New home construction purchases

New home construction purchases

 

Owning a home is integral to the American Dream. Owning a home, built specifically for you, with the opportunity to choose colors, floor plan, appliances, and every detail, is truly unique and special! 

Real estate markets experience cyclical patterns – they always have and they always will.  Since I embarked on a career in real estate in 1978, I’ve observed numerous market fluctuations in Boulder Valley. The dynamics of real estate are inherently tied to market conditions: during slow periods, many homebuilders actively seek the assistance of Realtors® to facilitate home sales. Conversely, in a booming market, some builders aim to exclude Realtors from the transaction. When this occurs, many homebuyers find themselves navigating a complex transaction – often the most significant financial deal of their lives – without any representation. In the current competitive and swiftly evolving housing market, having someone who genuinely cares about your best interests is more crucial than ever.

Contracts utilized in new home subdivisions or by custom homebuilders for constructing a new home do not adhere to the standard Colorado Real Estate Commission approved form. Typically drafted by the Builder’s Attorney in favor of the builder, it is advisable for the Buyer to engage their attorney for a thorough review of any contract related to new construction purchases. In instances where a property is substantially complete, a custom builder may permit the Realtor to create the contract using the Colorado Real Estate Commission-approved form. However, even if a home is fully finished, many new home subdivisions often only accept contracts that have been specifically prepared for that particular subdivision.

If market conditions permit, the potential homebuyer can usually obtain a copy of the contract the homebuilder is using for their attorney or themselves to view at their convenience, before signing the contract. If the market is so hot that there is no time to get the contract before signing it, most homebuilders will allow a clause that gives the homebuyer 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 you question why.

When writing a contract with a custom homebuilder, the builder may or may not be receptive to any changes a homebuyer’s attorney suggests. Most large, new home companies won’t allow any changes to their contract and will adopt a “take it or leave it” attitude. In the case a buyer really wants the property, and the homebuilder 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:

  • Is there a deadline for completion at all? If there is a deadline for completion, is there any penalty to the homebuilder if the home isn’t ready for move-in by the deadline?
  • What signifies completion? A Certificate of Occupancy? Can the builder close on a Temporary Certificate of Occupancy?
  • How is an uncompleted item punch list made? When is the punch list considered too long so that the closing is delayed? Will the homebuilder escrow for uncompleted items?
  • How much is the deposit? Is it non-refundable? Are there any conditions for which it is refundable? Is there a specific performance or liquidated damages clause in the contract?
  • 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 salesperson 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?
  • Does the builder provide title insurance? Will there be owners’ extended coverage?
  • Does the builder pay any other closing costs?
  • Does the builder or the buyer obtain the construction loan?
  • What remedy does the buyer have if the seller/builder refuses to close? This may seem odd, but in an appreciating market, it could happen that the homebuilder might actually resell the property for more than the current contract price.
  • Provisions for “Acts of God”? Who provides homebuilder’s risk insurance if something happens to the home during construction such as wind or fire damage?
  • How is the Realtor representing the buyer being paid? Is there any conflict between the amount the builder is offering versus the amount agreed to in the Buyer Agency Agreement?

Builder Incentives
Builders frequently provide incentives when homebuyers opt for the builder’s own mortgage lender. Unfortunately, homebuyers often struggle to assess whether the offered incentive for using the in-house lender is genuinely beneficial. In some cases, the homebuyer may end up paying a higher interest rate throughout the loan’s duration to secure the incentive. A licensed lending professional representing the homebuyer can assist in evaluating whether the builder’s incentive offer aligns with the homebuyer’s best interests or not.

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. 

It is crucial to engage with your Realtor, Attorney and Lending Professional to ensure a comprehensive understanding of the Builder contract and the entire transaction.

By Duane Duggan. Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit www.BoulderPropertyNetwork.com

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