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We saw another house we are interested in this weekend. It is new construction and out of our price range but through some research I have learned that the house did not cost the builder anywhere near what his asking price is. In fact the house is priced at least $100,000 more than what I believe it cost the builder.
First of all, the builder recently built and sold virtually the same house in a more upscale neighborhood nearby. He is asking the same price for this house as he sold the house in that other more upscale neighborhood. I am using that house and what he sold it for as a comparison to guide me to the price of the house I am interested in.
In the upscale neighborhood the builder paid $75,000 more for the lot than the lot he bought for this house. The house I am interested in is slightly smaller (about 400 square feet) than the house in the upscale neighborhood. Also the house in the upscale neighborhood has a partial stone front. This house does not. The house in the upscale neighborhood has a stone fireplace. This house has simple granite slabs. Also he built the house in the upscale neighborhood last year and from what I read building costs have dropped since then.
The upscale neighborhood is a street of comparable homes which seem to sell well even in this difficult real estate market. The house I am interested in is in an older neighborhood of smaller less expensive homes (as much as $300,000 less). There are five vacant lots off a short road stub in this neighborhood. Two of the lots are still vacant and two have large upscale homes that this builder built. This is the last lot that this builder owns in this neighborhood. The other two lots are for sale for a very low price (basically what he paid for his lot) but no one seems interested. They are smaller, steeper, rockier and right next to smaller older homes. The house I am interested in has a very large lot (several acres) but it abuts a high-tension power line that can't be seen from the house or the yard.
So my question is, would it be crazy to offer this builder over $100,000 less than his asking price. Do you think he would consider it? The realtor at the open house said he is anxious to sell and she could set up a meeting with him. At a significantly lower price we could swing the house. Any thoughts?. Jay
Doesn't hurt to try. Worst he can do is say no, and possibly you can both negotiate an acceptable price. You may want to consider taking your own agent with you to represent your interests in the negotiation.
The house I am interested in has a very large lot (several acres) but it abuts a high-tension power line that can't be seen from the house or the yard.
Resale of property that adjoins high-tension power lines will be more challenging than if the house were located elsewhere.
That alone would make this house worth considerably less than the other, unless that too abuts a similar fixed defect.
I think you could aggressively lowball and get a counter from it. Keep in mind that the general rule is that the market will overcorrect 10-15% before it rebounds. So don't be afraid to push the seller to the wall.
I personally know of some poorly funded builders in my neck of the woods (suburban Chicago) that have had lenders foreclose on finished homes and/or force the whole operation into bankruptcy. In such cases the window of opportunity is pretty narrow and if the builder is going to get any cash out at all it has to be a very speedy decision.
The other side of the coin, of course, is that the builder also has to feel that by selling to you he is not going to widen his loss -- although you have presented some evidence that this builder is seeking to sell for about $100K more than you believe he has into the property (btw, not an outrageous return at all given that you have not given any indication of the taxes, permit costs, site improvements and myriad other things that I know can drive up development...) you need to be able to present the builder and/or their agent with solid evidence that the comps support your offer and not their listing price.
It is a mistake to assume that even a builder with their back up against a wall will let a place go for less than it is worth -- even the bankruptcy trustees do not just give away brand new high end homes...
It's good that you're being detailed, but there's one important detail that you're missing. You don't know if he made or lost money on his sold house and it's really hard to find this info out. For example, he could have lost $100k on the house he just sold, so even though this one has $100k more padding, he might end up just breaking even on this property.
If I was negotiating this, I'd focus more on the comps in the neighborhood to determine a price. I'd then use the 100k differential as a backup or supporting argument for the lower price.
If not, you will need an appraisal. We are finding in our market right now that new construction will not appraise for the COST of building the house, let alone any profit. Just because he is asking $100k over cost, doesn't mean it will appraise for that. If it doesn't, you don't have a deal anyway, unless you are paying a large amount down.
Other important point is that steve is right. Sales price in another subdivision is absolutely no accurate marker of what the house cost to build. He could have lost money at that price and just sold it to get it off the books.
Thanks for the replies. They were a BIG help. It got me to thinking a bit more on this and look a little closer at both houses. The house in the upscale neighborhood did sell for significantly less than the original asking price ($76,000 less, yikes!!!). I now wonder if he did make any money on that house.
There would be some added development costs for the house we are interested in. The upscale neighborhood home is a smaller flat lot with city utilities (water and sewer). The driveway and utilities there were very simple and less expensive to put in. The house we are interested in has a long driveway (unpaved right now) and needed a well and septic. That I guess would drive up the cost.
But that said, there still is a question of value. If the house in the upscale neighborhood sold for a certain price, shouldn't a house in a much less desirable area sell for significantly less? The real question is, how much less?
The builder is highly respected in our town. He does not develop, he buys lots and builds homes on them or does custom building. I would be surprised if he had any problems since he does not have any homes sitting around other than this one. He also does not have a large staff to support.
As for appraisal, we would have a significant downpayment so I do not think this should be an issue. Any other thoughts? Should we wait and see if he sells the house in say the next month or so? Jay
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