Common Unaddressed Issues in Builder Contracts

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Practice Areas: Real Estate

 

Since most builder contracts favor the builder, you need to read them carefully and have your attorney review the contract as well. Before you sign anything, educate yourself and don’t rush into anything.  The following issues are ones that are commonly unaddressed and can cause you problems.

You should be aware of these and, where possible, try to negotiate a more favorable contract addressing these issues to protect your interests.  Your ability to do so is often a function of whether you are operating in a buyer’s market or a seller’s market.  As a minimum, you need to understand the risks you are undertaking.

Common Issues for New-Home Buyers


  1. The House is Not Delivered on Time
  2. Loss of Deposit Money
  3. Builder Retains Reservations of Rights
  4. Bad Workmanship or Incomplete Work
  5. Legal Protection for Purchaser
  6. Contract Remedies for Breach
  7. Is it Too Late to Talk to a Lawyer?
  8. Complexities of real estate contracts Require an Experienced Attorney

The House is Not Delivered on Time

Builder contracts are notorious for allowing builders to deliver projects past the promised deadline without any penalties. Delays are a common occurrence, yet the home buyer does not generally does not have a right to recover damages if the builder is late in finishing the home.

Many times the buyer has made plans to vacate their existing residence and when the builder does not finish the home as promised, it creates a myriad of financial problems for the home buyer.

Solution

Negotiate some type of penalty if the builder does not complete the home within a reasonable time from the date promised.

Loss of Deposit Money

Another issue that comes up frequently is deposits and advance payments made to the builder. Builders commonly ask for these advance fees prior to the house being completed. They can add up to substantial amounts of money. The money is supposed to go towards the payment of materials and sub-contractors. What happens many times is the builder has a cash flow problem and uses the funds from one project to finish another. Then when it gets down to your project, they have run out of funds and you are subject to mechanics liens for unpaid bills.

Most builder contract either have no financing contingency or very vague and confusing ones.  Nor, unless FHAS or VA financing are involved is there generally an appraisal contingency.  This means that as to the absence of a financing contingency that you may lose your deposit even if you do not qualify for financing when the house is built (by which time rates and lending conditions may have changed) and with respect to the absence of an appraisal contingency means that you will have to make up the difference in cash if the property does not appraise high enough to support the originally anticipated loan.

Solution

Before you agree to hand over a large sum of money to your builder, you should request that the  money be placed in an escrow  account and that you be provided with copies of paid receipts to make sure the money is going where it is supposed to.  Condominium builders are required by law to escrow deposit funds but single family home builders are not.

Another way to protect yourself is to buy an owner's title insurance policy protecting with protection against mechanic's liens.

Make sure that there is a real financing contingency and a valid appraisal contingency on the contract.

Builder Retains Reservations of Rights

Many construction contractors allow the builder to retain the right to create easements across your property.

Solution

In order to avoid this dangerous situation, you should negotiate upfront exactly what easements may be allowed on your property to avoid problems later after you move in.

Bad Workmanship or Incomplete Work

Typical builder contracts do not protect the purchaser from incomplete work or bad workmanship after the purchaser has paid the contractor the final payment.

Solution

Smart purchasers should negotiate with the builder that funds be set aside in escrow to cover incomplete work or bad workmanship even if the seller is able to obtain a certificate of occupancy. If the builder receives all the money before your punch list is complete, you have no leverage against getting the work corrected or completed.

Legal Protection for Purchaser

The majority of builder contracts provide a financial incentive for the purchaser to use the builder's attorney as the settlement agent or closing agent.

Solution

You should hire your own attorney to protect your interests.  At least have someone monitor the process. This way you do not forfeit any incentives built into the contract contingent on using the builder’s title company or attorney for processing the settlement.

Contract Remedies for Breach

Generally, the builder contracts only provide for the buyer to get their deposit back with no provision for monetary damages.  Sometimes, they do not even provide for interest on your own deposit money. Conversely they often contain an option for the builder to either retain the deposit monies as liquidated damages or chose to pursue actual damages in the event the market value of the unit has declined.

Solution

In order to protect yourself, be sure to negotiate as many contract remedies as possible in case the builder breaches the contract. Just getting back your deposit money may not be good enough to cover losses incurred as a result of the builder’s breach.

Consult with your real estate attorney first to find out what your legal remedies and liabilities are before signing the builder contract.  

Builder contracts are mostly one sided favoring the builder. It is your responsibility to educate yourself and to understand the contract terms and their impact upon you. If you are buying a new home from a new home builder, you should consult with a real estate attorney before signing the contract and/or insert a contingency in the contract that is contingent upon the review and approval of your attorney to protect your interests.

Is it Too Late to Talk to a Lawyer?

Sometimes buyers find themselves in the difficult position of having to seek counsel after a contract has been executed, either because they are unable to close due to change in financial condition or because delays in completion have caused the purchase to no longer be financially viable.  It is especially important to seek counsel as to your rights and liabilities at the earliest signs of trouble.

Complexities of Real Estate Contracts Require an Experienced Attorney

Builder contracts as a whole, or at least some of the more onerous provisions, may not be valid and enforceable.  State laws governing home owner associations often require specific disclosures to be made, failure to comply with which, may render the contract voidable or subject to cancellation.  Similarly, federal laws governing large projects (over 100 units) subject builders to very complex contract disclosure requirements which builders often try sidestep and in so doing, they may create a legal mechanism for buyers to cancel the transaction. 

These laws also require that builders not unduly limit remedies, restrict the forfeitable deposit to a certain percentage of the purchase price, and do not allow buyers to waive the right to pursue specific performance.  Very few attorneys, however, are familiar with the intricacies of the Interstate Land Sales Full Disclosure Act.

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