Thinking about buying a new home on sale by the builder? If so, consider this:
If you are like many other buyers, you may need to sell your existing home first and use the equity for your down payment (and to qualify for the new loan). But I want to make you aware of a disturbing trend we have noticed recently. I say “trend” because I am aware of several of these encounters with my own clients as well as others. I should also qualify the fact that my comments are directed only at certain homebuilders that have an ”independent”, but affiliated real estate sales division, separate from their new homes sales division (I will not name names in order to protect the guilty) and who force their agents on unsuspecting buyers. It typically starts at the new home sales office and goes something like this:
New home sales agent: “So, what do you think?”
Buyer: “I really love the Plan X, but I have to sell my home to be able to buy this one”.
New home sales agent: “No problem! If you can’t qualify to buy the Plan X and carry the cost of your existing home, you can use one of our “independent” agents to list and sell your home.”
Buyer: “But I have an agent whom I really trust and knows my neighborhood extremely well. May I use this agent?”
New home sales agent: “No. Sorry. If you need to sell your home to buy this one, you MUST use one of our agents.”
Believe it or not, this is about how the conversation went when I visited a new home development recently. Beyond the questionable legality of this requirement (IF THERE ARE ANY REAL ESTATE ATTORNEYS READING THIS PLEASE COMMENT), there are even more important implications to this restriction.
The reason I went to this sales office in the first place was to confirm this requirement because of a recent sale in a neighborhood where Kris and I had a model-match listing competing with a home listed by an “independent” agent (who is affiliated with the builder). Conflict of interest? We will explore just how much in a moment.
The home listed by the ”builder-affiliated” agent was virtually an exact model match to ours including; both located in the same high-end neighborhhood (one street apart), exact same size and floor plan, number of bedrooms and baths, similar upgrades, lot size, orientation and view. Both homes went into escrow in June and both closed escrow in July, 2006. This is where the similarities end.
Since we were competing for similar buyers, we were keeping a close eye on our competition. We also knew the agent was associated with a builder. meaning that the seller was most likely buying a new home from that builder. Soon after this listing came on the market (at a similar price range to our listing) they started lowering the price (which put pricing pressure on our listing and others in the area). Now we all know the market has slowed down and that prices have softened. But we were shocked at the frequency and magnitude of the price reductions of the builder-affiliated agent listing. Bottom Line – It ultimately sold for $85,000 LESS than ours. Why then, am I upset. For one, I might have been able to get a higher price for my client had my competition not been unreasonably influenced. The “below market” sale will now also have an impact on this entire neighborhood for months to come.
Now there is no logical reason in the world that two strikingly simliar homes in the same neighborhood would sell for a difference in price of $85,000 in one week, unless there were outside forces at work, namely having an agent that works for the builder first and not their client, whose home they were responsible for selling. The other agent (in cahoots with the builder), in my opinion (and I’m just speculating here), sold her clients down the road. I suspect that they were under severe pressure to sell with the threat from the builder of losing the new home they were seeking to buy. Plain and simple. This conflict of interest cost their client a lot of money. I hope they like their new home…a lot!
The moral of this story is, if you consider buying a new home from a builder who requires you to use their agent in lieu of one you prefer and who actually knows your neighborhood, tell them to get screwed! This actually happened to one of my clients several months ago (where a new home builder tried to impose their agents on my client) and they told the builder to “pound sand”. I was able to represent them.
Although technically the builder-affiliated agent, like any agent, has a fiduciary responsibility to their clients, you can now see how the conflict of interest can potentially overwhelm this obligation and cost you big time.
ABOUT THE AUTHOR Steve Berg is Broker/Owner of San Diego Castles Realty. He is an awesome agent and an all-around great guy. When he is not dazzling clients, he contributes the occasional article here. 
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{ 4 comments… read them below or add one }
What he said. (But glad he said it this time, not me).
here’s an interesting stat for 4S Ranch. 2006 Q2 sales are off by 17% compared to 2005 Q2. But 2006 Q2 expired or cancelled listings have increased by 422%. total % successfully sold is at 35% of all listings, last year the success rate for a sale was 82%.
the builders know this, and that is why they are insisting on contingent buyers list with their affliated agents. Not all sellers are lucky enough to get the Berg team on their side and sell successfully. The builders when looking at a “contingent” offer is now looking at a 2/3 chance of the home falling out of escrow. It may not be right or lawful, but I can see why the builders are resorting to this type of strategy. It is the same strategy behind undercutting the resale market by $100,000 across the board.
btw, did you guys read the NCTimes article on the July numbers? Too hot to show clients homes? Wow!
This may come as a huge surprise, Jack, but I am going to disagree with you.
Specifically, I disagree that the Builder’s sole motivation in demanding that contingent buyers use their in-house agents is to retain control of the situation and ensure their current home is successfully sold. They have the ability to slap a 72-hour clause on their contingent buyers (and they do) just like the rest of the listing agents in the market. The practice Steve describes has been going on for years, during good times and bad. I will give as an example another “Builder” who has a real estate arm and who, for years, has been telling people they must use their agents when, at the same time, they admitted to the affiliated agents that if push comes to shove, they can’t REALLY require this. This same builder, when the going got tough and recognizing they had to begin cooperating with agents who brought buyers (pay them a fee), would initially only cooperate with their own agents. Later, when the going got tougher, they would cooperate with their own agents to a greater extent than outside Brokers. These practices are, in my not so humble opinion, inspired by $$$, pure and simple. To call it anything else is generous.
Off to read the NCTimes article so I can keep up with you, although I suspect I know what I will find. Too hot, my *&(*. Try a cooling market.
Bottom line – An agent has a fiduciary responsibility to their client. NOTHING should cause a client to sell their home for that magnitude below market ($85,000 below market). Doing so, in my opinion, is a flagrant breach of the agent’s (any agent’s)fiduciary responsibility. There is no doubt in my mind that if the listing I had referred to had been managed properly from the beginning, the home would have sold within the timeframe given by the builder for a reasonable value and everyone would have been happy. But, again, this is the risk you take and what can (and does) happen when you subvert your own position as a seller to the builder by allowing them to force their agent down your throat. Just totally unacceptable.