A new construction contract is very complex. This post summarizes the main issues that homeowners tend to run into the most. Keeping this list in mind should help make the process smoother for you and your loved ones.
1. EARNEST MONEY. Earnest money on a new build is typically much higher than on a resale contract because the builder is creating a specific home for you and you get the option to choose structural upgrades and finishes. The builder takes on the risk that if you fail to follow through, the next buyer may not love your particular taste in customization. So, builders will usually require earnest money upon signing the contract. Additional earnest money may be required depending on selected upgrades.
2. COMPLETION DATE. Most home buyers expect the home to be completed with a few months, based on conversations with builder’s sales agents. Inside the written contract, builders typically give themselves 1 – 2 years to build a home although they are usually done within a year. Do not move into a hotel or put in a lease termination notice until you are absolutely sure of the actual completion date.
3. INTEREST RATE. You will not know the interest rate of your loan upfront. New build contracts take longer to complete therefore buyers cannot lock in an interest rate until much later in the timeline because lenders don’t lock in rates that far out. This uncertainty makes some buyers uncomfortable since interest rates may be higher at the time of locking in a rate. Make sure you keep your credit score same or higher over the next year.
4. INSPECTIONS. The builder’s agents will give you a calendar of expected inspection dates. If you find issues on a new build, you cannot use that as cause to back out of the contract but the builder is obligated to fix those issues while in the building process, or while you’re under warranty after closing.
5. CHANGE REQUESTS. Most builders build off a preset plan that they offer their customers and are called production builders. These types of builders are not as open to change requests i.e. custom changes. For a more customized build, choose a custom builder. Regardless, all Change Requests should be in writing and approved by you and any additional associated costs made clear in the Change Request Order form.
6. FINANCING. With new builds, a buyer typically has 30 -45 days to back out for loan issue reasons but some builders will hold back a portion of the buyer’s Earnest Money. If the buyer’s loan falls through late in the building process, the builder typically keeps the Earnest Money. Do your own due diligence by reading the contract terms and making sure you understand them.
7. APPRAISAL. Builder contracts are not contingent upon an appraisal matching up with the contract price/ agreed price. If the appraisal of the home comes in lower than the agreed price (once completed), the builder is not obligated to drop the agreed price to match the appraisal. In such situations, the buyer will have to bring more cash to the table from another source because the lender will only lend up to the appraised value. If buyer chooses to back out due to the home appraising lower than anticipated, the buyer usually will lose the Earnest Money.
8. REFUNDABLE FEES/ DEPOSITS. Make sure to ask the builder’s sales agents about this. Sometimes, there are clauses in new construction contracts that provide for nonrefundable fees or deposits. If so, make sure you review those terms inside the written contract in case you need to back out of the contract at some point.
The main complaint we get from buyers is that the builder is taking too long to deliver the finished goods. Construction involves a lot of steps and processes which are not visible to the buyer. Such tasks and processes include approval of plans, obtaining the required permits, setting up for utilities, ensuring appropriate easements etc.
The written contract trumps any verbal communications. So, study the written contract in detail to make sure all the terms discussed are in there. Keep your credit score up and know under what conditions you are able to terminate the contract without losing your Earnest Money.