What to Watch for in Builder Contracts

Posted by Duane Duggan on Tuesday, July 10th, 2018 at 11:14am.

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% 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 home buyer can usually obtain a copy of the contract the builder is using for their attorney or themselves and view it at their convenience prior to signing the contract. If the market is so hot that there is no time to get 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 won’t allow such a clause, it should automatically make the buyer question why not.

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 won’t allow any changes to their contract and adopt 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 isn’t 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 where it is refundable? 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 sales person 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 in which the builder could re-sell the property for more than the current contract price.

14. Are there provisions for “Acts of God”? This includes builder’s risk insurance if something happens to the home during construction such as wind or fire damage.

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. 

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About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.

For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611

 

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