Protecting your interests when buying new construction

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Buying a brand new home can be an exciting time. You’ll have an opportunity to put your own touches on a home. However, buying new construction is a complex process. Learning the steps involved, and your rights and responsibilities, can help make getting your new home a positive experience. 

Today, Attorney Karen Jennings-Flynn of Sherborn has joined us to share some of the key steps needed to protect your interests when buying new construction. Your very first step should be putting together your real estate team. Select your buyer’s agent, along with your real estate attorney and loan originator. You should be able to access your team of professionals and your team should communicate amongst themselves to coordinate efficiently in closing on the home in the time frame with the most favorable terms. Having this team in place from the outset will allow you to maneuver through the process with confidence.

Your team can assist you in gathering the following basic information:

Due diligence on the home builder. It’s so important to learn if the builder is properly licensed and qualified for the project. Take the time to check with the Better Business Bureau and other similar sites. You can learn if the builder is considered to be in good standing by checking with the Secretary of State’s corporation division (which is easily accessed online). Also, check with the local building inspector to learn if the builder has successful completed similar projects to confirm that the builder knows the procedures and requirements in that town.  

Due diligence on the property. It’s equally important to gather information on the property in particular. Go to the building department, conservation, and planning boards to learn of any zoning restrictions on the particular property.

Once you and your team have gathered and assessed preliminary information, you’re ready to formalize your relationship with the builder/seller. Depending upon how far along the project is, it’s possible you will be establishing a working relationship with the builder that will span three or four months or more. Discussions about the following topics will be indications as to whether this builder’s style will work for you and your team.

Check the builder’s home warranty. Have your attorney review the home warranty before you sign the purchase and sale agreement to make sure there aren’t any areas that are lacking. The warranty is an indication of the builder’s commitment to his work product and defines your access to the builder post closing. 

Find out your rights to access the property during construction. Be sure you and your agents have written permission to gain reasonable access to the premises for inspection at points during the build process. This way you or the professionals involved in the project such as your architect, home inspector, and/or buyer’s agent can make sure the project stays on track. Your lender also will want to have an appraiser have access early in the process and then again prior to closing.

Determine how long you can lock your mortgage rate. It’s not uncommon for there to be delays in new construction. Talk with your lender ahead of time to find out how long you can lock in your mortgage rate for, the costs involved in extending, and what happens if the project isn’t completed and your mortgage commitment expires.

Check if the builder will be keeping your deposit in an escrow account. With a typical home purchase, the buyer’s deposits are held in an escrow account until the closing. However, in some cases, builders will ask to use these funds for part of the construction. Talk with your attorney about the risks involved with doing this. They can put certain protections in place to ensure that you get your deposits back if the deal doesn’t close.

Document everything. Be sure there’s a detailed timeline and materials exhibit that accompanies your purchase and sale agreement. This is a benefit for both the buyer and the builder. Resist the pressure to sign the purchase and sale first and work out the details of the specifications later. This way, the specifications and timeline are part of your legally binding contract.

Invest the time in project management. Communication and diligence are crucial during a home construction project. I recommend including an agreement in the contract that the builder will have periodic meetings with you at the site. If you aren’t going to have the time for this, it’s wise to hire a professional (an architect, engineer, inspector, or project manager) not associated with the builder to verify that key milestones are being met and to keep open lines of communication throughout the project.

Understand the implications of project changes. Your lender needs to make an appraisal of the home based on the builder’s plans and specifications. Projects get appraised again at the end of the project to verify the value. Significant changes in the project could impact the final appraised value, which will impact the final amount of your mortgage. If you decide to make changes during the process, check with your team to avoid potential issues that could alter the appraised value of the home or delay the closing.

Hopefully by understanding the home building process up front and having the right legal protections in place, your dream home will become a reality.

Have a real estate question? Contact Kyle Mann to learn more about buying or selling your home in the Boston suburbs. Mann is a Realtor with Gibson Sotheby's International Realty.