Buying a home that is a new construction home seems easier. It is certainly more risky.
It does not matter if the builder is Toll Brothers, Pulte, Orleans or Joe with a pickup truck, the risks a buyer encounters in new construction greatly exceed the risks in purchasing a used home.
A used home can be inspected as carefully as you would like. A used house will generally be available on the date you want to move. The grass will be established and the trees and shrubbery will not need nursing. Most importantly, there will be no subcontractors filing mechanic’s liens because the builder did not pay.
What are the real issues in buying a new home? Let me try to list just a few.
- The contract used by the builder will not be a well-balanced document. It will not be a standard form that your Realtor® or lawyer will be able to read quickly. Instead, it will be a one sided document, designed to separate you from your money, even if the house is never built.
- The contract will contain an arbitration clause. The pitch will be that arbitration is quicker and cheaper. In large commercial disputes, that is exactly correct. In small consumer disputes, you will be substituting a panel of one to three lawyers to act as judges, who will be paid by you and your opponent at up to $700 per hour each, for a single judge paid solely by everyone’s tax dollars. If the arbitrator gets it all wrong, there is no appeal.
- There will often be no mortgage contingency. There may be language that looks like a mortgage contingency, but read carefully. For example, the agreement of one of the largest national builders requires you to apply to their mortgage company. The contract says that if they give you a commitment you must buy. Here’s the problem, they will give almost everyone a commitment for a loan. The devil will be in the conditions. I saw one contingent on the buyers finding $45,000 more cash and raising the wife’s credit score by 50 points. The people did not satisfy the conditions and the builder claimed their entire deposit and the note they signed for extras which were never installed as the house was never built.
- Mechanic’s lien risk is significant. Most builders push you to their own title insurance company and do not offer you mechanic’s lien coverage. This means that sub-contractors and sub-sub contractors can file a lien against your property up to six months after their work is done.
There are more risks. If you are buying new construction and do not have a real estate lawyer advising you, you might also start reading the new book “Brain Surgery –Self Taught.” This is one of the biggest financial risks of your life. Is this a good time to save a few dollars?