Q. What are the main points that should be covered in a contract with a proposed builder? My daughter and son-in-law are about to engage a builder in northeast Florida, and I don't want them to get hurt.
A. I suggest that they immediately retain a knowledgeable attorney in the area where they plan to build their house. Every state has different legal and contractual obligations, and your daughter and son-in-law should make sure that their contract contains all of the necessary protections covered by state law. They should discuss their legal relationship with the attorney, and make sure that the attorney has no conflicts of interest, has a working knowledge of real estate law and has the time to represent them adequately and properly.
There are many items that should be included in any building contract. Without listing all of the various points, here are some of the important highlights to be included in any such contract:
The contract should be contingent on the ability of the purchaser to obtain the necessary financing. When you are building a house, this can be tricky, because many lenders nowadays will not lock in a loan at a particular rate if the settlement cannot take place within 60 days. Needless to say, when you are building a house, it is highly unlikely that the new house will be totally completed within that short time frame.
The builder should give you a complete set of the plans and specifications for the house. These should be incorporated by reference into the contract, so that both the buyer and the builder know exactly what is under contract. It is not enough to permit language in the contract that the house will be built in accordance with the "model." Often, a builder finds it necessary (or convenient) to make modifications, or to cut corners, and you want to make sure that this will not happen. Clearly, the builder should have the right, spelled out in the contract, to discuss any proposed changes with the buyer. If the buyer agrees in writing to those changes, the builder can proceed with any such modifications.
Settlement on the house should not take place until the house is "substantially completed." However, this is a loaded concept. The builder's definition of "substantial" may be different from the buyer's. To avoid any subsequent arguments and confrontation, it sometimes is a good idea to rely on a third party for a definition of "substantial completion." This could be an arbitrator, or it could be the lender. Often, the lender will be quite concerned about making a loan on property that is not really completed.
Will the builder escrow any funds if certain items are not completed at settlement? Most builders are quite reluctant to escrow any money at all, because they recognize that they will never see those escrow funds after settlement. On the other hand, if the buyer has to go to settlement (because of time pressures), and if the house is not totally completed, the buyer wants assurance that there is some money held back to guarantee that the work will be completed. The common areas of escrow include such items as landscaping, or completion of the outside areas, such as swimming pools, patios or decks. While this may be a difficult area of negotiation, it certainly should be addressed between the parties when the contract is being negotiated.
Keep in mind that any real estate contract is not carved in stone. The form contract should be the beginning of the negotiations, and you certainly have the right to modify, amend or delete certain paragraphs to the printed form. If the builder does not want to make concessions, the buyer has to make a difficult choice of "take it or leave it."
Check with your attorney or with the local county officials where the property is located as to whether builder and occupancy permits are required. If so, the contract should state that the builder will not receive the sales proceeds until such time as all required permits are in place. Additionally, the builder should present the buyer with a general release of all mechanic liens, signed by all subcontractors, before receiving the final payment for the house.
Often, payment schedules (called draw schedules) are established, so that the buyer will receive funds during the course of construction. While one would prefer not to give the builder any money until the job is totally completed, necessity and practicality often require the establishment of draw schedules. However, a substantial portion of the final payment should be retained until the house is totally completed.
It is also recommended that the builder agree to take any disputes to binding arbitration in accordance with the rules of the American Arbitration Association. In my opinion, arbitration is cheaper and quicker than having to go to court to resolve any such disputes.
Finally, make sure what kind of warranty the builder is offering. Is it a limited warranty, or is it an extended warranty? Discuss the terms of any such warranty with your lawyer before you sign the contract.