Seth Fowler: Is The Fixed-Price Homebuilder Contract Dead?
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Every once in a while I have been accused of having an opinion. As with all opinions, they are mine and mine alone and might not even be exactly what I think or feel, but just something that makes me go, “Hmmm …”
While traversing the Lone Star State over the Thanksgiving holiday and hearing from other Realtors, my clients, and from my recent experience, this thought popped into my head: Do new home builders even want buyers for their homes these days? Is the fixed-price homebuilding contract a relic of the past?
Let’s discuss.
Supply, Demand, and Homebuilding
First of all, it’s been established over the years that the United States economy runs greatly on the back of new home construction. Whether a first-time buyer, entry-level production homes, or multimillion-dollar custom homes, this country needs all types of new home construction, and all that implies (we’ll hit on that later) to be in high demand for this country’s economy to maintain a high level of growth and stability.
Secondly, we have established that in Texas especially, this housing economy is NOT a bubble — we have high demand for homes, high prices, and low inventory. People continue to seek refuge in the Lone Star State and that is not going to slow down anytime soon — or maybe ever. Therefore the demand for new homes is at an all-time high as well.
Finally, we all understand what the supply chain is these days and just how messed up the global supply chain of all goods — especially those used to build homes — has become since the ugly COVID-19 came on the scene. Materials are scarce and it doesn’t appear that the shortage of goods and products needed to build a home will be remedied anytime soon.
If those statements are true, then why would homebuilders not want buyers?
I contend that there are some homebuilders who are either purposefully or inadvertently trying to get buyers already on contract to get so fed up with delays and excuses that they will terminate their contract.
It’s not an uncommon practice these days. In fact, we reported on this trend in July:
”This house I sold for $525,000 is now going to cost me $750,000 to build. What am I going to do? The only thing you can do is go to the customer and say, ‘we got a problem,’” Paschal said to CBS 11.
According to the report, Paschal offered to sell the home to Dickens at cost, but the price was still $200,000 more than the original price.
To terminate the contract, Paschal executed a “no cause” clause that was in the contract, which allowed Paschal to walk away. The execution of such clauses is becoming more and more common, according to real estate attorney Rachel Khirallah.
Where are the profits?
Again, this is an opinion and something that has crossed my mind, as well as the minds of other real estate agents that I’ve spoken with, and it’s definitely something clients have mentioned to me as well.
No one could foresee COVID, that’s pretty much agreed. The big issue is that most economists thought the economy would slowly creep back once COVID was somewhat under control and that prices would slowly increase as well.
What happened post-COVID (yes, I know it’s still out there) is that demand from home buyers came back in full force while prices of materials skyrocketed due to the lack of production during COVID. Add the 2021 Snowmageddon of this past February and all the shipping issues across the globe and supply chain mess and that brought us to where we are now.
Homebuilders typically create a pro-forma before they start a project to anticipate how much money the project will cost and how much profit they will make. You have to think that most builders build in a little “fluff” into their budgets for minor price changes or tweaks to the product.
However, there is no way any builder could have predicted that lumber would increase by 500 percent from 2020 to 2021 as it did. There is no way any builder could have predicted the total lack of skilled (or even un-skilled) laborers to do their part in the construction process. There is no way builders could have predicted the demand, delays, and total disruptions that have come their way in the past 18 to 24 months.
And, I would contend, that there is no way any builder is making near the percentage of profits expected on their pro-forma if it was created prior to March 2020.
With little or no profits, there is little to no incentive for builders to satisfy the needs and desires of buyers.
Do the math.
If I buyer signed a fixed-price contract (the standard way the majority of builders sell homes) for a $250,000 home to be built in February 2021, the chance that the actual cost to the builder to build that home has increased 35 to 50 percent is fairly high.
Lumber, concrete, windows, insulation, sheetrock, labor, shingles — nearly every single item that goes into building a home has greatly increased in cost with no end in sight. Yes, lumber has come down since March and April 2021 when it was an all-time high, but it’s still not down to pre-COVID prices when many budgets were made.
Why build on a fixed-price contract at all?
There is little incentive for a builder to keep that buyer at $250,000 under contract and happy. The job is already going to take at least twice as long just due to the labor and weather conditions of 2021. If a builder can somehow manage not to fulfill that $250,000 contract and simply give back earnest money deposits and any change order deposits, that builder can now list that home for an amount that either gets them the originally desired profit margin, or more.
Because we are not in a bubble — we have low inventory, high prices, and high demand — builders can ask more money for homes because someone will come along and pay that elevated price in hopes of getting a new home.
Realtors are sharing homebuilder horror stories.
You know us Realtors; we like to talk. There’s nothing better than swapping stories of deals gone awry or success stories of how a client “won” a multi-offer scenario. And you better believe we all share stories of builders who have harmed our clients.
I have heard stories of builders telling buyers — as they are signing a fixed price contract — that the price “could” increase without recourse once the home was finished at the framing stage. So a buyer with a budget of $300,000 would sign a contract at $300,000 and there could be a chance that prices have increased so much that the builder now has the right to re-price the sales amount and the buyer would be obligated to pay that price — or the contract would terminate!
How do you think a buyer on a budget handles that one? Yes, the price might be $300,000 or it might be $330,000 or more!
