How to Negotiate with Your Builder

By: Mike LaRuffa

Today, buyers have the luxury of being able to negotiate prices on homes. However, that strategy for negotiating changes when it comes to buying new from a builder rather than purchasing a re-sale. What is the biggest difference?  A re-sale seller is dealing with equity, the difference between what they paid for the home and what they can sell it for. A builder is dealing with materials, land, overhead, plus profit, for a builder, equals sales price.

The typical builder has the following expenses that all add up to 100%… land 18%, materials 50%, overhead expenses 15%, marketing 6%, permits, fees, warranty 3% and profit 8%. So, for a $200,000 house, the profit is only $16,000, not the mega bucks that most buyers think a builder makes. All the other costs are essentially fixed, meaning that the only place to negotiate for the builder is their profit line.

If you are looking at a home that has to be built, be mindful that the builder is less likely to discount the base price of the home since they are building it to current values. Instead of jumping the negotiating gun, ask about the incentives being offered that have been factored into the pricing. This is a good place to get the biggest bang for your buck.  Builders have a markup on options so giving them away has less impact to their bottom line than reducing the overall base price. Furthermore it helps preserve appraised values that reflect general value in the neighborhood and are important to you when you are getting your loan.

If you are looking at an existing inventory home, your negotiating strategy may be a bit different. First, determine when the house was completed. This is importance because builders factor in some interest (overhead expenses) to carry the house until sold. When that runs out, builders start to eat into their profit, so they may be more willing to negotiate. Dropping the bottom out of the price even on aged inventory is still not a preferred strategy due to degrading appraised values. You may want to suggest items that can be added to the home that you would purchase anyway after you move in…additional landscaping, appliances such as refrigerators or washer/dryer, decorator items such as shutters, blinds or special paint colors.

In closing, keep in mind that even though builders are eager to sell their homes; they also need to turn a profit. In your house hunting travels you may find that the builders that are still in business today have survived because they offer a good value at a fair price and they stand behind their product when you need them!