Why You Need a REALTOR® When Buying New Construction in Houston

I recently read an Instagram thread where a buyer of a new construction property in Houston backed out due to a low appraisal. The poor would-be buyer forfeited her $75,000 down payment! Nobody wants that! 

The thread was getting a lot of comments, but they were all giving incorrect advice. It made me realize how important it is for buyers to work with a REALTOR® when buying new construction in Houston. 

The Wrong Way to Buy New Construction Properties

Some of the misinformation that I saw on this thread included, “You have an appraisal contingency so you should get your money back if it doesn’t appraise,” “Earnest money is NOT $75,000,” “Earnest money is 5% of the total purchase price,”  and “Appraisals mean nothing.” Whew. I’m sure the intentions were good, but that’s all wrong!

So, let’s start with this buyer’s story and what she says happened. This buyer entered into a contract to purchase a house being built by a new home builder, and put down a $75,000 deposit. This buyer was unrepresented and was working directly with the builder’s sales agent. This buyer had also chosen to obtain financing through the builder’s preferred or in-house (we’re unsure which) lender. An appraisal was ordered, and it came in around $100,000 lower than expected. So, the lender ordered a second appraisal, which came in slightly above the purchase price. Now the buyer had two very different appraisals: one above and one below the purchase price. Feels fishy, right? The buyer responded by ordering two additional appraisals! One came in at around $70,000 lower than expected, and the other around $30,000 lower. At this point, she’s concerned and was talking with the lender about terminating. This is when she learned the $75,000 deposit is not refundable in the event of a low appraisal and went to social media to share her tale of woe! 

What Should You Do Instead?

First, I’m going to explain how this would-be buyer put down a $75,000 deposit when everyone on social media was screaming about how earnest money should be less than that amount. Yes, when purchasing a resale home, the earnest money or earnest money deposit is much less. Often, it’s 1% of the purchase price, but that is negotiable. With new construction properties in Houston, however, there is NO earnest money paid. Instead, there is a deposit of 3% of the purchase price, plus any upgrades. So, this house is either a $2.5 million property or the buyer selected a lot of upgrades! This 3% deposit is never refundable if you terminate the contract.

Next, let me explain why an appraisal on new construction might come in low. Appraisals are made based on the value of the most comparable nearby properties. One possibility is that the subject property is one of the very first homes constructed in a development and the existing properties in the area are old and outdated, and drive down the value of the new construction. Another possibility is that the subject property has so many updates that it is not comparable to even the other new properties in the development. Appraisers can only assign value to features of a house that have a known value in the comparable community. If all of the houses in this community have formica counters, but the buyer chooses a quartz upgrade, the upgrade is worth the exact same low value as the formica. If 10 houses have formica and are priced at $200,000 and 3 houses have quartz and are priced at $210,000, we can assign a value of $10,000 to the quartz. See the difference? If there are no other homes nearby that are completely comparable, the upgrades might not show up in the appraisal. 

About That Real Estate Deposit

Finally, let’s discuss why the deposit was not refundable if the buyer decided to terminate due to a low appraisal. Like commenters mentioned, there is an appraisal contingency in “resale” purchases, but unfortunately this is not the case for new construction. Most builders use their own contract form, and the language in these specifically states that there is no appraisal contingency and a buyer is still obligated to purchase the property if the appraised value is lower than the purchase price. Builders have multiple homes to sell, and these homes are all around the same price. Otherwise, builders risk losing their profits and not paying their loans or investors. Appraisal value issues are common and to be expected in new developments where the surrounding homes are of a lower value. If builder contracts allowed for appraisal contingencies, they’d be reducing the prices of beautiful new homes to match the values of existing outdated homes—or not selling them at all. You can see how neither of these options work for a builder if they’re going to stay in business. 

What to Do Instead When Buying New Construction Homes in Houston

What could this buyer have done instead of terminating and forfeiting $75,000? One, she could have selected fewer upgrades. A REALTOR® would have advised her of the consequences of over-improving. Two, she could have closed on the house and lived there until area values caught up to the value of her home—most likely after the development is fully built out—and then sell for full value. A REALTOR® will also advise new construction buyers of the timeline they should anticipate being in the house in order to break even.

The real problem with this transaction is that the prospective buyer simply didn’t understand the appraisal process for new-construction homes or how the deposit works. That’s common! Many builders have vertically integrated their business and own title companies and lending institutions, and therefore have some control over how a house appraises. Builders incentivise buyers to use their lender options with discounts, upgrades, and free title policies. If you’re considering new construction, it is critical that you work with a licensed REALTOR® that understands the builder contract and can guide you through the process. The builder’s representative, lender, title company, and appraiser are there for the builder and no one else. You need an expert on your side, too and this is exactly why you need a REALTOR® when buying new construction in Houston.

Are you looking to buy a new construction home in Houston, Texas? Angel Fultz is a skilled real estate broker with extensive knowledge of the new construction process and master negotiation skills to get you the best deal.