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New Construction Contracts & Sale Services

Instructor: Eric Mcconnell

Eric McConnell is a former property manager and licensed real estate agent who has trained numerous employees on the fundamentals of real estate.

New home construction contracts are sales contracts for new homes which will be built by the builder. This lesson covers new home construction contracts.

New Home Construction Contracts

When buyers agree to purchase a new home that hasn't been built yet, they sign a new home construction contract with the builder. These contracts are important for several reasons. First of all, they guarantee the builder's compensation, while at the same time guaranteeing the buyer a specific property that the builder can't sell to anyone else except in the event of buyer default. They also clearly spell out the obligations of both the buyer and the builder, including restrictions, covenants and major milestones like payment due dates and the projected closing date.

Key Components of New Home Construction Contracts

A properly written new construction contract will cover several key elements of the arrangement between builder and buyer. In addition to the standard elements of a sales contract sales contract, such as price and estimated completion date, the New Home Construction Contract must be as detailed as possible and include the following.

Lot Reservation

If the home is being built in a new development or on previously undeveloped land, the sales contract should include a lot reservation with a legal description of the lot being reserved, the dimensions of the lot and the total square footage of the lot that will be purchased.

Plans and Specifications

New construction contracts should always include a full set of plans and specifications for the home, including a site plan, floor plan, builder's renderings and construction plans with all relevant specifications and measurements for the property (e.g. lot size, room size, total square footage).

Addendums

It's not uncommon for both parties to have addendums included in new construction contracts. For example, if the buyer and builder agree to a third party inspection outside of the builder's scheduled walk-through(s), and there is no provision in the standard contract for it, an addendum should create supplemental terms to reflect this new agreement.

Warranty

New construction contracts should contain any applicable builder or contractor warranties on their labor as well as an explicit warranty from the builder or developer that the land will be delivered free of encumbrances and with clean title. Any manufacturer warranties on major systems (e.g. air conditioning, appliances, windows) should also be passed on to the new owner.

Covenants and Restrictions

New construction contracts often obligate buyers to more than just having the money necessary to take title to the new property. Many new homes are built in planned communities. It's often the case in planned communities or larger developments that there will be covenants and restrictions that come along with the ownership of the property.

Covenants and restrictions are similar in that they both bind the owner to a certain set of behaviors, however breaking a covenant is much more serious. A restriction usually prohibits a certain activity, such as allowing guests to park overnight in the community without obtaining a guest pass. Violating a restriction is usually punishable by a nominal fine or the temporary suspension of another privilege of ownership, such as use of the community pool, until the violation is cured.

A covenant, on the other hand, is a promise the buyer makes to the seller as a condition of ownership. Breaking a covenant can result in the buyer losing their property. For example, if a home in a planned community of one acre lots comes with a covenant that prevents subdivision, a buyer could be foreclosed on for trying to sell one half an acre of their own land. This is why it's critical for buyers to understand any restrictions or covenants of ownership before signing the contract.

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