Ask the Broker: Why should I take a buyer’s agent along to buy a new home . . . ?

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

This question came at an appropriate time. My column in tomorrow’s Arizona Republic deals with this topic:

Last year it was so hard to buy a new home. We would have had to camp out in some builders’ parking lots just to have a chance to be in a lottery to see if we could qualify to buy their house! But now it seems the builders are are giving really good deals. And I don’t need a realtor to find new houses that the builders are selling. So, is there any reason why I should use a realtor when I find a house that I think I want to buy?

I love this picture:

Those people are waiting on a line to take a raffle ticket that will afford one or two lucky winners the opportunity to put a deposit down on a house that will not have been built for ten months or so. The photo was taken last June, in the midst of the buying frenzy that was going on in the Phoenix area at that time.

I was at another subdivision at about the same time where a couple was living outside the sales office in their mobile home. One or the other was continuously waiting on line on the off chance that the builder might release a lot for sale.

All of these folks were owner-occupants. Investors were banned from new home subdivisions at that time, and no investor would wait day-upon-day for a chance at a lot, anyway. The investors were buying resale homes, where all you needed was cash and fast information.

Those days are done. Resale inventory hovers at around 47,000 homes right now, where normal is somewhere between 25,000 and 35,000, and new-home builders have their own excess inventory to work through. For one thing, their demand projections were wrong, so they planned more lot releases than they had buyers for. Add to this the slow sales in resale — which means that many would-be move-up buyers have had to cancel their contracts.

For now, builders have a surplus of ‘spec’ homes — houses that have been specified, planned, permitted and built to some degree, but which are not currently under contract to a buyer.

But guess what? As soon as they hang the front door, you’ll be able to hear opportunity knocking. Because the builders — salespeople, managers and stockholders — want to get those spec homes off the books as soon as possible.

Why? Home-building is in some respects a retail business. Current inventory is funded from the proceeds of past sales, and future inventory requires the sale of current inventory. If it’s May Day at my department store and I still have a huge inventory of cable-knit sweaters — we’re going to have a sale. If a builder needs to move operations to a new subdivision — or even just a new phase of the same subdivision — but its mobility is impeded by partially-completed but unsold homes — we’re going to have a sale.

This is precisely what is going on right now. But like every other kind of retail sale, it is temporary. As soon as that excess inventory is cleared, it’s business as usual. Even now, if you go to a new home subdivision with the plan of designing your own home, you’re going to pay full price.

But if you’re willing to take one of those spec homes instead, you might get an incredible deal right now. For one thing, all the upgrades in the original specification will probably be free. The builder might also give you cash incentives of as much as 4%, 6%, 8%, even 10%. If you agree to buy a home that can close between now and September 30, 2006 — the end of the third financial reporting quarter — the incentives may be completely astounding.

So why should you take your Realtor to this party? You have a very limited number of homes to choose from, and your choice is really made for you by the quality of the deal the builder is willing to offer you. As you may know, even if you come in with a buyer’s representative, the builder is really going to run the whole show. It’s their contract, their lender, their title company. Your agent won’t do so much as dot an ‘I’ or cross a ‘T’.

So why bring an agent along?

Here’s why: Because the builder is paying huge incentives to Realtors, right now, too. It’s called a “buyer’s agent’s commission”, but what it really is, from the builder’s point of view, is a tip to the agent for bringing you — like the tips cab-drivers get for bringing drunken businessmen to strip clubs. And builders are paying enormous tips right now, because they want “your” agent to steer you to their subdivisions and not some other builders’.

Who is really paying for that “buyer’s agent’s commission”? You are. The buyer pays for everything in the sale of a home. So why should you bring an agent along, when the agent is going to get paid a big stack of your money?

Two reasons: First, the builder is only going to pay that money to the agent. If you come unrepresented, the “buyer’s agent’s commission” stays in the builder’s pocket. Second, if you bring your agent, you can negotiate in advance how much of that “buyer’s agent’s commission” will be conceded to you.

Do you see? The builder is going to pay “your” agent as much as 4%, 6%, 8%, even 10%. How much will your agent have earned for the actual work performed? Not very much. You can share in that largesse — for down payment, closing costs or in the form of a price reduction — if you are willing to assert yourself.

Like this: “I’m going out today to put a deposit down on a spec home. I know they’re paying very high commissions. You can come along with me and keep 2% of that commission if you will agree in writing to concede the rest to me.”

If you hear anything other than, “Damn betcha!,” find another agent. It’s your money. It’s your purchase. It’s your power. If “your” Realtor won’t take $6,000 or $8,000 or $10,000 in extremely easy money, you need to find someone with at least two brain cells to rub together.

It may be that your agent will pull his or her own weight — but that’s strictly a bonus. But if you take a Realtor along with you when you go to new home builders in this market, you’ll save even more money than you would by going alone…

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