Most Commonly Asked Question Series- Question #2

Question #2 – What are the Biggest Mistakes Buyers Make When Selecting a Home Builder?

Lingenfelter Custom Homes – In Business to Build Dreams

Written by Adam Lingenfelter

1. They focus too much on finish and not enough focus is given to the quality of the structure itself – Contrary to what you may hear from many real estate agents, the most important part of the structure is what you don’t see. What is the foundation like? How is the house framed and what kind of material and size of material did the builder use? How was the house weatherproofed? What type of insulation (and how much) did the builder use? What type of HVAC units did the builder use? Are those units single stage, two stage, variable speed units? Do they have high efficiency units? How energy efficient are the windows? What kind of framing hardware is in the structure?  How will the house hold up in a storm?  These items are very expensive to fix later so it’s important that the structure itself is built properly. But it is much easier to upgrade finishes later if you choose to do so.

2. They get pricing from too many builders – It is important to talk to 2 or 3 builders because this is a big decision and you need to make sure you hire the right one. However, I have seen many times when buyers talk to too many builders and in doing so they don’t spend enough time talking to any of the builders.  It will likely take several conversations with each builder before you truly find out who you want to work with.

3. They look for the best deal and end up hiring the “cheapest” builder – There are so many ways a builder can develop estimates that it makes it very difficult for someone with limited experience to make the best decision on which builder to use. Buyers often go with the builder with the lowest bottom line but end up paying more in the long run because the builder left out key components or didn’t include things the buyer really wanted done.  It is always important to look at pricing but it’s even more important to choose the builder who you feel is the most trustworthy. Sadly, many builders have found ways to deceive their clients in the way they create their budgets. Look for a builder that is transparent in the way they price their projects and transparent with their change order process.

4. They don’t ask for references or they don’t call the references – A good way to know how a builder is to work with is to talk to both previous and current clients. Current clients are almost always better to talk to because the build process is fresh in their minds and you will likely hear honest feedback from them (both good and bad). Homes are built by humans so no build process is perfect because humans make mistakes sometimes.  It’s how a builder deals with those mistakes that sets them apart from the rest. The best builders pursue excellence in their home builds and their clients will recognize that but there will still be some things that the best clients are frustrated with during the build even if their home is being built by one of the very best builders in a particular market.

5. They don’t look at current projects that are in various stages of construction – It’s important to see what the builder’s homes look like in framing, rough-in stages, drywall, finish trim etc. It’s one thing to have a builder tell you what they do but its much better to see it in person. Not all builders do what they say they do so its important to verify it.

6. They give the builder too large of a down payment – Home builders need a certain amount down to cover soft costs and payroll at the early stages of a project because they need enough to operate until they can take the first construction draws. However, a home builder does not typically need more than 30-50k (possibly a little more on projects over 1 million). If a builder asks for 100k-200k (or more), they are likely having cash flow issues and that should be a huge red flag. Fairly recently, there was a home builder in our area that was taking deposits over 100k and he eventually filed for bankruptcy. Sadly, many good people lost some or all those deposits.

7. They don’t ask enough detailed questions when interviewing builders –

• How many homes have you built? How many do you build per year? It is important to know how many they build per year because smaller builders (10 homes per year or less) may have a more difficult time hanging on to good sub-contractors in a busy market and they also might have to pay a bit more.

• What kind of insurance do you have? This isn’t as big of a deal if you will be getting a construction loan through a bank because they will need copies of the GL policy and Builders Risk Policy anyway. However, it may save you time if you find out they don’t carry the proper insurance or if they aren’t sure what they have.

• What kinds of things do you do that other builders don’t do?  It’s good to find out what they are passionate about. How much pride do they have in their homes? If they can’t clearly state what they do better, then it is a good indicator that they really build everything to code minimum. You want to stay clear of this builder.

• What type of warranties do you provide?  Most builders will offer a 1-2-10 warranty but when dealing with smaller builders it is good to also have a 3^rd party warranty. It doesn’t cost a lot of money and it is added assurance that you will have a warranty if the builder quit building homes at some point. The builder warranties cover things like drywall repair in the first year, equipment components for 2 years and major components like foundation and framing for 10 years.

• What do you do to make your homes safer? This is particularly important when living in areas where earthquakes or tornadoes are more common. It’s shocking how little most builders do to make their homes safer for their clients. If they don’t have a handful of items they do on every house I would be worried about how much they care about their client’s safety.

• What do you do to make your homes more energy efficient? A buyer can afford a lot more home if their builder does a good job building an energy efficient home.  Look for builders that build homes with HERS scores of 55 or less. Make sure they can show you 3^rd party documentation of their HERS scores from a certified inspector. If they can’t show you documentation, they are likely not doing a very good job building energy efficient homes.  It’s worth noting that a home builder that builds more energy efficient homes is typically a builder that is building a better home overall and it will save you money in the long run.

• What are your standard features? It’s good to know what the builders you are talking to do as standard, and what they typically upcharge for. It is hard to determine which builder is giving you a better deal if you don’t know what each builder is including their base package. Some builders have a higher base cost than others, but you will often find that once you make the upgrades, the builder that was originally higher ends up being less money because the upgrades cost quite a bit more with the less expensive builder.

• How are you compensated?  Do they make a flat fee? A percentage of the build cost? Or other. How does that fee compare with the other builders? If the fee is higher do they offer more in-house services that will reduce the build cost in other areas? If they offer fixed price projects and cost-plus projects what do they prefer doing and why do they prefer that?

• How do you handle changes/upgrades?  It is important to know the process for changes and how the builder is being compensated for those changes. Does the builder get compensated on a flat fee for change orders or is it a percentage similar to the percentage they charge on the overall build?

• How do they create their budgets (methods and means)? Its important to get a feel for how accurate the budget will be. Especially if it is a cost-plus project.

• What types of homes are they currently building and what are the price points? You want to find out if they are proficient building the type of home you will be building. Do they only build smaller homes and your home may be beyond their knowledge and skill level? Do they only build much larger homes and use sub-contractors that are used to getting paid more than is necessary for the type of home  you are building? Knowing what they typically build will give you insight to how comfortable they will be building the home you want built.

• How do you determine which subs/vendors you will use on my project? – Smaller builders are typically less selective because its harder to find subs that are regularly available when you they don’t have enough volume of homes being built. Larger builders might need to use multiple subs because one sub-contractor won’t be able to handle all their work. It’s good to know what factors into who they hire. It’s also good to know if they consistently use the same subs or if they change subs depending on price.