Things Worth Checking For in a New Construction Contract

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If you’re thinking about selling your house, but your dream home isn’t on the market, it may be time to consider building.

New homes offer many perks, including the opportunity to choose a floor plan that suits your personal needs.

If this is your first time purchasing a new build, the contract is very different from your typical real estate transaction. Unfortunately, they’re usually designed to protect the builder more than the buyer. 

You must be diligent about understanding every aspect of the document you’re about to sign. Address every issue you find, and if possible, hire a real estate attorney with your best interest at heart to examine it.

As you review your new construction contract, here are a few items to keep in mind.

What to Check For in a New Construction ContractTimeline Estimates and Penalties

Construction time frames are an important part of the contract. Although most new builds require about a year of preparation and building, construction has been slower in the aftermath of the COVID-19 pandemic.

Make sure you understand the start and finish dates and deadlines for selecting materials. Also, check for information regarding what happens if the home isn’t completed by the estimated date.

Delays and incomplete work can cause some of the biggest legal issues when it comes to construction. If there are no penalties in place, try to negotiate them. This will incentivize the builder to finish your home within a reasonable amount of time.

Scope of Work

This refers to the work your builder agrees to perform. Building is much more than hammering nails. Your builder will usually obtain all the necessary permits for your county or municipality. In addition, the builder will agree to follow the architectural specifications you’ve agreed upon.

Keep in mind, the scope of work may change at some point during the building process if you decide to add a special feature or the builder uncovers a problem that doesn’t allow for a certain element. 

These scenarios should require signed changes to the scope of work within your contract. Plus, you should be made aware of any fees or refunds that result from changes along the way.

Pricing

Perhaps the most contentious part of building a new home is determining the final price and what happens if additional expenses arise along the way. In short, is your price locked in or will you have to foot the bill for unexpected costs?

Both parties must be completely clear about what is and isn’t included in the final price. For example, will the builder include landscaping or work solely on the home? Will your driveway be finished with cement, or will you need to hire another contractor? 

Nine out of 10 construction projects exceed their budget, according to the International Journal of Innovation, Management and Technology. This can be because of delays that require more labor or even rising material costs. Investigate your contract for clauses regarding these situations. 

Warranty Coverage

Although it’s tempting to assume a new house won’t have a single problem, that’s rarely the case. Mistakes can lead to maintenance problems in new homes that are expensive to fix, but repairing them shouldn’t be your responsibility. Whether you’re purchasing your home for the first time or you’re an experienced buyer, warranties are great to have.

A builder’s warranty can last anywhere from six months to two years. Some major structural elements may be covered for up to a decade. In most cases, your warranty should include the following:

  • Concrete foundation
  • Landscaping
  • Carpentry
  • Insulation
  • Electrical wiring
  • Roofing and siding
  • Doors and windows
  • Garage doors
  • Plumbing
  • Septic system
  • HVAC
  • Waterproofing

Likewise, there are certain things that usually won’t be covered in a builder’s warranty, including:

  • Appliances
  • Fading paint
  • Minor cracks
  • Weather-related damage
  • Insect damage

The bottom line is, make sure you fully understand the scope of your builder’s warranty before signing the contract. If you’re worried that it doesn’t supply enough coverage, consider boosting your homeowners insurance.

Dispute Resolution

When you’re excited about the prospect of a shiny new home, it can be easy to view everything in a positive light. Unfortunately, disputes are common in the construction business, and it’s important to know what to expect if you encounter a problem.

Most contracts will include information about dispute resolution. In many cases, they require arbitration, which means you can’t sue the builder. You’ll have to submit a complaint to an arbitrator, who will hear both sides and make a decision. 

This is similar to a trial in court, but the key difference is you lose your right to appeal the final decision. Make sure you fully understand the guidance set forth in this section.

If there’s no information regarding attorney fees, broach the topic before signing. Some states won’t allow you to recover your money, even if the decision is in your favor, unless it’s stated in the contract.

The Bottom Line

Contracts are binding, which makes it imperative to have a full understanding of what you’re about to sign. Take time to fully review the wording of each section, and don’t be afraid to ask questions or negotiate. 

In addition to hiring a lawyer to review the contract, check your builder’s license, insurance, and references. Remember, you’re the one who will be paying the mortgage each month. You have a right to protect your interests when you make such a large investment.

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About kristenherhold

Kristen is the PR Editor of Clever Real Estate, the nation's leading real estate education platform for home buyers, sellers, and investors. In her free time, she enjoys traveling, reading, and cheering on the Denver Broncos and Missouri Tigers.