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Steve McLinden, the Bankrate.com Real Estate AdviserNew-home contracts loaded with land mines

Dear Real Estate Adviser,
When signing to build a home, what are the most important points that should be in the sales contract? Should we have a lawyer look at it?
-- Tom Willtell

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Dear Tom,
Builder contracts can be loaded with hidden land mines. Like most contracts prepared by teams of lawyers for large companies, they're meticulously sculpted to give "the house" every edge possible. What makes the job of those lawyers easier is buyers who purchase directly from a builder who are not represented by an agent or lawyer and will thus sign on the dotted line without really knowing what they're getting into. Sometimes there are only inconsequential issues at play. But often, there are significant ones.

Here are just a few of the many clauses and codicils to be wary in the fine print of builder contracts:

  • Language that allows the builder to "modify" your floor plan to conform to the nuances of your lot, making it "similar" to the plans you agreed upon. Look for other elusive phrases like "vary only slightly" or "dimensions may vary" and verbiage that allows the builder to make "minor changes" in the dimension of rooms, walls, windows and doors to conform to your land. Sometimes "minor changes" turn into major ones for you. They can even include flips in floor plans. You'll want leverage to make the calls on all such decisions.
  • Substitution clauses that give the builders latitude to replace certain components of your home with "similar or better quality" items, should the originals suddenly rise in price or become unavailable. Again, you'll want language that gives you -- not the builder -- the latitude to make such calls.
  • Mentions of additional fees due at closing, like special assessments that oblige you to chip in for infrastructural elements in your new neighborhood like sewer and utilities and (or) amenities like jogging paths and swimming pools. Make sure that amount, if applicable in your deal, has been agreed upon in advance and is specified in the contract to avoid any surprises.
  • Closing fees of 1 percent to 2 percent of the purchase price. Find out what expenses these fees cover.

There are many other potential considerations. For example, we've heard of instances where builders don't yet hold title to the property they're marketing when the building contract is signed. You should address that concern in the fine print by inserting language such as, "If seller does not presently hold title, this contract may be rescinded by the purchaser." Some builders even have anti-speculation clauses that allow a builder the right to buy back your house at the original price if you put it back on the market within a year after purchase. If you plan to flip the place in short order, you'll want to address that issue in the contract.

So yes, if you're contracting with any home builder to construct a home, no matter how reputable, I strongly recommend using an attorney. In fact, you should request a copy of your sales contract from the builder for the attorney's review well before you sign. If he won't oblige, then tell him you will have to reconsider the deal.

Best of luck.

To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "buying, selling a home" as the topic.

Bankrate.com's corrections policy -- Posted: May 20, 2006
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