7 Things To Know About New Home Builder Contracts

Building a new home in Stapleton, or any neighborhood, from the ground up can be a great experience.  My family and I did it, we love our new home and I’ve been lucky enough to help other families navigate the building process as well.    That said, buying new is very different from buying a resale, especially when it comes to the contract that is used.   Builders have their own in-house contracts they use rather than using the Colorado approved forms, which were designed to handle resale transactions.  My goal is to help buyers understand some of these differences between a builder contract and a standard resale contract.  I’m a big supporter of the builders so I don’t want this to come off as negative, but these are the recurring issues that buyers ask me if they can change when they read the builder contracts.

7 Things to Know about New Home Builder Contracts:

1.  Earnest money on a new build is typically much more than a resale.  A builder is building a home for you and allowing you to pick all the structural upgrades and finishes.  There is risk involved with that (if you fall through that next buyer may not love the green carpet you picked!) so they usually require earnest money upon signing the contract and then additional earnest money as a percentage of the finishes that are selected along the way.  (amount varies by builder)

2.  The buyer’s loan “out” may not be as favorable as it is on a resale.  On a resale transaction in Colorado buyers can back out all the way up to their Loan Objection Deadline if they have a loan problem, typically with no loss of their earnest money.  With new builds, a buyer typically has 30 -45 days to back out based on loan reasons but there are often penalties that the builder will hold back from the buyer’s earnest money.  Even if they tell you there is a loan “out” be cautious and read the fine print in their contract.  If the buyer’s loan falls through late in the building process the builder typically keeps the earnest money.

3.  Builder contracts are not contingent upon an appraisal.  Meaning if the appraisal of the home comes in low once it’s built the builder is not obligated to drop their price to match the appraisal.  The lender can still lend on it but because it appraised low the buyer will have to bring more cash to the table to keep the lender happy.  The buyer can’t back out if the appraisal is low, unlike a resale, without losing earnest money.

4.  Builders typically give themselves 1 – 2 years to build the home per the contract.  This always makes buyers nervous.  They are expecting to have the home built in 8 months based on conversations with the sales staff but when it comes time to sign the contract the builders give themselves a ton of leeway and most builders say they have 2 years to build it.  (I’ve never seen one last even close to 2 years)

5.  Inspections on a new build are different.  When you inspect your home on a resale you can back out of the deal if you find issues.  If you find issues on a new build you can’t back out but they will fix them for you if you are still in the building process.  (or under warranty after closing)

6.  Builders do not offer a lot of flexibility for changes.  Buyers should know that most builders are “production builders”, meaning they build off a preset plan they offer their clients.  Builders aren’t typically set up to make a lot of custom changes, so what you see in the floor plan is what you get.  “Custom” builders are the ones who serve clients who want to build something completely unique where changes are encouraged.

7.  Lastly, new build contracts involve time frames that are much longer than resale ones, so buyers can’t lock their interest rates right away because lenders don’t usually lock rates that long.  New home buyers will need to wait to lock their rate later in the building process.  In a rising rate environment this can be nerve racking.

So those are the 7 most common issues that buyers have once they review their builder contracts.  Am I saying new homes are bad compared to resale?  Absolutely not!  They are a great fit for many of my buyers because they offer flexibility, customization and often the longer building time allows the client to sell their existing home.  I just want buyers to go into the contract process knowing it will be a little different than the resale transactions they’ve done in the past.

Can anything be done by buyers to negotiate on some of these items from the builder contract?  I’ll give you the attorney answer….it depends!  Your leverage as a buyer depends on the state of the market and currently it’s a seller’s market…so builders don’t need to be flexible on making changes for their buyers.  If you don’t like their terms there are other buyers that do right now.  As the market balances, and eventually shifts back to a buyer’s market (real estate is always a cycle) buyer’s will gain more power and builders will be more eager to adjust some of these contract items.  I’m not saying you shouldn’t try to improve the contract but I want to be upfront with clients that if they want a ton of changes made to the contract it’s not happening in the current market.

Hope this has helped set the right expectations regarding some of the differences between builder contracts and resale ones.  If you have questions or if I can be of service as you make your next move I’d love to help!  As a Realtor I’m not affiliated with any one builder so I can show clients the new and resale market to help them find the home that fits their needs!


15 Responses

  1. Bryan

    Hi,

    Help!

    Can you back out of a contract if a structural defect is found? Concrete block wall overhangs the slab by 2″ in multiple areas.
    has already failed inspection by city and call for structural engineering review.

  2. Norman

    Let’s say a buyer entered into contract on a new home build and paid upfront for the extras he chose (Earnest Money) as well as a lot premium. The home falls out of escrow and the original buyer does not receive a refund on the Earnest Money. The builder is now selling the home with the price to include the already paid for lot premium and extras that they recieved from the original buyer. Is there anything that can be done to negotiate a lower price for the home based on the money the builder has already received for the home?

    1. Joe Phillips

      Norman, thanks for your comment on my post. No, I don’t believe the next buyer has any ability to get a lower priced based on the previous buyer’s loss of earnest money. The two things really don’t have anything to do with each other, the market value of the home is the market value of the home..regardless of whether or not the builder/seller made money from previously selling it to another buyer. Especially in this hot Denver market, the builder will be able to sell it for full market value to another buyer.
      I hope this helps. It’s just my two cents. Thanks

  3. Dana

    Can I back out of the contract because I am just not happy with how things turned out? Do I have to buy the house after it is built?
    How can a person be forced to buy a house?

    1. Anonymous

      …because you signed a contract saying you would buy it???

  4. Patel

    I’ve just sign contract for to build new home, How many days within i can get my money back.
    I singed on day before yesterday, As per laws in Texas? is it possible to get earnest money back as my mind changed.

  5. Rhonda Stubbs

    We are suppose to close on our new house on 7/26 @ 1030. Twelve hours before closing I get a call from the corporate office stating they are canceling our contract because my husband has had to many issues with the quality of the build. Is this legal. We have already sold our house and now we will be “homeless” in 26 days as I cannot get out of my contract. Do I have any rights in this manner.

    1. Anonymous

      Just curious, was the builder Thrive home builders? We had something similar happen to us.

  6. anonymous

    The other day my husband signed a contract for a new property that the previous buyer fell through on. Can the loaner take away your contract and give it to a previous buyer after you was told that they fell through. Are they allowed to do that

  7. It’s very comforting to know that you have never seen a build take two years. A similar situation just happened and I was feeling a bit worried. Feeling that I can trust the contractor is important to me. After all, this is going to be my home for years to come.

  8. Hi Joe Phillips, nice suggestions. Can you guys suggest me should i hire a home builder or should i purchase a already build home.
    Thanks

  9. If u don’t get your walk thru is the contract that you signed broken every wall is up in the house this a new construction build

  10. Boda

    Just enter into a contract with my builder not yet sign the final contract. Is it possible to back out now before signing the final contract as we’re not cot comfortable with the new variation that the builder want us to sign for. Please advice.

  11. Thanks for your comment about how you should know the difference between a new builder contract and other house contracts. I like how you said that you can choose how to finish and upgrade it. My parents are considering new home construction for sale to move into a new home.

  12. It’s amazing how involved a builder contract is! Great steps outlining what to look for.

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