Negotiating New Home Construction Contracts
In a real estate market where last week’s drywall subcontractor is this week’s seasoned home builder, negotiating a new home construction contract becomes more important than ever before. When entering into a contract to buy a newly constructed home, here are just a few important points to consider.
1. The Importance of Reading the Contract
First, new home buyers should read their contract. This point sounds so obvious, but many people rely on the verbal representations of the builder. Many people do not read or fully understand the construction contract before signing it. If a contract to build a new home ends up in court, the written word usually is enforced, not the verbal promises. If there are parts of the contract that do not make sense, the wise buyer should seek professional advice.
2. The Importance of a Builder’s Warranty in Construction Contracts
If the new home construction contract does not contain a warranty from the builder, the home buyer should ask for one. A warranty is a promise from the builder to stand behind his work and fix any problems that may occur in the first few years. A warranty from the builder is different from a home owner’s limited warranty available from third parties.
In this hot real estate market, many builders are not offering any warranties. Many new home construction contracts now contain broad disclaimers. These disclaimers state that the home builder is making no warranties at all, not even a warranty that the house will be fit to live in. A reputable builder should stand behind his work for at least the first year, if not more.
Read the construction contract closely to determine who is responsible for foundation problems. Many new home construction contracts provide that a soil engineer, not the builder, is responsible for foundation problems. A foundation problem is not a minor repair. It is a major problem. Any person negotiating a new home construction contract should consider asking the builder to take responsibility for the foundation work. Carefully review what kind of title the builder is conveying. Within any new home construction contract, the builder promises to transfer the new home to the buyer when the construction is complete. Transfer to the new owner is by something called a deed.
3. The Importance of Deeds: General Warranty Deeds vs. Special Warranty Deeds
There are many types of deeds. The most common types of deeds are general warranty deeds and special warranty deeds. A new home buyer wants a general warranty deed because the seller is promising to transfer a title free from any major problems caused by anyone in the chain of title.
The seller, on the other hand, would rather promise to convey title by a special warranty deed. In a special warranty deed, the seller only promises to transfer title free from any problems caused by the seller, not by those who may have owned the home or land before him.
There is a growing trend in Colorado construction contracts to promise to transfer title by warranty deed, and then make exceptions for anything the title insurance company lists on the title insurance policy. This is not the same as a general warranty deed. It is not even a standard special warranty deed. The exceptions in a standard title insurance policy are quite broad. What a buyer really wants is a general warranty deed. If the builder will not agree to transfer title by a general warranty deed, then extended title insurance coverage is highly recommended.
4. The Importance of Protecting Your Initial Deposit for a New Home
Most new home construction contracts require initial deposits. Typically, this deposit is between five and fifteen percent. The deposit is not returned if the buyer backs out of the deal.
Home builders have a legitimate interest in obtaining a deposit. A home buyer may want to protect this deposit by having the money held in escrow by a third party. If the builder will not agree to a third party escrow, a new home buyer should, at a minimum, get an agreement that the money will go into the construction account for the house being built. A new home buyer should avoid having his deposit being put in the builder’s general account.
5. The Importance of Knowing Your Builder or Construction Company: The Limited Liability and The Personal Warranty
Understand the difference between the home builder, as an individual, and the home builder, the corporate entity with limited liability. One thing all people in the construction industry understand is their liability and how to limit that liability. Most home builders today operate not as individuals but as companies. The company name may be the name of the builder, but it is followed by some initials or wording that identifies the company as being separate from the individual behind it. The typical initials are LLC, LLP, P.C., Inc. or Corp. If a new home buyer sees these initials, the buyer is on notice that they are dealing with a company with limited liability and not an individual. If dealing with a company with limited liability, the new home buyer should consider asking for a personal guarantee.
6. The Importance of a Home Construction Contract that Works for You
In today’s new home construction market, getting a builder to make changes to their form contracts can be difficult. However, it never hurts to ask. In Colorado, many quality builders will understand the buyer’s concerns and make the requested changes simply because they will stand behind their work.
