Builder Contracts

​New construction sales are way up and RMAA new construction contracts are way up too.  Unless a new home purchase is substantially complete, there are issues unique to new construction contracts that should be explained to buyers.  It’s always better to be pre-dispose a buyer to new construction issues than to deal with unexpected, unpleasant surprises.  Before you show a new construction property, do some research on the builder and check out their reviews. 
 
First, RMAA housekeeping matters.  Many new home contracts do not include items required by GREC.  When you are presented with the purchase paperwork, please be certain that it includes not just your Georgia Real Estate License number, but also the RMAA Firm License number H-53737 and, if it was in FMLS, the Office Code number.  In the Agency section, the contract should also state that you are representing the Buyer as a client.  If any of the items are omitted, please have them added to the signature block or the special stipulations.  If they are not included, the contract will have to be amended to be GREC compliant.  Hate that extra step.
 
Generally, large merchant builders have their attorneys write a Purchase Agreement that is unique to them. They are often one-sided, protecting the builder over the buyer. Changes are either discouraged or prohibited.  Your job, as the buyer's agent, is to understand it thoroughly, so you can explain it to your buyer.  Some builders do use the GAR New Construction Purchase Agreement.  It will include the items in the above paragraph.
These are some things to look for: 

These are some things to look for: 

• Closing Dates: Closing dates can be a moving target in a new construction agreement.  If the property is not substantially complete, the closing date is often tied to the issuance of a Certificate of Occupancy or the installation of finishes.  Some builders will include a specific closing date, but allow themselves a unilateral right to extend the closing, often twice. Be sure fully understand the outside closing date and prepare the buyer. The buyer, on the other hand, will most likely NOT be allowed to extend. If the buyer is allowed to extend, the buyer will typically be charged a fee for each day of extension. 
• Non-refundable Earnest Money: Unless the builder defaults, the earnest money usually becomes non-refundable at a certain point, sometimes as early as execution of the purchase agreement.  You need to know when funds become non-refundable so you can make sure your buyer understands. 
• Preferred Lenders: If a closing cost incentive is offered, it is often subject to the use of the builder’s preferred lender. The earnest money may also be non-refundable, if the buyer does not use the builder’s preferred lender.
• Loan Contingency: Loan contingencies may not be allowed or, if allowed, may be subject to limitations, such as using the builder’s preferred lender or a shortened time period for approval.  The loan contingency period can be as short as 14 days, especially in new condominium sales. 
• Appraisal Contingency: See if there is an appraisal contingency and how long it is. Often, appraisal contingencies are not included in builder contracts. You don't want to be the highest priced property so be careful.  An appraisal contingency can be added as a Special Stipulation, but it is negotiable and you may not get it.
• Sale or Lease Contingency: A builder usually won't allow a property sale or lease contingency, but always good to ask if it's needed.   On a pre-construction sale, the sale or lease contingency may be allowed, but construction may be delayed until the contingency is removed.
• Lot Reservation: If the buyer is choosing a lot, there may be a lot reservation fee. Some lots won't allow certain floor plans. So, make sure to ask. For example, if the buyer wants a basement, some lots may not be suitable. 
• Standard included features: The contract may include standard features, but not upgraded features. There is usually a design meeting to pick out any upgrades or finishes. Most builders require a nonrefundable deposit for upgrades or changes, often 50% of the cost or even 100% of the cost of the upgrades. 
• Mechanical and electrical inspection: Some builders will do a mechanical and electrical walk-through after framing, before sheet rock goes onto the framing. 
• A pre-drywall inspection allows an inspector to check electrical and plumbing systems prior to sheetrock. If a pre-drywall inspection is not included in the contract paperwork, you can ask for one. Be sure this is in addition to a final inspection. Know the guidelines of the final inspection in the contract. It is often termed a house “orientation.”
• The property will be inspected by the county multiple times (sometimes 10-15) throughout the building process to make sure it is code compliant.  Inspections can slow the process and lead to closing delays, but they are required.
• Know the builder warranty.  It can vary greatly from no warranty to a 1 year builders warranty to a third party warranty.  Third party warranties can be for systems (electrical, plumbing, mechanical) or for structural issues.  The   HBW 2-10 Warranty that covers everything for up to 2 years and structural for 10 years is an example.  Some builders purchase the basic 2 year and allow the buyer to pay a fee to upgrade to the 10 year structural warranty.
• Ask about a follow-up walk through with the builder 11 months post-closing for cosmetic and other issues. Nail pops and caulking are typical items that show up in the first year.  Typically, any warranty to cover such issues ends after 1 year from closing.
• Know the final walk-through language. Items that the lender would object to can delay the closing, but typically cosmetic issues will not allow a delay.  
• The buyer should get a copy of the HOA docs, CCR's and HOA Bylaws for review. 
• If there is an exterior item requested that is controlled by the Architectural Committee, make sure to include it in the contract. In the early days of a community, the builder often controls the architectural committee and can grant the buyer’s requests directly.