Study the Builder’s Sales Contract BEFORE You Sign! I am continually amazed at the number of clients who blindly sign contracts. Remember this is one of the biggest purchases you will be making in your life! Before hiring a builder or contractor for any substantial home improvement project, all agreements should be put into writing. These guidelines are true whether your buying a new house or remodeling. The written contract should include:
- The contractor’s full name, address, telephone number and professional license number
- A detailed description of the work to be done.
- Specify the materials to be used — quality, quantity, weight, color, size, brand name, etc.
- The starting and completion dates
- The labor cost and the material charges
- Information on how and when you must pay
- Any warranties and guarantees of workmanship
- The method for debris and material removal when the job is complete
- A “right to cancel” clause. This gives you time (3 days is the standard) after you have signed the contract to change your mind. The clause should also describe what happens if unexpected problems occur after the work is begun.
- Never sign a contract unless it is filled out completely.
- Read the entire contract carefully. Ask questions.
- Keep a copy of the signed contract.
- Do not pay more than the required minimum down payment before the work is begun.
- Do not pay the balance until all work is completed and debris removed.
All contracts are different. You need to study the sales contract as carefully as you studied the finished houses. The contract might include substantial fees and taxes that may be due at closing, when you assume the mortgage and take possession of the house. The contract also favors the builder much more than you realize.
Once you sign it, you’re into the deal, so it’s in your interest to understand the terms beforehand. Another reason to review the sales contract: As with all contracts, it is written to favor the writer, in this case the builder, and it may be egregiously one-sided. To level this playing field, you may need your own lawyer to explain the legal nuances and suggest modifications. At minimum ask your realtor to review it with you. If the builder refuses to change a thing, at least you’ll know what you’re getting into.
To prepare, get a copy of the sales contract and study it before meeting with the builder’s on-site sales agent or your lawyer. This is unusual, but any builder should be willing to accommodate you. If this builder won’t, ask why. A strong disincentive to reading the contract, however, is the small size of the print. Before you start to wade through it, get it enlarged at a copy shop.
As you read the contract, it helps to know the builder’s priorities. These can be summed up in three words: Time is money. The clock on the loan the builder will take out to finance the construction of your house starts ticking as soon as he breaks ground. Anything that delays construction will cost him. If a decision must be made on the spot, he wants to make it and move on without debate.
For example, the builder may have to modify the floor plan so that it will fit within the setbacks of your lot. Anticipating this possibility, he gives himself wiggle room in the contract by stating that the house will be “substantially similar to the model and to the plans.” You want to know how similar.
If the contract says, “the exact dimensions of the house and components thereof may vary only slightly from the actual dimensions of the model,” your house should be very close to the model. But it could change quite a bit if the contract says “changes in the dimensions of the rooms and locations of windows, doors, walls and partitions, the general layout of the residence and the position of the residence on the lot may be made by the seller.”
The builder will insist on this latitude, but you can insist in an addendum that the contract will not be finalized until you have carefully reviewed the plan modifications, should any be required. In some cases, the builder has to reverse the house, such as putting the garage on the left instead of the right. You would want to know about this because flipping the floor plan could mean that the view for which you paid a hefty lot premium will only be seen from the laundry.
The contract will also include a substitution clause. To avoid stopping the job, the builder reserves the right to make a substitution if something that he normally uses becomes unavailable. The contract will say that the substituted item will be of “similar or better quality,” but the builder will be the judge of this, not you.
In some instances, the contract may also state that the builder reserves the right to make a substitution “if there is a substantial increase in the cost,” and the substituted item “will not be of lesser quality than the quality required by the applicable building code.” Since building codes are performance and safety oriented and say nothing about quality of materials, this loophole allows the builder enormous latitude. For example, in the bathrooms, he could substitute “nonporous” builder-grade sheet vinyl for the costlier ceramic floor tiles he normally specifies in the base price house. Most buyers will miss this subtlety, but an experienced real estate lawyer would point it out and suggest a modification.
How about additional fees? These can be substantial, and they may be due at closing. For example, the contract may oblige the buyer to reimburse the seller for “any utility deposits, hook-up fees or public service fees, which have been advanced by the seller for the lot together with the house.” If you are the first buyer and no houses have been built, the builder may not know the exact charge, but he should have a good idea. If several houses have been sold and occupied, the builder should know exactly what those charges are.
A tax or other charge may be customary within a given area, but individual contracts can differ in the details. For example, in Sedro-Woolley tract builders charged an “impact fee” of $5,000. Instead of putting in the purchase price they made it a separate piece of financing due in ten years. What most buyer failed to realize was that they were a paying interest which would have been $2,500.
The cost to build the roads, install the utility lines and sewers, and add all those other amenities, such as a swimming pool, jogging and biking paths and tennis courts, will also be passed onto the buyers. It might be folded into the house price, but in many new-home developments now, it will be tacked onto the price as a “special assessment.” The amount, which might not be specified in the contract, can range from a few thousand dollars to as much as $20,000. The entire amount may be due at closing or, you may have to pay it off in annual installments over a period as long as 20 years. The special assessment obligation is usually transferable to subsequent owners, but in some instances, it must be paid off when you sell the house.
Many contracts state that the fee will cover the cost of the owner’s title insurance policy, a documentary stamp tax and the charge to record the deed. The total cost of these charges is considerably less than what the builder is charging. For a $200,000 house, these would be only $2,500 — $500 to $1,500 less than the builder’s fee. In many cases, however, the title insurance is heavily discounted, so the builder may be overcharging by an even greater amount. Of course you should question such stipulations and ask for a credit when the builder is overcharging.