Thinking about building a new home? Here's what you need to know about your contract
Building a new home can be an incredible experience. My family and I built our own home, and it was so much fun watching our dream home come to fruition in front of our eyes. I’ve also been lucky enough to help other families navigate the building process, and what a joy it is seeing them enjoy their new, spectacular homes!
That said, purchasing a new home in Colorado is different than buying a resale home, especially when it comes to the contracting process. Most larger builders, such as Lennar, Richmond, Parkwood, Wonderland, Brookfield, Taylor Morrison, and others, have their own custom contracts. Builders typically don’t use the standard Colorado-approved contracts, which are keyed toward resale transactions. (I chat about the Colorado standard resale contract in this article!)
Here are a few important differences between a typical national or regional builder new home construction contract and the standard resale contract in Colorado. Remember, all builder contracts are different, all deals are different, and this article isn't comprehensive, but hopefully this article gives you a few issues to discuss with your realtor.
1. I'm about to sign my contract ... how much earnest money do I need?
Some builders require an additional earnest money deposit for select upgrades
Many builders ask for a larger earnest money deposit in their contracts than you’d typically see for a resale home. Keep in mind your builder is likely allowing you to pick finishes, perhaps make structural upgrades, and so on. What you select could require special labor or unique materials. There’s risk involved with allowing you to customize your home (if you fall through the next buyer might not love the green carpet you picked!) so builders hedge that risk by asking for more earnest money.
The amount of earnest money, when the money goes “hard,” and additional deposits for upgrades differ by builder. Be sure to ask your realtor to break down the details for you!
2. Do I get a warranty on my new home?
One of the great aspects of buying a new construction home in Colorado is that your builder will offer you a warranty package (it's either in your contract or it's a separate document at closing). If you buy a resale home, you typically don’t get a warranty – whatever condition the home is in at closing, you’ll likely have to live with it.
New homes often have a workmanship defect warranty (approximately 1 year). You may also receive a longer structural defect warranty (approximately 8-10 years). So for example if an issue comes up 6 months after you close, generally it will be fixed at no cost to you if it falls under the warranty in your contract.
Check out this video by Alex, Focus Real Estate's attorney, for more about warranties!
3. Can I terminate my contract if I have loan or inspection issues?
A brand new home in Sterling Ranch. More about Nathan and Amanda (pictured) here!
For new homes, the buyer’s loan “out” is usually not the same as it is for a resale. For resale transactions, buyers can often terminate a deal all the way up to the “Loan Objection Deadline” if they have a loan problem, often with no loss of earnest money. With new builds, a buyer often has around 20-45 days (timelines vary by builder) to back out of the deal for loan issues. Also, there can be a financial penalty associated with terminating. Even if your builder tells you there’s a loan “out” be cautious and read the fine print in the contract!
On a similar note, inspections on new homes can be different. When you inspect your home on a resale, you can often back out if you find issues. If you find issues on a new build, you normally can't back out. Instead, the builder will likely fix the issue before closing or the warranties discussed in #2 above could kick in.
4. What if the appraisal on my new home comes in low?
Know how much your new home will *really* cost before you run into appraisal issues
Builder contracts are often not contingent upon an appraisal. That means if the appraisal on your new home comes in low, you still have to close on the home - you'll likely just need to bring more cash to closing. While every deal and market is different, I'd say it's relatively rare for a new home not to appraise right now in Denver. Here at Focus Real Estate we've helped hundreds of clients build homes around Denver and haven't yet seen a new home not appraise, but it's certainly possible. The real risk may be if you do a lot of customizations or spend a lot of money on upgrades, or if there are other economic headwinds that impact housing prices.
One of the services we offer at Focus Real Estate is helping you design and manage every aspect of your new home - with an eye on both your budget, as well as appraisal risk. Having helped clients build so many homes with Lennar (a Lennar home is pictured above), Richmond, Parkwood, Wonderland, and many other builders, we have lots of data on what your design center spend could look like, for example, and we'll give you an all-in cost estimate of what your home will *really* cost before you sign your contract. This is one way to help minimize appraisal risk. (More about our services here!)
5. How long does my builder have to build my home?
Builders typically give themselves 1 – 2 years to build your home per the contract. This can make buyers nervous. Many buyers are expecting to have their homes done in 6-12 months based on conversations they've had with their builder's sales staff. But when it comes time to sign the contract, the builders often give themselves a bit of runway on the timing side. For what it's worth I’ve never seen a home get close to 2 years, but it's good to understand what's allowed under the contract.
For clients who ask me about this, I often tell them to remember that their builders are just as incentivized as they are to complete their home. Your builder doesn't get paid until your home is done and you close. Meanwhile, while your home is being built, your builder is paying carrying costs (taxes, etc.) and making payments to the contractors building your home. So all builders want to go as quickly as permitting, weather, and other factors will let them - so they can get paid, recoup their costs, and move on to the next home.
6. Can I negotiate terms in my builder contract?
At least right now in Denver, most national and regional builders aren't very flexible when it comes to changing their contracts. Most of Sterling Ranch's builders are “production builders," meaning they build off standard plans, using their standard contracts as the starting point. The bigger production builders like Lennar and Richmond build tens of thousands of homes every month/quarter, so you can imagine the issues they'd run into if every client had a unique contract with unique requests. Even the more regional, semi-custom builders like Parkwood have a lot of leverage relative to buyers right now, so they don't have much of an incentive to change their contracts.
I wouldn't say changing your builder contract isn't possible, but given the current builder and seller-favorable real estate market in Denver, it could be an uphill battle depending on your issue. This could change if market conditions change in the future.
7. When can I lock in my interest rate?
A Wonderland spec home. Check out this Roundup post on this windowed masterpiece.
Last, many new home contracts involve longer time frames than resale transactions, so buyers can’t always lock in their interest rates when they sign their contract. You may be able to pay a fee to lock in a favorable rate in advance, but if you don't go that route you may be subject to whatever interest rate is available when you close.
This is important because of #3 above - if for some reason you have loan or interest rate issues, you often only have a limited period of time to terminate your contract. I normally advise my clients to talk to a lender before signing a new home contract so they understand their options. Locking in interest rates, buying down rates, etc. are good things to think about early in the process if you're concerned about rates.
So those are 7 of the most common issues our buyers ask us about at Focus after they study their new home contracts!
Ultimately, there are many "pros" associated with new homes and their contracts relative to resale homes and their contracts (and vice versa), and building new can be a great fit for many. Regardless, I always want buyers to understand that there are differences between new homes and resales, including on the contract front.
Last but not least, like I mentioned above, this article is not comprehensive and is not legal advice and should not be relied upon. All builders, all deals, and all contracts are different, and this article might not apply to your situation. You’re responsible for your own contract – so read it and get the necessary legal help you need!
Mariel Ross is a realtor who specializes in helping clients budget for, design, and build their dream homes in communities. At Focus Real Estate we've helped clients build hundreds of new homes around Denver with Lennar, Parkwood, Richmond, Wonderland, and many other builders. Learn more about what I do here. If you'd like more information, shoot me a note at mariel@focus-realtors.com and be sure to "Like" the Roundup on Facebook. The Sterling Ranch Roundup is powered by Focus Real Estate.
*Special thanks to Joe Phillips of Focus Real Estate and the Stapleton Scoop (www.stapletonscoop.com) for allowing us to use his amazing, original Scoop post on new home construction contracts!*