Builder’s model offers ‘substantial deal’

With complete color coordination, upgrades and options worth thousands of dollars — and the benefit of professional lighting designers, landscapers and interior decorators — model homes offer buyers the vision of a perfect home.

No clutter of unopened mail, no backpacks overstuffed with paper and books, no filthy running shoes or soccer balls falling out of the closets — only a serene theatrical setting awaiting the ideal family.

Consumers snap up model homes in Washington-area communities as soon as they go on the market. Sometimes, it is because they want to move into a home that is already decorated with a recognizable theme and extensive coordination.

Purchasing a home with all the upgrades and options in place can make moving more appealing for those buyers who prefer not to mull over window treatments and paint colors.

There are other reasons buyers choose to purchase model homes.

There’s a financial incentive, particularly in recent years, when new home values have risen so rapidly. Sometimes a buyer will purchase a model home and then lease it back to the builder for use as a prototype for prospective buyers for months or even years. By the time the buyer actually moves in, the home will often have increased significantly in value.

“From an investment point of view, buying a model home can be a great idea if the builder allows you to buy the home in the beginning of a development,” says Brad Rozansky, a Realtor with Long & Foster Real Estate in the Bethesda/Gateway office. “There’s a ton of money to be made in an increasing market, and you have a built-in tenant which should be paying enough to cover your monthly expenses for the house.”

According to Realtor Corey Savelson of RE/MAX 2000 in Rockville, “Consumers are catching on to how great an investment this has been lately. If values stagnate, then buyers of model homes will have paid more than the rest of the neighborhood. But over the past few years, [buyers] have turned out to be geniuses.”

Some model homes draw multiple buyers with competing contracts. Yet for the past several years, builders typically have sold the model home for a stated price and will not negotiate. Buyers should not expect to get a bargain price for the model home except in the sense that the home will include extensive upgrades and decorative items — often worth more than the builder is charging for them.

“The price of the model home is normally as much as 10 or 20 percent above the normal base price of a product because of the optional features and upgrades to the home,” Mr. Savelson says. “Often, the home will include window treatments and other decorative items, depending on the house and the builder, but these items will be at a substantial discount compared with the actual cost of these items.

“Buyers know they’re getting a substantial deal on the property because of options and upgrades,” he says.

According to Rhonda Ellisor, vice president of sales and marketing for Miller and Smith: “We probably only recapture about 25 percent of the cost of things like window treatments, which can cost as much as $1,000 per window. Items like custom paint colors and professional landscaping are considered when we set the price, but we don’t always get back the amount we have spent.”

While many builders choose to sell their model home early in a community’s development and rent it back from the new owners, Miller and Smith does not sell its models until the development is almost complete.

“We choose to wait until nearly the end of the development, and that way, we do not have to rent back the home or have an investor own the property,” Mrs. Ellisor says. “Usually, by the time we sell the model, we have already experienced some price appreciation.

“We establish the price for the model home when we are ready to sell it by adding the base price for that model at the moment, all the options which have been included in the model from the options sheet except for the cost of upgraded carpet, and an estimate of the cost of built-ins, mirrors, wallpaper, paint, landscaping and other upgrades to the home,” she says.

“We don’t charge any extra for the carpet upgrade because we know that is one part of the house that gets used during the model-home phase. We do clean the carpet before someone moves in,” Mrs. Ellisor says

At Winchester Homes, the model homes are typically sold at the beginning of a community’s development.

“Our model homes can be a great value because, often, by the time we are ready to have the buyer move in, the price will have increased,” says Nina Goldstein, director of marketing for Winchester Homes. “While the model home will not be priced at bargain rates, buyers are getting great value because of the upgrades and options.

“If you look at all you get for your money, it is definitely cheaper to buy the model than to put in all the upgrades yourself,” she says. “You could spend less if you bought one of the other new homes in the same development, but you would not be buying a home which is similarly equipped. If you don’t want a lot of upgrades and options, then the model home is probably not the house for you.”

Mrs. Ellisor says: “The buyer needs to love it. It takes a particular buyer to choose a model.

“The model homes usually have a very thematic color scheme, which extends throughout the house,” she says. “Sometimes, this will appeal to a broader market, and some designs will appeal to a narrow market. For instance, one of the model homes we sold had a red-and-yellow color scheme throughout the house. The more sophisticated buyer will understand the value of the work of the interior designer. They are very exacting about color, including the paint, the fabrics, tile, wood, window treatments, all of which are designed by a designer to fit into that particular space. It’s just a different level than the way the average person does this.”

