Contracts for the Purchase of New Homes from Builders
Builder/Seller Sales Contract Forms For New Homes Are Almost Always Extremely Unfair to Homebuyers. The typical printed sales contract forms used in the resale of previously owned homes are heavily slanted in favor of the seller. The typical sales contract forms used by builders for new homes are even worse for purchasers and require major revisions to even approach reasonableness.
The sales representatives for most knowledgeable and reputable builders realize how one sided their contract forms are and they are usually willing to make reasonable modifications when an informed buyer objects to contract provisions which are obviously unfair and inequitable. When the builder’s sales representatives deal with uninformed purchasers, however, they present the builder’s printed contract form, fill in the blanks and the purchasers just sign it, never realizing just how bad a legal position they have put themselves in until it is too late to do anything about it.
Among the more common undesirable provisions to watch out for in builder contracts are the following:
- Deposits. Any deposit or other advance payment which a homebuyer is required to make should be placed in a separate escrow account that is not under the builder’s control. It is not just small builders who have financial problems before they complete homes and pay off all the mechanics and materialmen. Some of the biggest homebuilders in the country have gone under leaving homes unfinished and liens unsatisfied. If the builder has access to your client’s money, you may rest assured that it will be your client who is left empty handed, with neither the house properly completed nor the subcontractors paid.
- Delivery Date. Builder contracts never require the builder to deliver the house when promised. Nor do they permit recovery of any damages for the builder’s failure to deliver on time. If your client’s move-in date is inflexible and important, either write into the contract monetary or other penalties for the builder’s failure to deliver on time (to pay your client for having to make two moves or for making other arrangements to accommodate the late delivery of the new home) or encourage your client to purchase a previously owned home.
Specifications and Substitutions. Most builders have preprinted contract addenda forms which provide at least some amount of detail concerning things like the orientation of the home on the lot, the floor plan of the home (that is, the layout of the various rooms and spaces within the home) and the type of material, equipment, appliances and other building specifications to be used in constructing the home. Obviously, it is important for a purchaser to be able to evaluate all of these specifications, both in general and in particular, in order to determine whether or not the purchaser is getting real “value” in the home that he or she is purchasing. Although I have seen very few purchasers do so, I always recommend that any purchaser buying a new home consult with a professional home inspector with respect to the specifications contained in the original contract between the buyer and the builder.
The careful purchaser will also make sure that the contract incorporates by reference any advertising or marketing materials (such as newspaper ads, pamphlets, brochures, etc.) which contain specifications or representations concerning the house or the subdivision that are not included in the sales contract.
Assuming that the initial contract adequately specifies the materials, equipment, etc., that are to be included in the home, the purchaser also needs to make sure that another commonly used provision in builder contracts will not take away what those specifications have given: Builder contracts invariably allow the builder to substitute, for a wide variety of reasons, other materials and equipment for the materials and equipment originally specified in the contract. There are lots of reasons why builders want such provisions in their contracts. For example, as time goes by, certain equipment or materials may no longer be available or may become significantly more expensive to purchase. For whatever reason, the builder may wish to make substitutions which may not be entirely consistent with the purchaser’s tastes or preferences.
To protect against such eventualities, the purchaser should provide that the seller must disclose to the purchaser, in writing, any substitutions made in place of the specifications originally agreed upon, that any substitutions must be made with equivalent or better materials, equipment and workmanship and, finally, that the purchaser shall have the option of canceling the contract if the substitutions are not acceptable to the purchaser.
Even if the purchaser does not wish to cancel the contract as the result of an unacceptable substitution by the builder, such a provision gives the purchaser considerable leverage in negotiating some kind of mutually acceptable compromise (such as a reduction in price or adding some other betterment to make up for the substitution).
Proper Completion. Most builder contracts provide that the builder’s architect (or some other person under the builder’s control) will be the “arbitrator” if there is any dispute as to whether or not the house has been properly completed. Do not agree to that. How can such a person be an unbiased and impartial arbitrator in disputes with the builder?
Most builder contracts also require the purchaser to settle and pay the contract price in full, with no deductions and no escrows, once the seller gets a Certificate of Occupancy or Residential Use Permit for the home. COs and RUPs are routinely obtained by builders even though a house is far from what the typical purchaser would call “complete.” The prudent purchaser should insert more reasonable provisions into the contract for determining whether or not the home has been properly completed and for escrowing appropriate amounts of money (or getting other adequate protection) until the home has been properly completed.
Remember, once the settlement on the new home has been completed, the homebuyer has lost a significant amount of leverage against the builder to compel him to complete the home properly. Once the homebuyers have signed the papers and the builder has been paid in full, they may find it difficult to get even a return phone call responding to their complaints of incomplete or improperly completed items.
- Reservations of Rights. Some builder contracts actually authorize the builder to create additional easements or rights of way across a purchaser’s lot even after settlement. Such a contract provision would allow the builder to decide, after the purchaser has gone to settlement on his new home, that the bike path for the subdivision should run through the middle of the purchaser’s front yard! A prudent purchaser would never allow a seller to retain such rights after the cxecution of a purchase agreement. In any circumstance in which a builder can demonstrate a good reason for reserving any such rights, you should make certain to strictly limit the exercise of those rights in such a way as not to adversely affect the property your client is buying.
Accepting the Builder’s Settlement Agent. Builder/Sellers frequently try to persuade purchasers to accept a settlement agent designated by the builder/seller. Sometimes the seller will even offer to pay some or all of the purchasers’ settlement costs if the purchasers will agree to settle with the seller’s designated settlement agent. There is nothing wrong with accepting this offer so long as the purchasers retain their own experienced real estate attorney to protect their interests at settlement.
Where the seller designates the settlement agent, it is important for the purchaser to remember two things: First, no settlement agent designated by the seller is going to do anything contrary to the seller’s best interests. Second, most builder contracts define very narrowly the actual “settlement costs” which the builder will pay for the purchaser. Consequently, the dollar amount which the purchaser will save by going to settlement with the seller’s settlement agent is usually less than the purchaser expects.
Homebuyers Purchasing New Homes from Builder/Sellers May Need Additional Help. The above comments address only some of the worst provisions that are commonly found in builder/seller form contracts. There is no “standard” builder/seller contract that is used as widely as the local Board of REALTORS® residential resale contract form. Consequently, you may run into many other provisions not discussed above which may be very undesirable for the homebuyer. For this reason, it is always prudent to at least recommend to your homebuyer clients that they consider hiring an experienced real estate attorney to represent them at both the contract stage and at settlement.
The cost of hiring an experienced real estate attorney to help protect a homebuyer in the purchase and settlement of a new home is usually no more than a few hundred dollars. Not having adequate legal representation at both the contract stage and at settlement can cost a homebuyer thousands of dollars, especially if unexpected problems develop between the signing of the contract and settlement or, even worse, after settlement, after all of the settlement documents have been signed and all money has been disbursed. There are few situations in which the cost/benefit ratio of dollars spent is more favorable for the homebuyer.
The above observations address certain specific problems with builder contracts. The author has prepared a separate article on considerations for homebuyers in negotiating the typical contract for a resale home.
*These materials were developed by Mr. Brincefield for a seminar he presented for the Alexandria Bar Association