when you buy. And I’m not saying that all the builders do this, but they have been known to do this to their advantage. It’s all about profits. They want to build homes. They want to shove it out and maximize on the profits. Builders are building homes. Not that they’re nice people and they want the economy to be good and they want to give you a home. They’re doing it for profits. Everybody does things for profit. I sell homes and I’m a real estate for profits. But I have to be honest and sincere about what I do. I don’t jip buyers and sellers. Don’t forget to hit that subscribe button. And please make a comment on what you feel that new home builders should do or not doing. I would love to hear from you.