A buyer who has decided to purchase the model home should start by talking with the community’s on-site sales representative.

“When buyers are shopping for model homes, they should ask the sales representative when the home will go on the market so they can get information before it’s even on the market,” Mr. Savelson says.

“Buyers should ask some probing questions about a ballpark price and the time frame of the sale and the probable move-in date, and talk about what stays with the house and what doesn’t,” he says.

Buyers of model homes must be flexible enough in their circumstances to be willing to wait six months to two years, or even longer, to move into their chosen model home. The specific arrangements for the move-in date must be made in writing with the builder.

“Nine times out of 10,” Mr. Savelson says, “the buyers will have to lease back the home to the builder. The lease-back time can be as little as six months, but the average time is as much as two years.”

Arranging financing when buying the model home can be different from a typical new home purchase, if a lease-back is involved.

“Lenders will consider you an investor when you buy a model home and lease it back to the builder, which means, depending on your qualifications, that you will need to make a 10 to 25 percent down payment,” Mr. Rozansky says.

Mr. Savelson says, “Most builders will try to structure the arrangement with a model-home buyer as a short-term lease-back with a flexible end so that the buyers can still purchase the home as an owner-occupant. If they have to finance the model home as an investor, they should expect to pay a good full percent or even 11/2 percent higher interest rate on the loan. Also, there are fewer choices for investors for low- or no-down-payment programs.”

At Winchester Homes, the lease-back arrangements are usually set for a particular time frame with the option of a month-to-month extension at the end of that time period.

“We try to establish a time frame for the lease-back upfront in the lease,” Ms. Goldstein says. “It depends a lot on how many homesites there are in a community, which helps us estimate how long we will need the model home.”

Model-home buyers are required to carry homeowners insurance on the house, even during the lease-back period.

“In a normal rent-back situation, the builder will pay the equivalent of the principal, interest, taxes and insurance on the home, along with a homeowners association fee, to the owner,” Mr. Savelson says.

Realtors recommend that buyers of model homes obtain a home inspection on the property before settlement.

“Even if someone has a home inspection, the bigger question is how the home will be delivered,” Mr. Rozansky says. “Buyers need to be very specific about whether the home will look brand-new, if it will be repainted or if the carpet will be repaired. They also need to know what will convey with the home.”

At Miller and Smith, the model homes are essentially sold as resale properties in an “as is” condition.

“Touching up paint can be difficult after artwork has been taken down, but we do clean the carpet if it needs to be cleaned,” Mrs. Ellisor says. “A lot of buyers want the furniture, artwork, bedcovers and decorative pillows in the house because they match the color scheme.

“If we are not planning on reusing any of these items in another model home, we’ll sell them,” she says.

“We set up a sale date and then allow the model home buyer to come in for the first half-hour of the sale to buy what they want. Then we open the sale for the next half-hour to Miller and Smith employees. After that, the model-home items are available to the general public. We advertise these sales in the classified ads under Furniture for Sale and Estate Sales,” Mrs. Ellisor says.

Buyers should try to structure into the contract that the builder will repaint and re-carpet if the lease-back will be extended, Mr. Savelson says, “but most of the time, builders won’t replace the carpet if they think it’s in substantially the same condition as it was at settlement. It is also important to have in writing a very detailed list of what stays with the house and what doesn’t, because some items are borrowed and some are not.

“Even things like fixtures and chandeliers should be in writing because sometimes everything in a house stays, and sometimes everything goes,” he says.

When Winchester Homes sells its model homes, furniture is rarely offered for sale to the home buyer.

“We typically don’t sell artwork or furniture because we are in the business of selling homes, not furnishings,” Ms. Goldstein says. “But even without the furniture, the buyer has less to do when it comes to decorating because they have seen the placement and style of furniture in the model, and the color scheme is already in place.

“Buyers do need to be aware that the warranty on the house is different from a typical new home, which usually has a one-year warranty,” Ms. Goldstein says. “The model homes come with an ’as is’ warranty, and certain appliances in the home may already have their warranties expired, depending on how long the home has been leased by us.”

In addition to the potential financial advantage of buying a model home, buyers also benefit from being able to see what they have purchased in place rather than deciding on optional finishes from a small sample.

“In the past few years, anyone buying a model home is a winner because of the appreciation they will have achieved,” Mr. Savelson says.