Typical Problems for Buyers with Volume Builder Contracts

 

I am looking to purchase a home to be built in a new subdivision. What concerns should I have, and what should I look for in the builder’s contract forms?

The majority of residential real estate in Colorado is sold through the use of Real Estate Commission approved forms. However, there is no State approved form addressing the issues raised by new construction. Volume builders typically use their own forms, which are naturally very much builder oriented.

To some extent, the rigors of the marketplace protect you from the unfairness of these forms. Builders have an incentive to keep you happy, so that others continue to purchase their homes. Yet, as the real estate market has improved, builders have had less of a need to keep buyers happy. Builders are now more likely to receive multiple offers on a property. Values and/or construction costs may increase during the construction period above contract prices. These pressures will tempt builders to take advantage of the escape clauses which they have built in for themselves. While you should have many concerns about these forms, and while these concerns vary somewhat from builder to builder, there are two especially troubling features about most volume builder form contracts.

  1. No effective remedy for Purchaser for Builder’s default.In many builder documents, the provision addressing defaults reads substantially as follows:
      Time is of the essence in this Agreement. If either party hereto prior to Closing Date fails to make any payment or otherwise fails to perform, the non-defaulting party’s sole and exclusive remedy hereunder shall be to terminate this Agreement and either retain as liquidated damages or have returned, as appropriate, all earnest monies paid hereunder.

    Purchasers are lulled by the symmetry of this language. The buyer’s remedy for a seller’s default seems to be the remedy for the seller if the tables are turned. Yet the purchaser’s remedy is not meaningful.

    If the builder breaches, you simply get your deposit back. This is in spite of the fact that you will have invested much time and some money pursuing the house. Perhaps of a greater concern is that, in an appreciating market, you may not be able to replace the home lost with a similar home at the same price. You will lose the “benefit of the bargain” at no harm to the seller. A builder may have agreed to construct and sell you a home for $200,000. Prior to closing, the builder may have a second purchaser willing to pay $240,000 for the same house, yet no ability to meet the demand. Protected by the above default language, it would be rational for the builder to simply refund your earnest money and breach the contract.

    The solutions to these problems involve allowing you to bring an action for specific performance and/or your actual damages in the event of a seller’s default. Yet, solutions are complicated by: common provisions purporting to preclude your recording of the contract; providing seller compensation for its attorneys’ fees in the event of your default, but no attorneys’ fees to you in the event of a seller default; making certain deposits “non-refundable;” and by the omission of language specifying a closing date.

  2. No date by which sale is to close.Builders need flexibility to time the closing on the sale of a new home. On the one hand, builders generally like to close as soon as possible to, among other things, avoid accruing interest on their construction loans. On the other hand, delays can occur which may be beyond the control of the builder. Yet, you will need to make many plans based upon an expected closing date. Among other things, you may need to sell an existing home, terminate a lease, hire movers, or lock in interest rates. While it may not be reasonable to designate a specific closing date, contracts should “bound” a closing date by picking a date before which the buyer will not be expected to close and a later date before which a seller must close.A provision setting a closing from a builder’s oriented form might read as follows: “At least three days prior to closing, Seller shall notify Purchaser that the Residence will be completed in compliance with this Agreement and that the closing will take place at a specified time and place.” This type of language requires the purchaser to close upon three days’ notice while giving the builder an indefinite period to complete the house. (This latter feature renders the phrase “time is of the essence” in the default provisions almost useless for a purchaser.) These problems are often compounded by provisions allowing the seller to provide the title commitment to purchaser as late as the closing date and the need to work out a “punch list” identifying the “minor” items to be fixed or completed after closing.

As a buyer facing these potential problems, you would need to negotiate solutions contemplating that you may lose a sale of your existing home, forfeit deposits paid to movers, or pay for two moves, temporary storage fees, and hotel rooms. The fact that the title company and closer have a much greater incentive to please the builder over the home buyer further stacks the odds against you.

While the solutions are not always simple, it has been found that reputable builders are willing to sign contracts addressing the above concerns.

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