Buying a new home is very different from buying a resale home. Even the contract is different. Builders use their own in-house contracts and they are not written to benefit the consumer.
Please remember that this is a binding contract and it involves large sums of money. If you breach this contract once you have signed it, you will be at risk of losing a lot of money. Be sure you understand what you are signing and that it encompasses everything you were expecting. If you notice any discrepancies between the writing and any oral agreements you had with the builder, they should be addressed before you sign anything!
Have the contract reviewed by your attorney. The contract is written to favor the builder. The builder is likely to offer you financial incentives to use the builder’s title company and lender. Those financial incentives are probably pretty enticing, but have the contract reviewed before you sign your life away. Make sure that the contract includes provisions which protect your interests.
Here are some things to tie down before signing a new home construction contract.
1. Make sure you understand all the time frames in the contract – including the start and finish dates, delivery dates for materials, for making changes or selections, etc etc. Late or incomplete work is one of the biggest issues with construction projects.
Negotiate some type of penalty if the builder does not complete the home within a reasonable time from the date promised.
2. Be clear on pricing. Make sure there are no additional fees or expenses that may arise. Find out what the cost will be if you make a last minute change, such as adding a closet or extra wiring. Just understanding the hidden costs will probably be the best way to hold the line on any change orders.
3, Understand exactly what materials you are buying. This is more than a “home.” It is all the windows and doors, cabinets and appliances, lighting and flooring that go into that home. Make sure your contract specifies the quality and grade of these important items. Once the builder has started ordering materials, it will be too late to argue over the quality.
4. Specify the payment schedule. Define what amounts will be paid on what dates. Will the payments be lump sums or installment payments. Are the payments due at a set time or based on certain completion dates. Are checks or credit cards acceptable.
5. Understand the dispute resolution process. Is there a mandatory arbitration clause? If not, consider adding a provision for attorneys’ fees and court costs in case it is necessary to litigate.
6. Be clear on the earnest money deposit required. The builder is likely to ask for a much larger earnest money than you would pay for a resale. Part of the joy of a new home is choosing all the structural upgrades and finishes. There is a risk for the builder that if your contract falls through that next buyer may not want the solarium you chose or the Juliet balcony so they usually require earnest money upon signing the contract and then additional earnest money as a percentage of the finishes that are selected along the way. Each builder has a different percentage, so be sure to understand what it is.
Before you agree to hand over a large sum of money to your builder, you should request that the money be placed in an escrow account and that you be provided with copies of paid receipts to make sure the money is going where it is supposed to.
Another way to protect yourself is to buy an owner’s title insurance policy protecting with protection against mechanic’s liens.
7. Be sure to understand what happens if you do not qualify for your loan. In a resale contract, you get your earnest money deposit back. With a new construction contract written by the builder, you want to pay close attention to this scenario. If your loan falls through late in the building process the builder may keep the earnest money. Read the fine print!
Make sure that there is a real financing contingency in the contract.
8. The Builder contracts frequently are not contingent upon an appraisal. In other words, if the house does not appraise for your loan amount, the builder is not obligated to drop the price to match the appraisal. In short, the builder’s failure to build a house that appraises for the value you need for your loan is not his problem – it is yours. The lender can still lend on it but because it appraised low you will have to bring more cash to the table to keep the lender happy. You can’t back out if the appraisal is low, unlike a resale, without losing your earnest money.
Make sure that there is a valid appraisal contingency in the contract.
9. Inspections on new construction are different. How does your contract handle them. When you inspect your home on a resale you can back out of the contract – either immediately or after negotiations – if there are issues. Those same procedures and protections are not available to you in new construction contracts. The solution is that the builder who created those problems and issues now gets to “fix” them. In most instances this will be ok, but not in all instances. Typical builder contracts do not protect the buyer from incomplete work or sloppy workmanship after the final payment has been made. Smart purchasers should negotiate with the builder that funds be set aside in escrow to cover incomplete work or bad workmanship even if the seller is able to obtain a certificate of occupancy. If the builder receives all the money before your punch list is complete, you have no leverage against getting the work corrected or completed.
If this all sounds daunting, then just call the Lise Howe Group at 240-401-5577. As a realtor and associate broker and a lawyer licensed in DC, I love to represent my clients in negotiations for new home construction. Give us a call or email us at lise@lisehowe.com to start us working on your behalf.
