Before you are handed the keys to your dream house, you will have to sign on the last line, putting your initials here and there on a large number of documents.
One of the most important? The contract of sale of new housing.
But before you affix your signature to this stack of papers, it’s critical that you truly understand this very important document.
To help you figure it out, we spoke with two experts: real estate agent and co-founder of Home Value Leads, Brian Rayl of Dallas, Texas, and broker Dianne Langston of Quality Real Estate Services in Fairfield, California, to answer common questions about home purchase agreements. Here’s what they had to say:
What’s in a new home contract?
BR: A new home purchase contract has basically the same requirements as a resale contract. It establishes the projected closing date, the terms of the contract, who pays what expenses, and the obligations of both parties.
What are some of the most important features of the contract that I need to pay attention to?
BR: The most important thing to look for is reimbursability and the dates listed in the contract. Generally, there will be multiple dates, such as the date you need to finalize your choices in the design center, the dates you need funding approved, the proposed closing date, etc.
DL: The price (you) will pay, the amount of time (you) have to apply for a loan and secure financing, any concessions agreed upon by the seller. Amount of cash or initial deposit, disposition of the deposit if (you) do not comply with the agreement, remedies for default of the buyer or seller, location of the lot on which the property will be built, exterior façade, colors, if gardening is included.
Why are these contracts important for both buyers and builders?
BR: The contracts are designed to put all aspects of the sale of the home into a written agreement that both sides of the transaction agree to. It protects the builder by ensuring that he will be paid for his work and protects the buyer by preventing the builder from selling the home to someone else.
How is a contract for the sale of a new home different from a resale contract?
DL: Resale contracts that are not related to builder sales are usually drawn up by lawyers from the State Association of Realtors. In California, this contract is written to give the buyer the option to terminate the purchase agreement within 17 days of signing for virtually any reason. Allow the buyer to have the property inspected by any professional of their choice. State that the seller will allow access to the property for these inspections. Seller is required by law to complete Seller’s Transfer Disclosure Statement, which requires Seller to disclose any known or suspected defects and repairs to the property. These clauses do not exist in new construction contracts.
Editor’s note: Builders have a number of inspections throughout the construction process, as well as a walkthrough before moving in. If buyers want an inspection by a third party, they must obtain permission from the builder; Those terms will be explained in detail in a new housing contract.
How do these contracts change depending on the type of lender? Does it make a difference if a buyer uses an FHA loan versus a conventional loan?
DL: Differences in lenders will usually focus on incentives to use a lender with whom the builder has a relationship. The seller may offer to pay the buyer’s closing costs and/or loan discount points to encourage the buyer to use their lender. The differences between the FHA and the conventional loan center on the seller’s obligations and the appraised value of the property. The buyer’s deposit cannot be forfeited if the property is not evaluated for FHA financing. The property must also qualify for FHA financing along with the buyer. The property must meet minimum standards of habitability.
Will the contract detail the payment terms or are those terms in a separate contract?
DL: The seller cares about the buyer’s payment only to the extent that he can suspect whether the financing exists and whether the buyer can obtain it. The contract will only quote the payment if the rate can be determined and the seller knows the amount of the buyer’s down payment. Contracts usually explain this information. Most likely, the buyer’s payment is not a condition of the agreement.
What additional financial information can be included in the contract?
BR: Generally, a builder will provide incentives to use your preferred lender. They may pay part of the closing costs or provide a free appraisal. However, those terms are never found in the contract itself.
What if I need to sell my current home before I can buy a new one?
BR: Most builders representatives are not real estate agents and therefore cannot list your home for you. Many will have preferred agents they work with who will offer to sell their home for a reduced commission. However, your purchase will not depend on you selling your home.
Will the contract include information on easements and rights to land, minerals, water, etc.?
BR: The contract will usually mention mining rights. Most builders these days retain mining rights and don’t pass them on to the buyer. The rest is usually covered by a title policy that will be separate from your purchase contract.
Will my design selections and options be included in this document?
BR: No. The contract will have a date on which these options must be finalized. It will also define how much of those option costs will need to be paid at that time and whether those option costs are non-refundable.
What if there are construction delays? How does this affect my contract?
DL: Construction delays and out-of-control circumstances are generally considered beyond the builder’s ability to influence. Contracts are not drafted to allow the buyer to pay the seller charges per day. The buyer will usually have to wait. There may be a reference to the seller’s ability to complete construction and remedies if the builder is unable to finish and may be limited to returning the buyer’s deposit.
What should I consider for homes like condos, townhomes, etc.?
BR: Keep an eye out for homeowners or condo association fees, transfer fees, management fees, etc. Typically, the builder will retain control of the partnership until he finishes building and selling all the homes. Also keep an eye out for special rates.
What if I need to make a change to something in my contract?
BR: Once the contract is signed, it can be very difficult to change anything in the contract. This is why it should be read carefully at first and reviewed by your real estate agent and/or an attorney before signing. Once signed by both parties, it is a legally binding agreement and can only be changed if both parties agree to the change.
DL: Need is different from desire. The buyer must request a copy of the agreement that will be used to reserve a property and take it home for review. The buyer should discuss with the seller’s representative exactly what their concerns are and ask if it is possible to negotiate their concerns. The builder’s decision will be based on the sales of the development, the buyer’s financing, and whether the change will modify the builder’s design. Builder’s product customization usually must be paid for in advance and these funds are forfeited if the buyer does not close the escrow.