As opposed to using the standard Florida real estate contract like in the resale side of real estate, most Florida home builders use their own contracts, and they usually err on the side of protecting the builder rather than the buyer. By making you aware of the contract clauses you might see in builder contracts, the goal is not to steer you away from them, as most will be unavoidable. The goal is to heighten your awareness of them, and the impact that they might have on your new home construction experience. As is the case with any other contract, if there is anything you are unclear about or do not understand, you should consult an attorney before signing.
Here is a selection of some clauses you should be aware of that you may see specifically in new home sales contracts.
In most cases, the deposit that you give a builder at the time of contract will be substantially higher than if you were entering into a resale contract. Most builders here in Florida require 5-10% of the sales price as a deposit, and some even require 20% down at time of contract. Now, what happens to that deposit? In a resale transaction, the deposit would be held in an escrow account at a bank, either by an attorney, title company, or real estate broker. In the case of new construction, that money is sometimes used to build your house. If this is the case, the builder’s contract will have a deposit clause, whereby you as the buyer waive your right to have the money placed in an escrow account.
Some builder contracts do not include a financing contingency like the Standard FAR/BAR contract does. This would mean that if you gave the builder a deposit on a home, but you are denied for financing, you could lose your deposit. The chance that this could happen increases the importance of getting pre-qualified by a lender before shopping for a new home to get a feel for what you can afford. In any case, when you sign a contract with a builder, make sure you know whether or not it includes a financing contingency.
Several factors will determine how quickly your new home is built, such as the market conditions at the time you do a contract, availability of labor, and the builder’s backlog. For example in a heated market such as Florida experienced in 2004-2005, homes were sometimes taking 12-15 months to be completed. The main reason for this was there were a large number of homes under construction. If you had bought a year earlier in 2003, your home may have only taken 6 months to complete. Some builders use a construction completion clause to spell out how long the builder has to build the home for you. While it theoretically may only take six months to build your home, some builder contracts allow the builder to take years, yes with an “s”, to build your home.
However, don’t take this clause to mean that the builder will take the full amount of time to build your home, simply because the contract says they can. Builders want to get homes finished and closed as soon as possible because that’s when they get paid. They want you in your new home just as quickly as you do.
This is a separate clause found in most builder contracts that ties into the previous clause. It basically says that the construction completion can be delayed for reasons that are beyond the builder’s control such as acts of God, adverse weather, theft, or a shortage of labor or materials.
Some builders place a firm closing date in their contracts, while others leave it open ended. Builder policies vary, and you will have to ask about the policy of your builder regarding closing dates. Without a firm closing date you can be left in limbo not knowing when to schedule movers, utility hookups, change of address, delivery of new furniture, and so forth. This can understandably be a nightmare. Even if builders do not specify a closing date at the time of contract, most will at least give you a week or two notice when the house is complete to arrange for your closing and subsequent move.
Think not having the slightest idea of when your closing will be is bad? What if you didn’t know how much your new home would ultimately cost until just before the closing? In order to protect themselves from unexpected rising construction costs while your home is being built, some builders employ escalation clauses in their contracts. These can be worded and structured in various ways but basically they allow the builder to pass on any increase in costs during construction to you, the lucky homebuyer.
If you sign a contract that has an escalation clause in it, at least make sure that there is a cap on how much the price can go up, and that you are comfortable with that amount. This cap can either be a hard dollar amount or a certain percentage. Without this cap, you are essentially handing the builder a blank check.
Termination of Sale Clause
This clause allows the builder to be released from their contract with you at any time if certain conditions occur. These conditions usually include the builder being unable to get the proper permits for your home, being unable to deliver clear title, or for any other reasons beyond their control.
Holding Period; Builders Right to Equity
Keep in mind that 2004 and 2005 were the hottest years on record in Florida real estate. Some real estate investors referred to as “flippers” were buying homes from builders and selling them just a few months later for big profits, as home prices in the state skyrocketed. Different builders had different names for this contract clause and only a very small percentage of builders put it into their contracts.
In a nutshell, this clause told a buyer 1) how long they had to own the home the builder was selling to them before they could turn around and sell it and 2) that if they sold before that time period was up, the buyer had to share a percentage of the gain on the sale with the builder.
The idea behind the clause was that if a builder had, say, 400 homes in a subdivision to sell, the clause would limit the amount of competition they would have from investors who bought early on in the project and might decide to sell quickly and take their profits by undercutting the prices of the builder.
It’s not likely you’ll see this clause in builder contracts in the very near future, as price gains have slowed dramatically since then. But that’s not to say that if you buy in the coming years that you won’t see it. Prices will soar again, its just a matter of when, and builders may pull this clause out of their filing cabinets and dust it off to use again.