You’ve just spied the house of your dreams, or at least a close approximation, after wandering through several models in a new home development. You decide you can swing the finances, that your furnishings will look great and that you like the community. The builder is thrilled and hands you a contract, known officially as a purchase agreement.
You are willing, you explain, to sign, once your attorney can give it a once-over and after you make a few changes here and there: You’d like an island in the kitchen instead of a U-shaped arrangement of appliances and counters; you need to have the closing date pushed back since you won’t yet have the funds from the sale of your current house; and you’d feel more at ease if you could extend the homeowner’s warranties.
Can you actually make these contract changes? Do you have any negotiating clout? On some matters, yes; on many, a decided no.
Most potential homeowners find out soon enough that buying a production or semi-custom house is not the same as buying a custom home. And it definitely is different than buying an existing home. If you’re not buying custom, you won’t have the same ability to choose a site and to design the home from scratch. On the other hand, you don’t have to pay steep architectural and building fees.
Yet, home buyers don’t have to accept automatically what the builder/developer offers. “Given the competitive nature of the current market, homeowners have some negotiating rights,” says Roger Mankedick, executive vice president of Concord Homes.
The tough part for buyers is that there’s no single agreement they can study. Many builders draft their own rather than copy industry forms with the result that many agreements differ yet share a pro-builder tenor, says Richard Nikchevich, a real estate partner at the Chicago law firm Hopkins & Sutter.
Any savvy owner, he says, must read and compare the fine print to learn what each builder agrees to, then negotiate, while understanding that certain points are more open to change than others. Timing is also critical, says Bill Young, director of communications for the National Association of Home Builders. “Once you’re in the construction stage, any change is more difficult and more expensive,” he says.
If you’re concerned about getting contract changes approved before you plunk down your down payment, you should be. There’s no uniform agreement. Mankedick of Concord Homes says his firm will discuss the possibility of changes but not OK any until a purchase has been made. Ed Fitch, vice president of marketing at Town & Country Homes in Westchester, says his firm won’t OK changes before a purchase, since it “would slow down a sale and the building process.”
There are a number of additional things you should think about when it comes time to sign a contract for that new-construction home:
– Altering and signing the contract. Don’t think you have to sign the contract as it’s first shown to you. Even if it doesn’t include an attorney approval provision, most builders will allow such a rider and will give your lawyer five to 10 days to eyeball the contract, says Jerry James, president of James Building Corp., a real estate developer in Northbrook. If you need to add in a contingency for selling an existing home, many builders say they would agree, but for a limited period. They would also insist on a kickout clause that says they can keep marketing the house and if another buyer comes forward with a clean contract, the one with the contingency could lose unless they waive that provision. Most builders also won’t start construction until the contingency is waived, Fitch says.
And even before you sign the contract, you must back up your interest with a “reservation request” deposit, which typically averages $1,000. You then need to sign the contract within five to seven days, at which time you’ll bring up your deposit to between 5 and 10 percent of the price of the home. Unlike the sale of a custom home, however, you won’t have to increase that amount until the house is done.
Exactly how soon ground will be broken after you sign the contract depends on where the development is in its building cycle. “If permits have been approved, it might occur in a few weeks,” says Vicki Gonzalez, a partner in the law firm of Bellas & Wachowski in Park Ridge.
– Choosing the site. In planning a development, typically done in stages, builders have a grand scheme in mind and know which house will go on which lot. Many don’t allow any switching, primarily because they’ve had to have plans approved by a community so they conform to ordinances, utility easements and setback requirements, says James.
Buyers also shouldn’t count on snaring a better lot in successive phases, particularly if they want a cheaper price. Builders often hold back their best lots and designs for the “doubting Thomases,” who have to pay more for their indecisiveness, Mankedick says.
– Getting financing. Observers caution buyers to try to add several points to contracts, if they’re missing. Attorney Nikchevich advises that any financing contingency should extend for a sufficient period of time so owners don’t lose their deposit, and that they should comparison-shop for the best mortgage company rather than be forced to accept the builder’s recommendation.
