Confined hydration and conformational flexibility are some of the challenges encountered for the rational design of selective antagonists of G-protein coupled receptors. We present a set of C3-substituted (-)-stepholidine derivatives as potent binders of the dopamine D3 receptor. The compounds are characterized biochemically, as well as by computer modeling using a novel molecular dynamics-based alchemical binding free energy approach which incorporates the effect of the displacement of enclosed water molecules from the binding site. The free energy of displacement of specific hydration sites is obtained using the Hydration Site Analysis method with explicit solvation. This work underscores the critical role of confined hydration and conformational reorganization in the molecular recognition mechanism of dopamine receptors and illustrates the potential of binding free energy models to represent these key phenomena.