WHEN BUYING NEW CONSTRUCTION, YOU HAVE TO PROTECT YOURSELF FROM BUILDERS TRYING TO TAKE ADVANTAGE OF YOU

Common Issues with Shady Builders

The reality is, when you’re buying a new construction home, you must understand that the builder is there to represent their own interests, and they are not seeking to represent your interests as the buyer. In fact, they often intentionally try to work directly with the buyer and keep real estate agents removed from the deal by setting up stringent rules and requirements on when and how a buyer can be represented by their own agent. They don’t want you bringing an agent in because they know the agent is more experienced, informed and looking out for your best interest. Sadly, far too many new construction builders are trying to sell to buyers who are less informed, giving them an opportunity to make the most of the deal at the expense of the buyer. I’ve seen it over and over again.

The builders know that the consumer is not an expert at understanding real estate contracts. Builders know that without the help of a seasoned agent, most buyers will not be able to navigate the complexity of the documents in a way that allows them to negotiate a good deal or protect themselves when buying a new construction property.

A good agent can guide a buyer through the fine print of a new construction purchase document, which can be several hundred pages long. The builder typically will only give the buyer two to three days to review them, which is simply unreasonable considering how much information there is to review. Yet it happens all the time. On top of trying to go above the buyers head on the content of the documents, their aim is also often to rush buyers through the paperwork so they don’t have time to read the details, which is highly problematic because in the fine print there can be very important information that a buyer needs to know. 

A Real Story from a Client I Helped

I was recently working with a client who was interested in purchasing a new construction condo. She was cautiously optimistic about the property, and since she’d never purchased new construction before, she brought me in to help her review all the paperwork. And it was a really good thing she did. 

My buyer, we’ll call her Emily, was told by the builder that their in-house lender would offer a 5.99% interest rate. However, when we read the fine print of the purchase documents, we found out that the builder's in-house lender was actually unwilling to lend on the project at all.

This was a major red flag. If the builder's lender wouldn’t provide a loan on the new construction project, then why would an outside lender? And even more, what does that say about the nature of the property in general? We dug more into the issue and discovered that Fannie Mae and Freddie Mac (who back around 70% of mortgages in the United States) would not approve loans on this project either. This was a major blow.

The builder was adamant that they had a lender that would loan on the project, so the buyer should not be concerned. But I explained to Emily that if Fannie Mae and Freddie Mac wouldn’t approve loans on this project, then this would be a major problem for her when she was ready to sell the property in the future. She was unaware that Fannie Mae and Freddie Mac support around 70% of the mortgage market, and had she proceeded to sign the purchase documents based on the interest rate she was told without reading the fine print, she would have been completely taken advantage of and blindsided.

We dug in more to learn why lenders weren’t willing to provide loans for this new build project. It turns out that there was a fairly complex agricultural component connected to the land where these new condos were built. Fannie Mae and Freddie Mac don’t purchase or securitize loans on agricultural land, such as farms and ranches, as a general rule.

Even though this property was a condominium, part of the deal between the condo developer and the city was that they were going to save a portion of the 400-acre development for avocado and citrus groves – somewhere around 122 acres. The city wanted to preserve open land and native landscape in areas like these that are being developed for residential purposes. 

Because there are large swaths of avocado and citrus trees as part of this development, the homeowners association decided as part of their bylaws that they were going to bring in a farmer to maintain, cultivate, harvest, and ultimately sell the fruit from these trees.

This all sounds great, right? Well, because of this, Fannie Mae and Freddie Mac consider the development to be agricultural land and thus won’t offer to purchase or securitize mortgages on this condominium because of the agricultural features.

Why This Was a Problem

Owning a property on which Fannie and Freddie will not lend tanks the sellability of the property because the demand for it will be absolutely decimated. And thus, the property is unlikely to appreciate at a rate similar to comparable properties in the neighborhood because it will have much lower demand due to the lack of available financing relative to the other comparable properties in the area.

The builder's representatives were never going to share this level of detail or the repercussions of the lack of Fannie Mae and Freddie Mac financing with my client, Emily. The builder, in this case, was perfectly happy leading the consumer into buying their condo, which by all accounts was an inferior investment. They were just trying to save their own shorts, hoodwink whoever they could into buying these condos with minimal time to review hundreds of pages (in our case, we had three days, including Saturday, to review over 550 pages of documents) and pressure buyers to sign by threatening to give the condo to someone else. The onus is on the buyer to figure out what they are signing, and the builder puts the pressure on hard to try to get the buyer to move forward without explaining the ramifications of the fine print. 

Emily was able to avoid this dumpster fire of a transaction, save her deposit, and continue her home search to find a property that would be more beneficial for her because she brought me in to help her. Had she proceeded with the deal solely based on her excitement about the opportunity, she’d have stepped in it and taken the builder’s bait.

Protect Yourself. Get a Good Agent Involved When Buying New Construction.

This is not to toot my own horn. But rather to spread the word to people out there, who are considering new construction, and let them know that most builders are simply not looking out for you. They are looking out for themselves, which becomes clear as day as soon as you dive into the fine print of their hundreds of pages of purchase documents.

This is not to say that no one should ever buy new construction. New construction projects have served many of my clients well. It’s just intended to make you more aware that new construction purchases are vastly different from purchasing a property from someone in your neighborhood. 

Be informed. Ask for help. Bring in subject matter experts and an agent you know you can trust to help you get a good deal and stay protected. 

Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.

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