So far in the series on Buying New Construction in Prince William County we have covered:
This installment in the series is going to look at a few differences in builders contracts, financing and incentives. A builder's contract is not the same as a standard Virginia Regional Sales contract. In fact it doesn't resemble one at all. A builder's contract is designed to protect the builder and not the buyer. For example you've toured the model home and are excited that you can move into your home by the end of the year. The builder has quoted you a 4 month build time, yet in the contract they state they have 24 months from the time of contract to complete your home. What happens after 4, 5, 6 or 12 months and it isn't done? You probably don't have any recourse to get out of the contract without losing your earnest money deposit, mostly likely 5% of the total cost of the home you selected.
Builders Contract Paragraph 1 (Example from local builder contract)
1. Settlement. The Purchaser understands that the settlement attorney has been retained by Seller unless Purchaser elects to make settlement at an attorney or agent of his choice. Declarant shall give notice to Purchaser specifying a date on which settlement shall take place. Declarant shall complete the Home and Settlement shall occur, within twenty-four (24) months after the date Purchaser signs this Agreement. Settlement shall take place on the date and at the time and place specified in the notice or such other date, time and place as the parties may agree upon in writing.
Builders Contract Paragraph 3 (Example from local builder contract)
3. Miscellaneous. Subject to the provisions hereof, when this Agreement becomes effective, it shall bind and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. The invalidity of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. Notwithstanding anything to the contrary herein, acceptance of the deed at settlement shall constitute Purchaser's acknowledgment of full compliance by Declarant with the terms of this Agreement. The terms hereof shall be merged into and extinguished by delivery of the deed at settlement except for Sections 4(b), 5(a) and (b) and 17, 18, 21, 22 and 23 which shall survive delivery of the deed and shall not be merged therein. The laws of the Commonwealth of Virginia shall govern this Agreement. Time is of the essence in this Agreement.
Builders contracts are full of these little loop holes and others that you might not think much of in your excitement to have them start on your new home. Remember this as you read through a contract with your agent. You need to make sure you understand the significance of each and every paragraph before you sign a contract.
If you recall in the first installment of Buying New Construction in Prince William County I suggested you needed to be pre-qualified by an "independent" lender. This is where that Good Faith Estimate (GFE) comes into play. The builder is going to try and entice you with incentives that are tied to THEIR LENDER and THEIR TITLE COMPANY. In order to know whether those incentives are truly a deal or not you have to be able to compare the costs associated with your loan and settlement.
Recently I visited a site where the builder was offering $10,000 in closing cost assistance and $10,000 in upgrades if you used their preferred lender and title company. Two things were glaring apparent. The first was that a lot premium or an upgraded kitchen (to include stainless appliances & granite counters) took up all of the upgrade incentive. The basement upgrade at this site was $22,000 so it would only cover half. The second was when we compared Good Faith Estimates between our lender and theirs we found loan origination fees, underwriting fees, processing fees, "handling" fees and attorney fees (among others) were $4500 more than the fees from our lender. So the $10,000 being offered as an incentive was in reality only $5500.
This doesn't mean that the $5500 is something to reject immediately but it does mean that you need to make sure that you understand that the fees associated with getting the "incentive" the builder is offering can cut the value in half. Don't hesitate to ask to take the builder's contract to your own attorney for review. We are talking about a big financial decision and not something you should feel forced to sign or you will lose the house of your dreams.
Please understand YOU CAN NEGOTIATE WITH A BUILDER. You don't have to just accept the restrictions they quote you on incentives. You do by Virginia Law have the right to choose your own settlement company, a builder can not force you to use their settlment agent or their lender. Knowing when and what to negotiate for is what a buyers agent representing you can help you understand.
The next post in the series Prince William County New Construction Buyer's Guide we will cover the build process (including change orders) and why hiring your own home inspector is important.
If you are ready to get started on looking at new construction in Prince William County give Cindy Jones a call at 703-346-2213. Let my experience with builders and new home contracts give you an edge to get the deal you really want on your new home. Now more than ever an experienced buyer's agent on your side is critical to protect your best interests.