Monday, February 14, 2011

BEWARE OF BUILDER CONTRACTS

Have you ever signed a contract without reading it?

For 99% of people (including anyone who has ever acquired a cell phone or visited a doctor’s office), the answer is probably yes.

I’ve done a couple of deals lately involving builders, and if there was ever a contract you should read before signing, it’s a builder contract.

In Colorado, the standard real estate commission purchase contract is 14 pages. The last builder contract I looked at was 58 pages, plus addendums.

What on earth do they write into 58 pages of legalese?

Here’s some of it:

The seller makes no warranties about soil condition, and your acceptance of the soils report is your acceptance of the risks associated with shifting soils

• The seller makes no warranties regarding the presence of mold or radon

• The seller makes no warranties about future development (or lack thereof) of additional phases of the subdivision

• Seller makes no warranties regarding completion of amenities, including parks, clubhouses, pools or other common areas

• During construction, the seller reserves the right to change the home’s elevation or modify the position of the home as it rests on the lot

• The buyer may not have the home professionally inspected until it is “substantially complete” (no “work-in-progress” oversight by licensed inspectors hired by the buyer)

• If the buyer (or the buyer’s lender) causes closing to be delayed beyond the agreed upon closing date (unilaterally enforced upon buyer only), the buyer agrees to pay a penalty of interest on the full purchase price at 18% per annum for each day of delay

• The seller has a “targeted” (but unenforceable) closing date – per the contract the seller has 24 months to finish the home, no matter what they tell you

Additionally, in a clause that is utterly absurd in today’s lending environment, the seller reserves the right to cancel the deal (and keep the buyer’s earnest money) if the buyer cannot furnish a written loan commitment (with a completed appraisal as the only outstanding condition) within 30 days of acceptance.

So as you can see, there are some compelling reasons to read the contract, understand it, and negotiate on some of these points.

To blindly sign a builder’s contract is to waive 95% of your rights as a buyer, yet people do it every day.

One last tip for anyone looking at new construction… if you do pursue new construction, make sure a title company (and not the builder) holds your earnest money. With so many builders declaring bankruptcy, you don't want your earnest money deposit to be tied up in bankruptcy court.  (But make sure your title company is solvent as well!)

New construction is most definitely a retail purchase in a value driven market, so buyers need to be careful.  Read the contract.  Write down your questions.  And don't sign on the dotted line until you've reached a comfort level with builder and the builder's product. 

Talk to other owners.  Ask for bank references.  Do your homework.  Now, more than ever, it's up to buyers to get educated and choose wisely.