Duane Duggan, Realtor and Author RE/MAX of Boulder

Owning a home is still a key facet of the American Dream. Owning a home, built specifically for you, with the opportunity to choose colors, floorplan, appliances, and every detail, is quite special!

Real estate markets go through cycles – they always have, always will. Since I started selling real estate in 1978, I have seen a number of market cycles in Boulder Valley. All real estate is market driven: when markets are slow, most home builders actively recruit the assistance of Realtors® to help sell their homes, but when a market heats up, some builders actively try to eliminate the Realtor® from the transaction. The real estate market is extremely hot right now! When this happens, many homebuyers end up entering a complicated transaction, often the biggest financial transaction of their lives, completely unrepresented. In this hot market, being represented by someone who cares about your best interests is even more important than ever.

Contracts used for new home subdivisions or by custom home builders for the construction of a new home, are not the standard Colorado Real Estate Commission approved form. Since these contracts are usually written by the homebuilder’s attorney, in the builder’s favor, the homebuyer is well advised to have their attorney review any contract for the purchase of new construction. If a property is substantially complete, a custom builder will sometimes allow the Realtor to prepare the contract on the Colorado Real Estate Commission approved form. Oftentimes, even if a home is 100% complete, most new home subdivisions will not accept contracts other than the one that has been prepared specifically for that subdivision.

If market conditions permit, the potential homebuyer can usually obtain a copy of the contract the homebuilder is using for their attorney or themselves to view at their convenience, prior to signing the contract. If the market is so hot that there is no time to get the contract prior to signing it, most homebuilders will allow a clause that gives the homebuyer a certain number of days to have their attorney review the contract. If a builder won’t allow such a clause, it should automatically make you question why.

When writing a contract with a custom homebuilder, the builder may or may not be receptive to any changes a homebuyer’s attorney suggests. Most large, new home companies won’t allow any changes to their contract and will adopt a “take it or leave it” attitude. In the case a buyer really wants the property, and the homebuilder refuses to make any of the changes at the buyer’s attorney’s suggestion, the attorney needs to make the buyer aware of any risks that they may be accepting.

Some questions you should keep in mind as you and/or your attorney review the contract for new construction are as follows:

1) Is there a deadline for completion at all? If there is a deadline for completion, is there any penalty to the homebuilder if the home isn’t ready to move in by the deadline?

2) What signifies completion? A Certificate of Occupancy? Can the builder close on a Temporary Certificate of Occupancy?

3) How is an uncompleted item punch list made? When is the punch list considered too long so that the closing is delayed? Will the homebuilder escrow for uncompleted items?
How much is the deposit? Is it non-refundable? Are there any conditions for which it is refundable? Is there a specific performance or liquidated damages clause in the contract?

4) Is the buyer allowed access to the property during construction?

5) Are change orders allowed? What is the process for change orders? Is there a charge for change orders?

6) Are all promises made by the on-site salesperson done in writing?

7) Are the plans and specifications detailed enough so that you know exactly what you are getting?

8) What are “standard” items in the home? What are options?

9) Does the builder provide title insurance? Will there be owners extended coverage?

10) Does the builder pay any other closing costs?

11) Does the builder or the buyer obtain the construction loan?

12) What remedy does the buyer have if the seller/builder refuses to close? This may seem odd, but in an appreciating market, it could happen that the homebuilder might actually resell the property for more than the current contract price.

13) Provisions for “Acts of God”? Who provides homebuilder’s risk insurance if something happens to the home during construction such as wind or fire damage?

Builder incentives
Builders will often offer incentives if the homebuyer is willing to use the builder’s own mortgage lender for the buyer’s mortgage. The homebuyer seldom understands how to determine if the incentive offered for using the in-house lender is worthwhile or not. Sometimes the home buyer pays a higher interest rate for the life of the loan in order to get that incentive. A homebuyer’s licensed lending professional can help the homebuyer determine if the builder’s incentive offer is really in the homebuyer’s best interest.

Builder warranties on new homes
Builders offer a variety of warranties. When purchasing a new home, the individual builder should provide a copy of their warranty. If a builder’s warranty is not backed by a separate insurance company, the warranty is only as strong as the builder is. Even if a warranty is backed by another insurance company, it is still not a 100% guarantee that there will be backing in the event of a construction problem.

Be sure to consult with your Realtor, attorney, and mortgage lending professional to be sure you have a full understanding of the builder contract and the entire transaction.

By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.