Step 5
Signing Your New Home Contract

Whether you see it as an opportunity to build the custom home of your dreams, a chance to get on the property ladder, or a sound financial investment to park your nest egg – purchasing a newly constructed property is an exciting milestone.

Excitement aside, homebuyers should remember: buying a new home is a legal transaction between you and your builder. Therefore, your new home contract is one of the most important documents in the entire process. It outlines the responsibilities of both parties and states precisely what is being delivered, the timeline and costs. Before you sign on the dotted line, triple check that you’re satisfied with and are protected by the terms and conditions. Your contract involves a large sum of money – your new home will likely be the single biggest purchase you’ll ever make.

Ready to read and absorb your new home’s sales contract? Don your glasses, arm yourself with a highlighter and a strong cup of coffee and pay attention – here’s a look at 7 things you need to know about new construction purchase and sale agreements.

What is a New Home Sales Contract?

This law-binding document lists the terms of your new home’s construction, such as the projected closing date, key payment deadlines and customization decisions, who covers which expenses, and the responsibilities and obligations of the homebuyer and the builder. Understanding your contract is an essential step in the process.

With these details in writing and agreed upon, the contract will serve as a guide – right up until you move into your new home. If ever you’re in doubt on next steps, simply refer to your written agreement. It also protects both parties’ interests – your builder needs to know you’re agreeing to pay for their work and you’ll confirm your builder will provide you with a finished home, as promised and on time.

Make sure you understand what your contract entails before signing – if you break the contract or miss key checkpoints, you could lose a lot of money. If there are any discrepancies between your contract’s terms and conditions – and what you have agreed to verbally with your builder – ask for clarifications and amendments.

What are the Key Components?

As you read your contract thoroughly – prior to signing –  zero in on these components:

Pricing: For starters, your document will list how much you have agreed to pay for your home. Make sure you understand what’s included and what may incur additional fees or expenses. Understanding the fine print will help you avoid any hidden costs.

If you’re moving into a townhouse or a condominium, your contract may reference homeowners or condo association dues.

Timeframes:  Dates and deadlines are critical. Setting this schedule of important dates helps to avoid delays or incomplete work. You can even negotiate penalties – on either side – if your builder does not complete your home within the agreed upon time or if you miss key checkpoints for making deposits or getting approved for financing. You’ll also need to lock down deadline dates. Keep these marked on your calendar as a reminder.

Payment schedule: You’ll need to pay your builder an earnest money deposit, along with subsequent payments as construction progresses. Some builders ask for lump sum payments while others work with installments based on key completion dates. You could, for example, pay an initial 5 percent down payment followed by 10 percent after your home’s foundation is laid, 20 percent after walls and beams have been added, and up to 30 percent after windows, doors, and interior and exterior plastering have been completed.

You’ll also need to negotiate with your builder on how payments will be made.

Materials and construction: Homebuyers need to have a good grasp on what will be used to construct their new home. Getting this insight prior to ordering materials is your best bet to make sure you’re happy with the quality. It’ll be much harder to change orders once materials have been ordered, shipped and used.

Additionally, the home’s drawings and specifications should outline the structure of the property, electricity, plumbing, drainage, and landscaping.

Finished product: Your contract should detail what you are buying and what the builder is constructing, including its overall specs and location. Your builder will need to stick to these parameters and build your home based on what is listed in your contract’s drawings and specifications.

What is an Earnest Money Deposit?

Earnest money is a deposit that homebuyers make in good faith on a home they intend to purchase. It’s usually 5 to 10 percent of the home’s full price and is paid when the home’s sales contract or purchase agreement is signed by both parties.

(The housing market usually dictates how much is required for an earnest money deposit – if the real estate market is hot, for example, an earnest money deposit could range from 5 to 10 percent of the home’s purchase price compared to a standard 2 percent under normal conditions.)

For new homes, the earnest money deposit is usually larger compared to resale homes. This is because your builder is taking a risk to construct a new home with key customizations; if you decide to bail on the purchase, they may face difficulties finding a new buyer on a customized home. Therefore, your builder may ask for more earnest money deposits as construction progresses.

It’s the first step in a series of payments. After the good faith deposit is paid, homebuyers tend to  the other steps necessary: securing a lender to finance the home, and getting the property appraised and inspected.

In some cases, the earnest money isn’t refundable. If you back out of the sale without any contingencies worked in, or if you fail to meet the homebuyer requirements outlined in your contract, you could forfeit your entire deposit. Earnest money is always returned to the buyer – if your builder cancels the deal.

The earnest money is usually kept in an escrow account until closing. At closing, the deposit is then transferred over to be applied to the homebuyer’s down payment.

It’s usually paid by check or wire transfer. Don’t forget to ask for copies of receipts of earnest money deposits and make sure these payments are being held in an escrow account.

What about Repairs and Warranties?

Your contract may reference a warranty on appliances or on the construction. It should also include a maintenance period, in which your builder needs to follow up and correct any defects or issues. The maintenance period to identify repairs is usually about six months.

