Why you need a Realtor to Represent your interests Before signing a NEW HOME Contract
So, you have decided to buy or build a new home. Now you need to find the perfect builder, a nice floor-plan with a good price in a great community. The builder you choose will have his or her own variation of a construction contract. This is why you need a Realtor that works for you. I can help guide you through the negotiations, the list of what is included in the home and through the contract signing process.
Before you sign, it is imperative that you review and understand the contract. The contractor will not tell you that some items can be negotiated before signing. If you arrive at the model home without a realtor to represent your interests, you may miss out on some items that will save you more money later. A Realtor can help you negotiate key contract terms and more.
The Importance of Construction Contracts
This is crucial because, you want to get the house that was promised during negotiations, and the builder wants to get paid for the house being built. The construction contract serves to reflect this understanding, to make sure there is no disagreement before the actual works begins, and to provide a guide to follow in case a problem arises later.
Most often your builder will provide you with a contract that’s ready for signing. Never move forward without a signed and executed contract! The contract in its original form may have very few terms with very few details, or it may be detailed and filled with complicated terms that are hard to understand. Neither of those situations are acceptable. To fully protect your rights, the contract terms should be complete, specific, and easy to understand.
Commonly Disputed Issues in Construction Contracts
Below is a list of issues that are commonly disputed in residential construction projects. If these items are not covered in your contract, your Realtor can help you add them in. If they are already included, we can review them to carefully to make sure they sufficiently protect your rights.
Scope of Work. This work typically includes obtaining municipal or county building permits, and furnishing the labor, equipment, materials, and other services necessary to complete the house. This section also requires the contractor to conform the work to the house’s plans (drawings) and specifications, which should be attached and made a part of the contract.
Sometimes, even when contract documents are drafted carefully, they contain conflicting terms in the plans, specifications, and/or the written contract. This conflict can lead to confusion and disputes. For example, if the plans depict a master bathroom with one sink, but the specifications call for two sinks, which is correct? Consider specifying that, in case of conflict between the plans and specifications, the specifications will control. And, in all cases of conflict, the contract should be the controlling document.
Although you may assume it is implied, you’d be wise to make sure the contract includes a statement saying that the contractor must complete the work in a good and workmanlike manner in accordance with all applicable laws. That way, if you have an issue with the contractor’s performance, you can point to an explicit contract provision that the contractor breached, and rely on this to pursue legal action.
Timing of the Work. You've probably heard horror stories about building projects going off schedule. How do you protect yourself against this? Make sure the contact contains information about when construction will begin, the schedule of work the contractor must follow, and when construction will end (in other words, when can you move in). Extensions of time may be granted for delays caused by:
poor weather or other “acts of God”
inspection delays caused by the municipality
changes or additions to scope of work agreed to by both parties, and
other issues that are beyond the reasonable control of the contractor.
While the contractor may be hesitant to agree to it, consider including a provision for liquidated damages. Basically, this provision states that for every day the contractor works beyond the completion date (subject to the exceptions listed above), the contractor will be charged a certain amount. For example, if the completion date set forth in the contract is May 1, and construction is not complete by that date, the contractor would be required to pay the owner a per diem amount for each additional day of construction.
Such liquidated damage provisions protect the owner from delay, and are an incentive for the contractor to complete work in a timely manner. In most states, to be enforceable, the per diem amount specified must be a fair estimation of actual damages the owner might incur and cannot have been actually known at the time the contract was made. This provision is not meant to be a punishment, but compensation to cover costs that the owner will incur due to the delay. These might include costs to store your furniture or costs to rent an apartment during the period of delay.
Payment. This section should clearly indicate what, when, and how the owner will pay the contractor. Because the contractor will likely be relying on payments from the owner to fund the construction, the payment schedule must provide a steady stream of money so that the house may be built in a timely manner. A typical contract will require an initial payment prior to construction. Then, on a regular basis thereafter, the contractor will submit an application for payment to the owner indicating the amount of work completed during that cycle.
The contractor should also submit to the owner signed “mechanic's lien” releases or waivers, from subcontractors who have provided labor or materials. A subcontractor has a mechanic’s lien, which is an interest in the property, until he or she has been paid by the contractor for the work or materials provided. So, mechanic’s lien releases or waivers provide assurances to the owner that the subcontractor has been paid by the contractor.
Changes to Scope of Work. Sometimes, after construction has begun, the scope of work changes. This could be due to the owner’s decision (let’s add a built-in bookshelf there!), a requirement from the permitting authorities, or the discovery of an unknown property condition affecting construction. The contract should account for the possibility of such changes by requiring written work orders to reflect changes in the scope of work. Never just tell the contractor, “Sure, go ahead with our new plan,” without creating a written work order that both you and the contractor sign. To do otherwise would open the door to additional unanticipated expenses.
Warranty. Although not required in all states, many contracts contain express warranties, describing what types of defects the contractor will take care of later, how long the warranty lasts, your maintenance obligations, and what the contractor is required to do to fix the defects.
Dispute Resolution. No matter how careful you are in drafting the contract or how friendly you are with the contractor, a dispute may arise. It is common for construction contracts to require mediation or binding arbitration rather than litigation in a court if there is a dispute. If the contract requires arbitration, you may not sue the contractor. Instead, you must submit a complaint to an arbitrator – an expert in the construction industry who will listen to both sides of the dispute and issue a binding decision resolving the issue. The arbitrator will conduct a hearing where both sides will have an opportunity to present their position on the issue. The hearing will be conducted similar to a court trial. At the conclusion of the hearing, the arbitrator will issue a final decision.
As described above, seemingly simple contract provisions may be surprisingly complicated. Take the time to choose a Realtor to represent you and help you to understand the entire contract, then together we can take the steps necessary to protect your interests.