I have heard stories of projects being delayed and blamed on weather, materials, labor, inspections, or whatever else, simply because the builder wants to upset the buyer in hopes they will ask to terminate. Builders have zero incentive these days to meet or exceed the expectations of buyers because the homebuilder knows they can take that home and sell it for more.
What’s a buyer supposed to do?
This is not supposed to be an anti-homebuilder screed. In fact, I grew up from the age of 16 working with new home builders and proudly have represented many in my real estate professional career, and hope to continue that always. However, I do find it very interesting that I am hearing these similar stories from other agents, clients, and even various builders (no I will not tell you who) across the Metroplex that my hypothesis isn’t that far off.
Builders obviously need to make money. No one is asking builders to become nonprofit entities. That doesn’t benefit anyone in this situation. However, profits alone shouldn’t dictate customer service or disservice.
Feel free to correct me if I’m wrong.
If I have a totally wrong opinion — remember, this is just me sharing a thought that’s crossed my mind — then let me know. If you have had a tremendous experience in a timely fashion for an affordable price recently with your new homebuilder, share it — I will gladly sing their praises from the rooftops of the world. I’ve been wrong before with my opinions and I certainly will be wrong again.
However, if this situation resonates with you and your recent experience with a new homebuilder (again, no names please, this is not time to dunk on other businesses) then I’d love to hear it. Yes, builders and suppliers need to make money. Yes, price increases do need to be taken into account. However, if there are some builders out there purposefully trying to upset a buyer under contract in hopes the buyer will bust the deal and walk away so the builder can sell that home for twice the price, that’s not right.
But what do I know?
Editor’s Note: This column is the writer’s opinion and does not reflect the editorial viewpoint of CandysDirt.com. To submit a rebuttal or counterpoint, email [email protected].
5 Comments
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Such a fascinating trend. One would hope that the industry will adapt!
Definitely not a pro-buyer trend at all. As I was sharing this article I got text from CA buyer who is under contract with larger Texas-based builder in the $400K range – their home in TX was supposed to be completed end of January/early February. Buyer’s text THIS MORNING informed me that builder just told him “March if lucky” – so what can a buyer do? Terminate? Fine – builder would love that bc they’ll finish home and sell it for more money. CA buyer’s home is already under contract in CA and they have lease back until Feb but IF their home is finished in March that means they’ll have to figure something out for at least 30 days (probably more) and they have 2 dogs and many Air BNB don’t take pets – and are expensive and hard to find…this is happening all over the place and it doesn’t seem like the builders really care that much…shame
Opinionated… absolutely!
Let’s see: stock prices are not fixed, oil is not, gasoline is not, cars are not… but, you want Residential Builders to ‘do the right thing’ and lose money if the prices start climbing? You deny this in the body of your rant, but the rest of the comment belies this single nod.
Commercial construction doesn’t work that way, why should residential? Besides rising cost of everything.. not just lumber… many buyers want extras and changes and expect that to be rolled into the price. Buyers are not, by far, innocent sheep. They are a major force of rising prices, as are greedy real estate sales people who see a bigger commission if a better sale is possible.
Don’t DARE try to hang this all on the builder. Very hypocritical!
Thanks so much for your comments. I think I made it pretty clear that in no way were builders to be a non-profit center and certainly are entitled to raise prices as the market allows. The point was that some (not all certainly) builders have taken the approach of seemingly doing all they can to not retain existing on-contract buyers in hopes that buyer will just get fed up with delays and excuses and ask for earnest money back – which then builder can take that home and adjust for increasing prices and costs and sell for higher amount. If this is my imagination then why am I (and other agents and random people who always want to talk about the real estate market) seeing this approach from national, Texas-based and smaller local builders? As G.W.Bush once said, “fool me once, shame on you…fool me twice…well, uhhh…well…shame on fooling something…”
It appears you might be a builder? If that’s the case then you know fully well that a cost-plus way of purchasing a home for 99% of the market won’t fly. Of course those other commodities aren’t fixed prices – they also don’t take months and months from contract to close.
In a perfect world a builder would be able to just build inventory homes and not put them on the market until they were 90% completed – or at least until they had enough time to look at costs and adjust them. You and I know full well that majority of building companies couldn’t do that because of 1) investors 2) stock prices 3) carry costs and having to show bank progress on a project to satisfy bank or other funding entities.
I know your comment about “greedy real estate sales people” was simply a jab at me and you know that people who bring you or your company buyers aren’t the cause of your frustration. Sure there are lousy Realtors out there – just as there are lousy builders and everyone in between.
I know you (again, assuming you’re a builder) are feeling a big pinch these days-it totally sucks to see a pro-forma go down the toilet because of the most bizarre and random circumstances we’ve seen in the past 24 months – we all feel helpless these days when it comes to completion dates and schedules, materials not showing up on time, labor vanishing, theft, rising prices, land prices and on and on and on…yeah it sucks. I get it.
The point of the article was to highlight how the practice of builders trying to punish buyers under contract is happening all around us and isn’t good.
Thanks again for your comments – I really do appreciate. I’d love to continue discussion either on-or-off line bc it’s fascinating and a puzzle that I’m always trying to consider how to improve. I also appreciate that we can have a discussion and disagree and still be respectful of each other’s position – seems to be missing a lot in our country these days. I also love your email…Hook ‘Em…Horns need OL and hit The Portal hard!
Thank you for providing such a great piece of article, I really loved reading it .