Help clients avoid cost overruns, property tax sticker shock on new construction

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New home sales image via Shutterstock.New home sales image via Shutterstock.

Editor’s note: This is the second of a three-part series about the opportunities and issues real estate agents face in the sale of new construction. See Part 1.

If 54 percent of buyers are willing to consider purchasing new construction, it’s important that you educate yourself about the ins and outs of representing buyers on this type of property. Not only will this help you with new-home purchasers, it can also make a huge difference in your resale business.

I recently visited a new subdivision called Teravista that straddles both Round Rock and Georgetown, Texas. It was fascinating to visit the various builders, see the differences in the finished products, and see what major builders are doing to market their properties.

Luxury, quality and privacy bring substantially higher prices

We had some trouble locating the “Brand Spankin’ New Models” and ended up on the north end of the subdivision in a gated area. I was under the impression that the houses in this area were no more than $400,000 to $500,000 since most of the property was advertised as being priced from $220,000 to $350,000.

Imagine my surprise when we walked into a custom home priced in the high $800,000s. The high-quality finishes, the floor plan, the view of a water feature on the golf course, and the other amenities made it immediately clear as to why this builder was successfully selling homes $300,000 to $600,000 higher than prices elsewhere in the subdivision.

I asked the sales agent about the people who were buying these homes. Many were doctors and other professionals working 30-60 miles north in Killeen or Waco who wanted the great schools and amenities available in the Round Rock and Georgetown area. Of course, a substantial number were relocating from outside Texas where a house of this quality could easily be over $2 million.

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In terms of how to advise your buyers, purchasing the most expensive home in an inexpensive subdivision yields a much lower return as opposed to purchasing the least expensive home in a more expensive area. Please keep in mind that the quality of the home, the commute and other lifestyle factors normally outweigh the investment part of their decision.

There are two primary reasons that most buyers end up spending 30-40 percent more than they budgeted on their new home."

Cost overruns

There are two primary reasons that most buyers end up spending 30-40 percent more than they budgeted on their new home. First, if the buyer is building with a production builder, the buyer picks out the floor plan, exteriors and finishes based upon the options that the builder offers. The builder notifies the buyer of the final price five to seven days later. At that point, the buyers have already committed to having the home the way they designed it. Cutting back is extremely difficult. The same is true with custom builds when the buyers work with their own decorator.

The second reason for cost overruns is change fees. The buyers can change the tile and the flooring they picked, but the builder will charge them the cost of materials, labor, plus a change fee. Advise your buyers of these facts upfront so they can minimize these costly additions.

Property tax sticker shock

I was surprised to learn that the property tax rate in Teravista was about 10 percent higher than the most expensive rate in central Austin. Apparently this rate is common in other outlying areas as well. Part of the reason is that cities need the money to build new schools and other infrastructure.

Property tax sticker shock can come as a real surprise for someone locating from other places in the country. For example, a buyer from California might buy a $350,000 home expecting to pay about $4,200 per year in property taxes. If the property tax rate in Round Rock is 3 percent, one’s tax bill would be $10,500. It is critical that you advise your buyers of these facts so they can account for the higher taxes in their budgeting.

Comparing builders

If your buyers are considering two or more builders, do your homework. Begin by visiting previous subdivisions where these builders have built in the past. As you drive through the area, notice which homes look good five to 10 years later vs. those that are not wearing well.

For example, when we built our current home, we had a choice between two builders. While both builders offered attractive floor plans, one builder was about 20 percent more expensive. We went with the more expensive builder because its finished product appeared to be much higher quality.

Six years later you can really see the difference. The stucco in the less expensive homes is fading and cracking. Many of the properties have had serious problems with water penetration from the roof and elsewhere. This is a major concern because of the high potential for mold.

Another issue is that the less expensive homes were insulated with something that looked like black roofing paper and chicken wire. The more expensive homes were wrapped with the highest-quality insulation available at that time. This translates into much higher heating and cooling costs for the owners of the less expensive homes.

While our neighbors have had difficulty getting the builder out to do work after they closed on their purchases, our builder’s response team eagerly tackled what minor problems we did have.

While you may not know what’s inside the walls, looking at the exteriors and talking to agents/owners who know the areas can give you a pretty good idea as to what the builder’s reputation is. More importantly, when you’re reselling these houses, it’s good to know whether your buyer is getting a high-quality house from a high-quality builder or one that will be a nightmare in terms of maintenance and upkeep.

Would you like to know more about new construction? If so, don’t miss Part 3 on Thursday.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of the National Association of Realtors’ No. 1 best-seller, “Real Estate Dough: Your Recipe for Real Estate Success.” Hear Bernice’s five-minute daily real estate show, just named “new and notable” by iTunes, at www.RealEstateCoachRadio.com.

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