Commission’s Contracts Don’t Fit New Construction

 

I am a listing broker who often lists property for small builders. I understand that I might use the Real Estate Commission approved contract form for the sale of completed, or nearly completed speculation houses. But why shouldn’t I use the Commission’s Sales Contract for the sale of a home yet to be built?

The Real Estate Commission Sales contracts were never intended to be used for the sale of a home yet to be built. Among the provisions which do not work with new construction are the following:

Section 2b of the contract contemplates the sale of an existing structure. There are no references to a house which needs to be built.

Section 4 contemplates a fixed price for the home. There are no provisions addressing builder allowances, upgrade options, or change orders-issues common in new construction.

Section 5b of the contract allows a buyer to waive the loan commitment contingency and keep the contract alive. Builders will want to be able to kick a buyer out of a contract when that buyer fails to qualify for financing.

Some builders may be willing to allow a buyer to back out of a transaction if the house doesn’t appraise for the purchase price. Yet most builders are not willing to accept an appraisal contingency in the contract. (See § 6.)

Section 8a of the Real Estate Commission approved contract allows a buyer to provide notice of dissatisfaction or “unmerchantability or any other unsatisfactory title condition.” [Emphasis added.]. Most builders will want to avoid allowing the buyer to back out of a deal because of the buyer’s subjective dissatisfaction with the title. Further, § 8d requires the seller to “use reasonable effort” to correct title blemishes. It is not clear what this “reasonable effort” might encompass. Most builders will want to avoid the uncertainty created by § 8.

Section 10 of the Real Estate Commission approved contract provides a gaping hole for buyers to terminate their contractual obligations by subjectively objecting to the condition of the property. In resale transaction, sellers manage this risk by making the Inspection Objection Deadline fairly early in the transaction. In new construction, the Property Inspection clause is not meaningful if the Inspection Objection Deadline passes before the home is substantially complete. Section 10 of the Real Estate Commission approved contract does not work for new construction.

Section 18 of the contract addresses the parties’ responsibilities if a fire or some other casualty damages the Property prior to closing. The section begins by stating that “the Property, Inclusions or both shall be delivered in the condition existing as of the date of this contract, ordinary wear and tear excepted.” As of the date of the contract, the condition of the property may have been raw dirt. If a home being built is damaged by fire, neither the seller nor the buyer wants the property restored to the condition the property was in at the time the contract was formed.

Colorado Revised Statutes section 6-6.5-101 requires every developer or builder to provide buyers with a copy of the summary of the soil analysis and report on the site recommendations. For sites in which there is an expansive soils danger, the builder must supply buyers with a copy of a Colorado State publication detailing the problems associated with such soils. The Real Estate Commission approved contract does not address this statue.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN