- Buying New Construction: Buyer Beware of Builder Contacts
New Home Contracts: Minefield for Unwary Buyers
By: Raymond J. Bowie, Esq.
"Brand New!" There are definitely advantages to buying something new, whether it be a car, a home appliance, furniture, or a home. And this certainly appears to be the case with Naples area real estate, as attested by the continuing popularity of new construction which seems to sell faster than builders can build it.
Buying new construction in Naples does, however, entail a set of rules baffling to many buyers, even those otherwise experienced in real estate transactions. Sales contracts commonly used by tract builders and multi-family project developers contain clauses vastly different from the typical resale property contracts buyers may be familiar with, posing pitfalls for unwary buyers.
Here is a sampling of clauses commonly found in many local builder/developer contracts, often to the surprise and sometimes dismay of buyers:
- The contract may state the builder anticipates completion of construction in 180 days or so, but actually gives the builder up to two years to finish, and even this two-year period can be extended at the builder's discretion due to delays in getting materials, finding labor, or similar "acts of God."
- The completed construction will be "substantially similar" to the model home or plans, but there is no guarantee. The builder retains the option to re-site the home on the lot, reverse the floor plan, modify room dimensions or exterior elevations, change amenities, substitute appliances and other buyer selections, and add to, modify or delete community features and facilities.
- If the buyer is to finance the purchase with a mortgage, the buyer may be given a mortgage contingency of perhaps 30 days even if construction will not be completed for a year or more. If the buyer fails to obtain or notify the builder he has a loan commitment within this period, either the builder may cancel the contract or the buyer may lose the benefit of the mortgage contingency and thereafter forfeit his deposit if he cannot close.
- By law in Florida, a buyer of a single family or duplex home has a right to escrow up to 10% of the purchase price tendered as contract deposits – or to waive the escrow and let the builder have the deposits. Most builder contracts allow the buyer to escrow deposits only if the buyer agrees to pay either the builder's costs of providing a surety bond or the extra interest the builder must pay on construction financing because the builder is deprived of use of the escrowed deposits. This effectively induces most buyers to waive escrow of their deposits.
- The builder may reserve the right to delay or accelerate the pace of construction as he desires, but the buyer must always be ready to close at any time he receives from 5 to 10 days notice from the builder. And if the buyer is late closing, the builder may charge the buyer a per diem penalty or cancel the contract and keep the buyer's deposit for damages.
- Construction may be deemed to be "substantially completed" and the buyer required to close once the builder receives a certificate of occupancy from the county, even though major items may remain undone: appliances not delivered; certain fixtures or decorative items not installed; landscaping unfinished; swimming pool or lanai enclosures incomplete. The buyer may be required to accept closing on a continuing construction site.
- The buyer is permitted to do a final inspection at closing to compile a "punch list" of defective or incomplete items, but the builder is not required to escrow funds or agree upon any deadline for resolving the punch list items. Often, the builder's only obligation is to correct within "a reasonable time" those punch list items deemed defective in labor or materials under local prevailing trade industry standards, a term difficult at best to define.
- Occasionally, a builder may reserve the right to increase the purchase price by passing through to the buyer increases above the builder's anticipated costs of construction materials or labor, which the buyer must either accept or the builder can cancel the contract. Rarely, if ever, is there a clause decreasing the purchase price in the event the builder reaps cost savings.
- Builders often reserve the right to designate either their attorney or title company as the closing agent for the buyer, giving the builder an inherent advantage over the buyer left unrepresented at the closing table.
- In addition, at closing the builder may also require the buyer to pay the builder a "closing fee" equal to anywhere from 1.00% to 1.75% of the property’s purchase price, some of which the builder may use to pay his attorney or title company for closing services, to provide title insurance to the buyer, and to record the deed – and some of which may be simply pocketed by the builder.
Do all builder contracts contain such clauses?
No. Small single-family home builders and custom builders are less likely to have such clauses in their contacts, and they are much more amenable to heeding buyers' objections to such clauses when they do. However, buyers dealing with larger tract builders or multi-family project developers will likely encounter many of these clauses in their sales contracts – and discover that such big builders are reluctant to negotiate so much as a jot or tittle in their contracts.
So what is a buyer to do to get a fair contract?
Buyers desiring more balanced contracts and enhanced safeguards in buying new construction might want to deal with smaller or custom builders more amenable to negotiating their contracts. If a buyer purchases his own lot beforehand, the buyer often has greater leverage negotiating contracts with prospective builders. Of course, such buyers should carefully qualify the builder they select based on factors other than the builders' favorable contract clauses – factors such as the builder's experience, reputation, trade references, customer satisfaction and financial stability. A buyer gains little from negotiating a favorable contract with a builder who then defaults or performs poorly.
But what if the buyer wants that luxury condo in the sky or that tract mansion in a gated golf-course community?
Frankly, your negotiating options may be quite limited in dealing with condominium developers or tract builders. They build in such volume that they dislike any variations in their standard contracts and fear that by accommodating one buyer, they'll invite other buyers to demand similar accommodations. However, it never hurts to propose the deletion or modification of contract provisions deemed objectionable – provided you have your attorney review the contract and propose the modifications to the builder before you sign it. Once you've signed a builder’s contract, it’s generally too late to propose any modifications.
Buying a newly constructed home is exciting, glamorous, sizzling, and all the other adjectives that builders' ad agencies spin every Sunday. However, the new home buyer must always exercise care that he doesn't also buy a peck of contract troubles in the process.