Depending on which state you reside in, your contract may list express warranties, which detail the types of defects your contractor will need to take care of later, how long warranties last and what your maintenance obligations are as the homeowner. Manufacturer warranties can also be provided for major appliances.

Read your contract carefully to understand what your warranties cover. If you’re unhappy with the conditions or if your contract doesn’t list warranties, negotiate with your builder.

What are Change Orders?

The scope of work can change course during the construction progress. Sometimes it’s because the homebuyer wants to make amendments or additions. It may also be because building permits by-laws may be updated, or your builder could face difficulties in procuring materials or discover an unknown property condition affecting construction.

Your contract will factor in change orders for both parties. If you request a change to your property’s plans, your builder could be entitled to charge a reasonable fee and update the completion date for the home. On the other end, your builder is obligated to inform the homebuyer of a potential change, additional costs, and any adjustments in the completion date caused by the change.

What about Financing, Appraisals and Home Inspections?

Resale contracts are usually contingent on the buyer securing financing, a successful appraisal and a home inspection that doesn’t reveal any glaring issues. Buyers can walk away from the sale if they’re unhappy with the results from any of these steps. Sellers also need to complete a disclosure statement, documenting any known issues with their existing home.

These clauses differ with new builder contracts, particularly when it comes to financing, appraisals and home inspections:

Check the fine print on securing financing: Make sure you understand what will happen to your earnest money deposit and your contract if you do not qualify for financing. Sometimes homebuyers don’t meet the criteria to secure a mortgage – it’s worth clarifying what penalties you may face, or if you’ll forfeit your deposit and any payments if you can’t obtain financing.

Your contract should detail an expected date when financing should be secured. Ideally it isn’t too far along in the process. For peace of mind, you may want to  get pre-approved for a loan so you’ll know how much home you can afford.

Keep in mind that your builder may offer incentives, such as paying your closing costs or providing free upgrades, if you use their affiliated lender. These incentives are usually mentioned verbally but  any discounts or incentives should be written in your contract.

Include contingencies for home inspections and home appraisals: In other instances, your new home may not appraise for its sale price. Your builder may insist that they don’t need to drop the sale price to match your lender’s appraisal, leaving you on the hook to make up the difference. In most cases, builder contracts are not contingent upon an appraisal. This means you can’t terminate the deal if the appraisal is too low without losing your deposit.

Home inspections are also a pivotal step for new constructions – it’s an opportunity for the homebuyer to check on the craftsmanship and safety of the home. Homebuyers need to make sure there are contingencies in the contract for builders to correct any problems identified during an inspection.

Builders usually have a series of home inspections planned throughout the construction process. If buyers want a third-party house inspection, they’ll need to work this into the contract and arrange this on their own.

With resale homes, homebuyers can back out of the deal if their purchase fails the home inspection or appraisal. This isn’t a blanket rule that applies to new homes so you need to understand what your contract stipulates and make sure resolutions are worked in that protect your interests.

How can Homebuyers Protect their Interests in a New Home Contract?

Because homebuyers are committing to spending large sums of money, they need to make sure their new home’s sales contract includes contingencies that protect their best interest.

Here are a few safeguards:

Hire a title company to protect your deposit: Wise homebuyers will insist on keeping their funds with a third-party escrow account. Payments will be released when the agreement is finalized.

If your builder receives your payments before your new home is completed as agreed, you lose your leverage in getting repairs and corrections done.

In a nutshell, an escrow is a financial arrangement that uses a neutral third party to hold the funds and make payments when appropriate. Title companies take care of the escrow account along with all the nitty gritty details: title policy, insurance policies, right down to facilitating your closing.

Understand your dispute resolution process: You may get along seamlessly with your builder, but you need to be aware of what to do in case things go awry. If your contract lists a binding arbitration clause in case of a dispute, litigation is off the table and you have no legal case to sue your builder or contractor.

If your contract opts for the arbitration route, you’ll need to submit your complaint to an arbitrator, who is often an expert in the construction industry. An arbitrator takes into account both sides of the dispute during a hearing and provides a final decision to resolve the issue. Neither party may file an appeal.

Arbitration is less expensive than a formal court trial and you’ll likely get to choose the arbitrator. You can also include a clause that details which party pays attorneys’ fees in case you end up in a courtroom.

Hire a professional to review your contract: If you’re unsure about all the legal jargon, enlist the help of a real estate lawyer to explain your terms and conditions. While your builder may use a standard purchase agreement, your contract may not automatically include terms that are favorable to you. You can also recruit the help of a professional contractor if you have questions about your property’s plans and specifications. These professionals can help you with contract negotiations or your home’s plans so they align precisely with what you want.

The language contained in contracts can be difficult to understand and absorb. Don’t sign anything until you are ready, and don’t get pressured into making a rushed decision. You can always ask your builder or sales representative to hold the decision for 24 or 48 hours so you can do your due diligence.

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