Reprinted from Journal Online
By James C. “Beau” Brincefield, Jr.
The typical contract for the purchase of a new home from a builder is very one sided in favor of the builder. It is a dangerous minefield for a purchaser who is not experienced in buying real estate. Perhaps the worst aspect of this situation is that most purchasers don’t realize how bad the contract form is for them until it is too late to do anything about it.
One of the biggest problems with builder contracts is that they never require the builder to deliver the new house when promised. Nor do they allow any penalties if he fails to do so. This can be a serious problem for purchasers who become obligated to vacate their existing home by a certain date and then they find out that their new home is not going to be ready when promised. That is also when they usually find out that they have no right to recover any damages from the builder for failure to deliver the house when promised.
Loss of Deposit Money
Another common problem with builder contracts involves the deposit money and other advance payments that builders usually require from purchasers. It is a very risky proposition to give your money to a builder who has not both completed the house and fully paid all the subcontractors and materialmen. It is not just small builders who have financial problems before they complete their homes and pay all their bills. But, inevitably, it is the purchaser who is left empty handed, with neither the house properly completed nor his money back.
If the builder requires the purchaser to make substantial payments before the house is completed and all the contractors and materialmen are paid, the wise purchaser will insist that the monies be placed in a separate escrow account which is not under the builder’s control and that the funds will not be paid over to the builder until settlement on the home. In addition, the prudent purchaser will also obtain at settlement an owner’s title insurance policy protecting against mechanic’s and materialmen Is liens (which may be filed even after settlement).
Reservations Of Rights By Builders
There are many other provisions in the typical builder contract that are less obvious but equally dangerous for the buyer. For example, some contracts allow the builder to create additional easements or rights of way across the Purchaser’s lot even after the Purchaser has gone to settlement! In other words, the builder can decide – after you have gone to settlement on your new home that the bike path for the subdivision should run right through the middle of your backyard!
Deficient Or Incomplete Work
Another frequently encountered provision in builder contracts allows the builder’s architect to decide whether or not the material and workmanship in the completed house complies with the builder’s obligations under the sales contract. A slightly different twist on the same problem is found in contracts which provide that, so long as the seller can get a Certificate of Occupancy or Residential Use Permit for the home (which may be obtained even though the house is far from what the typical purchaser would call “complete”), the builder can require the purchaser to settle and pay the contract price in full. Such contracts also typically provide that the purchaser has no right to require the seller to set aside any money in an escrow account at settlement to guarantee the completion of any “punch list” items, either. Obviously, once the purchaser goes to settlement and the builder gets his money, the purchaser has lost any economic leverage he might have had to compel the builder to complete the house properly.
Selection of the Settlement Agent
Most builder contracts provide a financial incentive for the purchaser to use the builder’s designated settlement agent. Whether the settlement agent designated by the builder is an attorney or not, it is important for the purchaser to remember that the settlement agent has been selected by the builder and is not going to represent the purchaser’s interests at settlement. All but the most experienced purchasers need someone at settlement to protect their interests, especially if they have not had the benefit of any professional advice when entering into the purchase contract. Let the builder’s settlement agent prepare for and conduct the settlement, but get your own attorney to represent your interests.
Remedies For Breach of Contract
The typical builder contract severely limits any remedies a purchaser may have f or breach of contract by the builder. For example, it is commonplace to find provisions stating that the only remedy a purchaser has for the builder’s breach of contract is for the purchaser to get back his deposit. This amount may be only a small fraction of the actual damages suffered by a purchaser as a result of a breach of contract by a builder.
Buyer Beware; Get Professional Advice
Most knowledgeable and reputable builders realize how one sided their printed contract forms are and they are usually willing to make reasonable modifications when a buyer objects to provisions which are clearly unfair or inequitable. For the uninformed or unwary buyer, however, the printed form contract that is presented to them is the one that they sign and they never find out just how bad their legal position is until it is too late.
If you are thinking about buying a new home from a builder, you would be well advised to consult with a knowledgeable real estate lawyer before signing that contract. Or, at the very least, you should add a provision to the builder’s contract making it contingent upon review and approval by your attorney.