What to know about new home builder contracts

new home builder contracts

Working with a new home builder can give you the house you dream of. You don’t have to try and make existing homes work with your needs and wants. You can bring a house to life and ensure that it’s going to be ideal for your family. 

There are a lot of advantages to a custom-built home, but it’s also a different process compared to buying an existing home, whether that home is new construction or has been lived in. 

The following are things to know about signing a new construction contract with a builder. 

1. What These Contracts Include

When you hire a contractor to build your custom home, it’s a huge commitment. You want to work with someone who has an excellent reputation. 

Signing your contract will be a major part of the home building process, and it’s what’s going to establish the expectations between you as a buyer and the builder. Building contracts are legally binding and present the opportunity to make sure you’re on the same page with your builder before construction starts. 

Building a custom home is very personal and specific to you. Your contract needs to be specific enough to cover everything, but it shouldn’t be so complex that you can’t understand it. 

Most homebuilding contracts will include:

  • Scope of work, including labor, materials, and other requirements and costs that will go toward building your home
  • Plans and specifications with the design and layout of the home
  • Payment, which would be the fixed amount owed by you as a buyer, and it should outline when it’s due and how it will be paid
  • Schedule, including a timeframe of when you can expect milestones and the project as a whole to be complete
  • Clauses to account for any unforeseen changes 
  • Legal provisions

2. Types of Construction Contracts

There are different types of construction contracts that can be used. 

These can include:

  • Fixed price or lump sum. These give a fixed price for the job when it’s completed. The contracts might include clauses for penalties if the contractor doesn’t complete the house by the agreed-upon date of completion. 
  • Cost-plus contracts. A cost-plus contract will include materials costs and the cost of labor. The plus might be a percentage or fixed fee. It could be a guaranteed max price, so there’s a cap on your project. If there is uncertainty in a homebuilding project, then a cost-plus contract might be beneficial for the contractor. 
  • Time and material contracts. Similar to a cost-plus contract, with a time and material contract, it’s advantageous for the builder in projects with a lot of uncertainty. An owner might pay hourly or daily, but with a maximum price outlined in the contract. 

3. Components of a Construction Contract

We touched very briefly above on what a construction contract might include, but more specifically, it could have the following elements:

  • The contractor’s contact information, including their license number
  • The property will be described in legal terms
  • The cost should detail whether the homeowner is going to pay in installments or will just pay a down payment at the start and then pay when the project is complete
  • Description of the work with a completion date, although this is an estimate
  • The stop-work clause is something that may be included, and it lets the contract stop their work if they aren’t getting paid. The contract will also likely include details on when and how either side might be able to end the contract. 
  • The homeowner can include a right to withhold an installment payment if the work isn’t up to par or there are certain conditions. 
  • Each party has the right to sue the other for breach of contract, so the contract can include the state where the parties would bring a lawsuit. 
  • Contractors are responsible for checking to see which licenses, insurance, and permits they need. 
  • The contract might include details about when the owner can inspect and access the property. 

4. Common Issues

Some of the issues that are most commonly disputed in residential projects include:

  • Scope of work
  • Timing of the work
  • Payment
  • Warranty—this isn’t always required, but many contracts will have express warranties. These detail the types of defects a contractor will agree to take care of later. This will also include details on how long the warranty lasts and what the homeowners’ maintenance obligations are. 
  • Dispute resolution—even in situations where both parties are extremely careful in how they draft a construction contract, a dispute can arise. A contract may require arbitration instead of litigation, meaning you can’t sue the contract. Instead, your complaint goes to an arbitrator, who’s a construction expert and will issue a resolution that’s binding. 
  • Attorney’s fees
  • Contractor default—most standard contracts will detail what would constitute a breach of contract and how rights can be asserted. If not, you need a provision that will address a potential contractor default. The contractor should have a set time to fix the problem, and if it doesn’t happen in that time, you can include a provision to hire another contractor. You should also include the right to end your contract if there’s a default. 

5. Earnest Money

If you’re going to build a new home, you should know that earnest money is going to likely be much more than if you’re buying an existing home. Someone is building the property specifically for you and allowing you to customize it. There is a risk to them, so earnest money will usually be required when you sign the contract. Additional earnest money might be required as a percentage of finishes chosen along the way. 

6. No Appraisal Contingency

Finally, a builder contract, it’s not usually contingent on an appraisal, which is a big difference from buying an existing home. If the appraisal comes in low after the home is built, typically, a builder isn’t obligated to match the appraisal. The lender can still lend, but the buyer then has to bring more money for the lender to be okay with the situation. Unlike a resale, a buyer can’t back out if the appraisal is low without the loss of earnest money. 

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