For most consumers, purchasing a new home from a production builder (as opposed to a custom builder) seems great since the consumer will have the opportunity to make small interior design changes (colors and upgrades) and the home will be brand new. In addition, the ability to watch and oversee the construction of the new home can be exciting. Unfortunately, what should otherwise be a wonderful experience can turn into a very frustrating situation if the builder contract is not reviewed prior to signing it. As a starting point, builders, especially larger production builders, are typically very sophisticated and experienced in the issues and problems that are likely to occur in the home building process. As a result, the production builder contracts that are presented to consumers at the start of the home buying are extremely one-sided and grossly favorable to the builder. It’s designed to be this way on purpose, as production builders wants absolute control over all aspects of the home building process to keep the home construction machine moving without slow downs or variations in the process. The following are the top 5 tips that should be considered as part of the production builder’s contract negotiation:
Closing Costs Allocation – Understanding the closing costs allocation under the builder’s contract will ensure that the consumer is not surprised by unexpected costs at the closing. Builders are notorious for shifting all of the closing costs to consumers while controlling the entire closing process.
Financing Contingency – If obtaining financing for the purchase of the home, there should be clear terms and conditions related to the right to terminate the contract should financing not be secured within a specific time period. Often times, builders contracts attempt to remove or reduce financing contingency provisions in order to lock the consumer into the transaction or forfeit their deposit.
Written Notices – It is very important that any time periods that operate to reduce or eliminate a right of the consumer be subject to providing the consumer with written (as opposed to phone or verbal) notice before the reduction or elimination of a right occurs. These reduced or eliminated rights can include, but not be limited to, the time periods to: (i) make interior design selections, (ii) review survey and title matters, (iii) schedule or create a punch-list (items requiring repair or correction), and (iv) set the date of the closing of the contract.
Punch-List – The ability to create a punch-list (items requiring correction or repair) prior to closing of the contract and deeming the home complete is a critical aspect. More importantly, consumers should have the ability to engage a qualified inspector to assist them with the inspection. In addition, it is critical to understand what items on the punch-list can delay closing, otherwise, a consumer could be required to close on the home at a time when major items are either missing or not operational with the home.
Closing Attorney – Consumers should ensure that if they are going to pay all the closing costs for the transaction that they should be the proper party to have a closing attorney (representing them) handle the closing process. Builders are required to give consumers a choice as to the closing agent, but most don’t want this known to the consumer. Be mindful that builders attempt to use incentives to direct the consumer to use the builder’s title company, but when comparing all the costs – with the incentive, there really is no savings for the consumer.
Consumers need experience and expertise on their side when negotiating the production builder contract, which is why it’s recommended to have a real estate attorney assist in the review of the builder contract and outline the risks and ways to improve the consumers’ position in the transaction.