Many buyers in the market for a new home are frustrated because they cannot find a home that meets their needs or budget. As a result of the shortage of inventory, new construction is up in 2023 compared to prior years. If you’ve expanded your search to include a newly built home, you should know that it’s not as simple shopping for a resale. Buying a newly constructed home involves a lot of details and some extra homework for the buyer prior to signing on the dotted line. Buying a newly built home can be a great experience – you get to pick exactly what you want. Here are some things we often see when helping families navigate the building process that you should consider.
5 Things to Know
1. Get your money in order.
The finances of buying an existing home are relatively easy to understand. There’s a purchase price and closing costs. New homes have a lot more to think about.
The purchase price often involves lots of decisions about standard and upgraded features. If you fail to make timely decisions during the construction process, you may be penalized financially. It’s also not uncommon for buyers to change their minds about selections during the construction process. As a result, the total cost may exceed what you anticipated to be the purchase price.
The deposit for new construction is often much larger than for a resale. Usually that deposit is non-refundable to you. That means you have a lot more at risk in the event you are unable to complete the purchase. That could happen if you fail to qualify for your mortgage or have a sudden loss of income. If you back out of the deal, if the contractor does not try and force you to close, you’ll lose your deposit.
New construction contracts frequently are not contingent upon an appraisal. In other words, if the new house does not appraise for your loan amount, the builder is not obligated to drop the price to match the appraisal. In short, the builder's failure to build a house that appraises for the value you need for your loan is not their problem - it is yours. The lender can still lend on it but because it appraised low you will have to bring more cash to the closing table
You can’t back out if the appraisal is low, unlike a resale, without losing your earnest money. Make sure that there is a valid appraisal contingency in the contract.
2. Read the contract!
At the risk of stating the obvious, it’s very important to read all the contract documents provided by the builder. As many times as I’ve suggested this, it’s just as common for buyers to skip some or all this critical task.
The marketing materials are not part of the contract. Believe me – there will actually be a provision in the real contract stating that the builder is not obligated to produce a home for you that matches either the marketing materials or the model home. You’ve got to bear down and read the actual contact. I know it’s long and boring, but this is a huge expense you’re about to take on. It’s worth your time.
Make sure you get and read all the documents that the contract refers to. The contract may define what the contract documents are. If it does, that should serve as a checklist of what you need to have and read. The builder probably did not provide all of them to you up front – you need to ask for him.
Make a timeline of deadlines. Construction contracts have many deadlines, especially for making sections of options and materials. If you miss a deadline, you may get something you do not like or there may be a financial penalty for a late section. Other deadlines may identify your right to cancel the contract and get your deposit money back. Failing to understand the deadlines can cost you a lot of money.
3. What is the standard of quality being promised to you?
When you make your purchase decision, you likely consider the builder’s reputation as a quality builder. You expect a quality home. Believe it or not, many builder contracts do not identify a standard of quality to which you can hold the builder.
The contract may not even promise a home that is habitable or compliant with local building codes. At a minimum, your builder should promise that its work will be performed diligently and in a first class, workmanlike manner, and in compliance with all applicable laws, ordinances, regulations and rules of any public authority having jurisdiction over the development. If the contract does not include a quality standards clause like that, it should be a point of discussion.
Be aware that any promise made to you by the builder or sales agent are not enforceable unless they are in writing in the contract. The following is a standard contract clause disclaiming those promises: “[a]ll representations, claims, advertising, promotional activities, brochures or plans of any kind made by Seller, Brokers, their licensees, employees, officers or partners are not a part of this Agreement unless expressly incorporated or stated in this Agreement.” If there’s something promised to you that is important, you must ensure that it’s put in writing and made part of your contract.
4. What kind of warranty is being offered?
Litigation over defective new home construction has been escalating for years. For single-family homes across the entire United States the most significant deficiency types include exterior weather barriers (stucco, siding), structural (wood) framing, mechanical, electrical and plumbing systems, and window/door installations. Homeowners typically notice these defects after the closing and thus after they’ve already paid the builder. Your best bet for holding the builder responsible for correcting defects in the warranty. Don’t treat the warranty as an afterthought.
Ask to see the builder’s warranty up front – BEFORE you sign the sales agreement. Builder warranties for newly built homes generally offer limited coverage on workmanship and materials for specific components of the home, like windows, heating, ventilation and air conditioning (HVAC), plumbing, and electrical systems. Warranties also usually spell out how repairs are made. The length of coverage varies depending on the component of the house.
One year: Coverage for workmanship and materials on most components usually expires after the first year. For example, most warranties on new construction cover siding and stucco, doors and trim, drywall and paint during the first year.
Two years: Coverage for HVAC, plumbing, and electrical systems is generally two years.
10 years: Some builders give coverage for up to 10 years for “major structural defects,” sometimes defined as problems that make a home unsafe and put the owner in danger. For example, a roof that could collapse is a “major structural defect.”
Beware of contractual provisions that require you to waive certain warranties that exist under the law. Some states require builders to give explicit warranties that include certain protections. Other states, like Pennsylvania, may only include “implied warranties” under the common law. The typical builder’s contract includes waivers of these legal protections. These provisions may not be enforceable in certain states. You should ask that they be removed.
Get an inspection before every warranty expiration date. Defects often take a season or more to become noticeable. Some defects are hard to detect, so it may be worth paying a professional to point out what the builder needs to fix. Keep track of the date yourself, and in preparation for any inspection, make a list of every problem you’ve observed. Something as apparently minor as a cracked tile could indicate a major problem, like a shifting foundation.
5. Don’t pay your money before the work is complete.
The contract will include provisions concerning when the contractor is entitled to be paid in full and it’s not after all the work is completely done. Its customary for builders to be paid upon “substantial completion.” That phrase may be defined to mean something specific. Usually it’s when the home is complete enough that a temporary occupancy permit can be obtained, allowing you to move into the home. You may find yourself closing on the sale with many important aspects of your project incomplete such as landscaping, concrete work, front walks, driveways and decks. The contractor wants you to trust that they 1) come back to complete the work 2) in a timely fashion and 3) in a way that you’ll be satisfied with. Once they get their money, you’ll likely be less of a priority. The delays in getting to completion after closing can be quite frustrating for many new homeowners.
Will builders negotiate their contract?
Are builders willing to negotiate the terms of their contracts? It depends on a variety of factors such as how fast the development is selling, the current housing market and the builders’ own policies. To be up front with you – don’t expect builders to change much, if anything. Even if the builder says it will not negotiate, it’s worth discussing contractual issues before you sign. How the builder responds to you and its willingness to address your concerns before you sign is a good indicator of how responsive the builder will be to problems that arise during construction and after closing. Test their willingness to talk and hear you out. It’s all part of being a savvy shopper who makes informed decisions.
Call Us Before You Sign
If you have questions as you consider new construction, our experienced real estate attorneys would love to help. We can review your contracts and help you make an informed decision about your dream home.