The Typical Sales Contract Used by Builders Differs Greatly from NVBR’s Suggested Contract: REALTORS® may be Liable for Failure to Disclose these Differences to Purchasers

The Typical Sales Contract Used by Builders Differs Greatly from NVBR’s Suggested Contract: REALTORS® may be Liable for Failure to Disclose these Differences to Purchasers

Reprinted from Update Online

By James C. “Beau” Brincefield, Jr.
Northern Virginia REALTOR®

The typical builder sales contract differs from the NVBR approved form in many ways. This article identifies some of the more important differences.

Deposits

Under the NVBR contract, the REALTOR® must place the purchaser’s deposit in a special escrow account until settlement. The typical builder contract has no such requirement. In fact, many builder contracts allow the builder to hold (or, even worse, to spend) the purchaser’s deposit. If the builder encounters financial trouble, purchasers may not only lose the house, but also their deposit (and upgrade) money.

Quality of Materials And Workmanship

The typical builder contract gives purchasers little or no protection regarding the quality of materials and workmanship. Builder contracts often allow the builder to substitute materials as the builder sees fit, and give the builder or his architect the right to decide whether or not the completed house complies with the seller’s contract obligations. Many builder contracts even allow the builder to change the orientation of the house on the lot.

Financing

Usually, there are “package deals” between builders and certain lenders. Frequently, there are financial disincentives if a purchaser wants to use another lender (for example, the builder will not pay certain closing costs).

Settlement Date

The failure of the builder to deliver on the settlement date promised in the contract is one of the most common problems with builder contracts. Although the language is usually not obvious to the non-lawyer, the typical builder contract provides that the builder will deliver the house whenever the builder gets it ready, and that there are no penalties if that delivery date turns out to be a week, a month or several months after the date specified in the contract.

On the other hand, the typical builder contract requires the purchaser to settle whenever the builder says the builder is ready. The purchaser is usually not allowed to delay settlement (or require the builder to escrow any money) even if the purchaser believes that the house has not been completed properly prior to settlement. Naturally, once purchasers settle without any escrow, they lose the best leverage they have to force the builder to complete the house properly.

Settlement Agent

Most builder contracts provide for the settlement to be held by the builder’s attorney or settlement agent. The disadvantage of this to the purchaser should be obvious. The builder’s settlement attorney or agent (just like the seller’s real estate agent) does not and cannot represent the purchaser.

I believe purchasers need someone to protect their legal interests at settlement, especially if they have not had the benefit of any legal advice when they entered into the contract.

Condition of Title

In recent years I have noticed a growing trend in builder contracts that gives the builder various rights that can adversely affect the purchaser’s title. For example, I have seen contracts in which the builder reserved the right to create easements and rights of way over the purchaser’s property even after settlement Such contract provisions might allow the builder to do many things that could greatly reduce the value of the purchaser’s property (like putting an easement across the purchaser’s front yard for a bike trail or tennis court, or creating a utility easement).

Remedies for Breach of Contract

The typical builder contract severely limits the purchaser’s remedies for breach of contract by the builder. For example, it is commonplace to find a provision in the builder contract stating that the purchaser’s only remedy for the builder’s breach of contract is for the purchaser to get back the deposit. This amount may be only a small fraction of the actual damages suffered by the purchaser as a result of the builder’s breach.

REALTORS® Code of Ethics

In my opinion, REALTORS® have an obligation under Articles 7 and 17 of the NAR Code of Ethics to tell prospective purchasers that builder contracts are usually very one-sided in favor of the builder in many important ways, and that a purchaser needs the advice of a competent real estate attorney who owes his individual loyalty to the purchaser. I would even say that REALTORS® have an obligation to disclose to purchasers the kind of information contained in this article, so that purchasers will understand the extent to which their interests may be adversely affected by builder contracts.

Reprinted from The Northern Virginia REALTOR®, February 15, 1989.