Sales of New Homes are often confusing to many real estate agents since the builders generally provide their own version of the contract of sale. Negotiation is usually fruitless, but it is important for the agent and their buyer client to understand some of the basic issues to be considered in new home purchases. Also, it is essential to distinguish new home sales from custom home sales. In the latter case, the builder is constructing a home on a lot owned by the buyer. Custom Home Contracts are sufficiently challenging that my recommendation is to simply turn such a contract over to a knowledgeable real estate lawyer immediately.
With respect to New Home contracts, although there is often a financing contingency, it usually is designed to only benefit the builder. If the buyer fails to prequalify for their loan within a short time frame, the builder can terminate the contract. The buyer does not usually have the reciprocal right. New Home contracts traditionally provide that the buyer is required to apply to the builder’s captive lender. Often, if the first lender rejects the financing, the buyer is contractually required to apply to additional lenders. Only if that procedure fails will the builder then terminate the contract. Either be sure to get the financing committed before finalizing the contract or understand that failure to obtain financing is not final for the buyer, only the seller. This is one area in which agents can be helpful. Determine if the BUYER has the right to terminate the contract if their financing is not approved and try to have that incorporated in the sales contract.
Another area of concern is the handling of builder options. When construction upgrades/options are added to the purchase they are usually required to be paid for in full at the time of the selection. If the options are not selected at the time of the initial contract and are added after final ratification, the options will need to be paid in full at the time of their selection. It is important to try to select and incorporate the options in the initial contract as part of the final purchase price so that they can be included in the financing. Otherwise the buyer’s cash down payment must be paid, plus the cost of the extras, vastly increasing the cash requirements for a buyer who selects options at a later time. Many builders and lenders treat this matter differently, but agents can help by encouraging buyers to ascertain how best to handle the financial aspects of selecting options.
If a builder conditions a closing cost credit upon use of their lender and/or attorney, it usually makes sense to comply, (although I would prefer that they all use me for their closings). Buyers can always retain their own private legal counsel to review and explain documents, but the credit amount is generally too great to warrant using outside counsel and lenders. A builder’s preferred lender or attorney is usually most familiar with the builder’s product and will find it easier to process the loan or examine the title. Even if the preferred lender’s rate is higher than the rates being offered by other lenders, the amount of the conditional credit usually serves to make using the builder’s lender advantageous. You can always accept the lender credit and if the interest rate is not acceptable, refinance as soon as possible thereafter with a lender of your choice.
By: James E. Savitz, Esq.