So you’re thinking about building a new home. You’ve found a builder you like, and you’ve picked out the perfect lot. You’re ready to go … and then your builder emails you a 100+ page contract.
You’re not an attorney, and you’re not a construction expert.
Do you sign? Do you negotiate?
What should you watch out for?
Here at Focus Real Estate we specialize in helping clients build new homes. We’ve helped our clients with dozens of large production builder deals in the Denver metro the past few years. Infinity, Brookfield, Parkwood, Lennar, Shea, Taylor Morrison, Epic Homes, Richmond, David Weekley, and more.
So what “yellow flags” should you be watching out for in your contract?
First, when I say “yellow flags” I don’t mean issues that will automatically make you run screaming from your builder’s sales office. Far from it!
Instead, these are just 4 – of often several dozen – builder-friendly terms we and our legal team often chat about with our clients before they sign their builder contracts. (Our legal team also helped with this post by the way – see the bottom of this post!).
Also, you should know that each builder typically uses its own contract. So this post has many generalizations, and what we chat about may not apply to your deal.
Our clients have built homes in Central Park’s North End, Macanta, Painted Prairie, Sterling Ranch, Wild Plum, The Canyons at Castle Pines, and other neighborhoods around Denver – so the big production builders in those neighborhoods are the focus of this post. Smaller, more custom builders tend to manage their contracts differently, so we’ll address those in a separate post.
Lenders & incentives
Focus and our legal team started reviewing builder contracts regularly around 2017. In the last 6 years we’ve seen a lot of changes.
One bigger change?
Some builders are strongly (strongly!) pushing their own in-house or preferred lenders.
There are a lot of reasons for this I won’t bore you with, but some builder contracts now require buyers to, at a minimum, pre-qualify with the builder’s preferred lender. And then in addition to that, any incentives you’re getting might be tied to you using that lender.
So for example, a builder might offer a hypothetical $10k closing cost credit in the builder contract – but you have to use that builder’s lender.
If you don’t? You might lose the credit.
We’ve seen a few non-builder lenders roll out new programs where they might offer to match builder incentives (terms and conditions vary). So even if you have to pre-qualify with your builder’s lender and you have incentives tied to using that lender, that doesn’t necessarily mean you shouldn’t shop around and see what kind of deal you can get.
Home sale contingencies
If you need to sell your current home in order to pay for your new home, some builders will require you to list and sell your current home – quickly!
For example, we had a wonderful couple building a gorgeous new home in Central Park’s North End. The estimated completion date was 18 months out. Great!
But the builder required our clients to list their current home quickly after signing the builder contract. So our clients could’ve been in a position where they sell and move out … long before their new home is completed.
Why does the contract require such a fast listing and sale?
“Contingent” contracts are arguably less desirable for builders. A buyer has to sell their home first before they have the proceeds to close on their new home, so that’s one more thing that has to fall into place. Things could potentially go wrong on the resale side and that could impact the new home sale.
So this is one reason you might see an early sale deadline for your home – your builder wants to know if you’ll be ready to close when the time comes.
The good news?
We’ve been successful managing these dates with our clients and their builders. So make sure you work with your broker and builder to craft a realistic timeline for your home sale.
Your builder can make changes to your home after you sign your contract
In our experience, very few builders will guarantee in your contract that your new home will be built EXACTLY in accordance with the building plans. Nor will most builders promise you EXACTLY all the upgrades and selections you pick.
Why?
First, understand that construction is an imperfect, human process. While many builders desire to build your home perfectly and to not substitute anything or make changes to the floorplan or other improvements, the reality is topography, soil conditions, and other factors may necessitate that this happen. I’d say in my experience that changes are rare, but they can and do happen.
Examples of what might happen with your home?
Certain appliances, supplies, and other materials that were once readily available are either out of stock or extremely delayed. So while you might have picked a certain refrigerator initially, it’s possible your builder might have to swap in a different refrigerator that’s actually available.
The good news? In addition to the fact that builders don’t want to make changes if they can avoid it, some builder contracts say changes and substitutions generally have to be of equal or better quality.
So while you might not get the refrigerator you picked out originally, the builder might be required to give you a fridge that’s at least equal in quality.
Building & closing timelines in your contract might not be realistic
Some homes around Denver are facing delays. Some delays are permitting related; others are related to sourcing materials and labor; still others are related to Colorado’s wonderful, yet erratic, weather.
While almost all large production builders want to build your home as quickly as possible, since they normally don’t get paid until the home is done, the reality is there can be delays.
In your builder contract, there might be an “outside date” for when your home needs to be completed. These outside dates are often 1-2 years after you sign your contract. And even that date could be subject to force majeure (what this means is a long, separate conversation).
Regardless, don’t be shocked if your builder estimates that your home will be done, for example, by the end of 2023, but your contract says your builder actually has much longer.
So there you have it, friends! Remember, these are only 4 items we and our legal team often flag in builder contracts – out of several dozen potential issues, depending on the client and deal. So while this post is a good place to start, it is by no means comprehensive!
You can always reach me at Mariel@Focus-Realtors.com!
One last point. Larger builders in the Denver metro normally don’t use the standard Colorado-approved contracts, which are often used for resale deals instead. If you’d like to learn more, I chat about the Colorado standard resale contract in this article.
And if you’d like to know more about the basics of builder contracts, be sure to check out Joe Phillips of the Scoop’s article 7 things to know about new home builder contracts.
Don’t forget that all real estate transactions are different, and all real estate contracts are different. Some of the issues I discuss in this post may – or may not – apply to your transaction, may apply in a different way, or may even be interpreted differently. This post is not comprehensive and is not legal advice and should not be relied upon. You’re responsible for your own agreement and deal – so read it and get the necessary legal help you need!
Alex R. Ross, Esq. and our legal team assisted with this Scoop post.
