The available resale home inventory remains very tight this summer. Many potential sellers have decided to wait out the coronavirus rather than allowing people into their occupied home for showings or open houses. As a result of limited resale inventory, many homebuyers are looking towards new construction as an option. Buying a new home from a “dirt start” is exciting, and it enables you to have a home that is personalized for your needs and tastes. Thousands of details and decisions go into constructing a new home — and it’s truly a work of art. You are able to watch the home of your dreams being built from start to finish. Nevertheless, this process can be very stressful. Understanding the differences in contracts for a resale home versus a new home will make the process go smoother and help reduce your stress level.
Contracts used at new home subdivisions or by custom home builders for the construction of a new home are not the standard Colorado Real Estate Commission approved form. Since these contracts are usually written by the builder’s attorney in the builder’s favor, the buyer is well advised to have their attorney review any contract for the purchase of new construction. If a property is substantially complete, a custom builder will sometimes allow the Realtor® to prepare the contract using the Colorado Real Estate Commission approved form. Oftentimes, even if a home is 100 percent complete, most new home subdivisions will not accept contracts other than the one that has been prepared specifically for that subdivision.
If market conditions permit, the potential new homebuyer can usually obtain a copy of the contract the builder is using from their attorney or themselves to view at their convenience prior to signing it. If the market is so hot that there is no time to obtain the contract prior to signing it, most builders will allow a clause that gives the buyer a certain number of days to have their attorney review the contract. If a builder does not allow such a clause, it should automatically make you question why.
When writing a contract with a custom builder, the builder may or may not be receptive to any changes a buyer’s attorney suggests. Most large, new home companies will not allow any changes to their contract, adopting a “take it or leave it” attitude. In the case where a buyer really wants the property and the builder refuses to make any of the changes at the buyer’s attorney’s suggestion, the attorney needs to make the buyer aware of any risks that they may be accepting.
Some questions you should keep in mind as you and/or your attorney review the contract for new construction are as follows:
1. Is there a deadline for completion at all? If there is a deadline for completion, is there any penalty to the builder if the home is not ready for move in by the deadline?
2. What signifies completion? A Certificate of Occupancy? Can the builder close on a Temporary Certificate of Occupancy?
3. How is an uncompleted item punch list made? When is the punch list considered too long so that the closing is delayed? Will the builder escrow for uncompleted items?
4. How much is the deposit? Is it non-refundable? Are there any conditions for which it is refundable? Is there an additional deposit required for personalized items? Is there a specific performance or liquidated damages clause in the contract?
5. Is the buyer allowed access to the property during construction?
6. Are change orders allowed? What is the process for change orders? Is there a charge for change orders?
7. Are all promises made by the on-site salesperson done in writing?
8. Are the plans and specifications detailed enough so that you know exactly what you are getting?
9. What are “standard” items in the home? What are options?
10. Does the builder provide title insurance? Will there be Owner’s Extended Coverage?
11. Does the builder pay any other closing costs?
12. Does the builder or the buyer obtain the construction loan?
13. What remedy does the buyer have if the seller/builder refuses to close? This seems odd, but it could happen in an appreciating market where the builder could actually resell the property for more than the current contract price.
14. Are there provisions for “Acts of God”? What is the builder’s risk insurance if something happens to the home during construction such as wind or fire damage?
15. Are there any addendums specific to the community covering items such as Homeowner’s Association document review, Special Tax Districts, Oil and Gas Operations, etc.
16. Will the builder allow you to have a third-party inspector visit the property?
17. Will the builder mitigate any radon issues?
18. What is the Builder’s Warranty?
Builder warranties on new homes
Builders offer a variety of warranties. When purchasing a new home, the individual builder should provide a copy of their warranty. If a builder’s warranty is not backed by a separate insurance company, the warranty is only as strong as the builder is. Even if a warranty is backed by another insurance company, it is still not a 100% guarantee that there will be backing in the event of a construction problem.
Builder contracts for building a home are very extensive. Most are written to cover all aspects of getting your home built and to avoid any misunderstandings about the process. Be sure to review all clauses very carefully and discuss them with your Realtor and attorney. Upon completion, you will have a beautiful new home to enjoy for years to come.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.