Gonzalez says that buyers should be sure a contract doesn’t leave the financing rate open. “Ideally, it should say `market rate,’ ” she says.
– Altering the design. Some production and semi-custom builders are not willing to make changes in the structure or design, mechanical systems and materials. Others are willing to permit some alterations, yet they won’t go so far as to allow a buyer to start from scratch, since that would require bidding out work again and delaying production.
James Building Corp. falls into the latter category, describing itself as flexible. “We’ll work with you if you’ve got ideas–want a three-car rather than two-car garage–and, maybe, we can do what you want, maybe we can’t, but we’ll try as long as we can keep to our timetable,” James says.
Ralph DeLetto found that to be the case when he and his wife, Nancy, built their two-story brick colonial-style house in James’ Glen Lake Estates in Glenview. “I have a file that’s four inches thick on what we wanted to change. I found the contract to be fairly liberal, probably because we bought the house in such an early stage of the development.”
Concord Homes provides a list of 20 permissible changes such as adding or deleting rooms. “We’ve had to, since buyers want choices today,” Mankedick says.
Town & Country takes a similar tack, letting buyers choose from its preprogrammed choices, akin to a menu. “You can choose from what’s offered, but not go off it,” says Fitch.
Sarah and Eric Noreen made a long list of changes in the Vernon Hills house they bought in Town & Country’s Centennial Crossing. The couple upgraded cabinets to cherry, added rollout interior shelves, ceiling can lights with dimmers, wood flooring instead of carpeting or vinyl and a “gourmet” kitchen, which meant a cooktop and double ovens instead of a single stove.
Although Bob Bianchi downsized to a house in Concord Homes’ Avalon Sienna development in Wheeling, he spent about $15,000 on upgrades of oak railings, a hardwood dining room floor, laundry room cabinets and a tub, and a second bedroom downstairs and a family room upstairs, instead of the reverse arrangement of rooms. When Bob Bianchi bought in Concord Homes’ Avalon Sienna development in Wheeling, he spend about $15,000 on upgrades. They included oak railings, a hardwood dining room floor, laundry room cabinets and a tub and, in a reversal of the usual room arrangement, a second bedroom downstairs and a family room on the level above.
Two keys, according to Nikchevich and Gonzalez, are to write in exactly how much money an upgrade will cost and to be clear about what’s standard versus an upgrade. “Most models include upgrades, which is why they’re so attractive, but that may not always be made clear,” Gonzalez says.
– Protecting the house and its contents. When it comes to warranties, there’s little give in a contract, whether the builder offers its own warranty, offers it through a third-party company such as Residential Warranty Corp. in Harrisburg, Pa., through appliance and equipment manufacturers, or through a combination of the above. Town & Country’s Fitch said his firm won’t alter terms of warranties because of its third-party arrangement. And Residential Warranty also won’t allow any changes, according to Tom Bothell, vice president of marketing. Even his company’s method of resolving disputes–through arbitration–is not open to debate.
Attorney Nikchevich’s advice is for buyers to read all warranty policies thoroughly so they don’t face surprises and to understand the company’s policy for submitting complaints. Adds Gonzalez, “Most cracks in plaster are not covered since they’re caused by settling.”
– Inspecting the progress. Many who’ve built custom homes will tell you the importance of visiting a site daily to check the progress and workmanship. If you’re buying a production or semi-custom home, don’t count on visiting that often or getting additional visits OKed in writing.
Builders, instead, provide a limited schedule. Typically, buyers are allowed to visit during the framing, mechanical stage, drywalling and several times during trimming, says Rick Ackman, who manages five Town & Country construction sites. “Once the carpet’s in, we lock the doors until the owner is ready to see it finished.”
The main rationale is that construction sites are dangerous places and the Occupational Heath and Safety Administration (OSHA) has strict guidelines. But some builders also say that most buyers don’t understand the construction process. “We’ve had clients who’ve driven by after a snow and freaked out that the snow is sitting on their deck sheeting. We explain that the snow won’t affect the home’s structure, performance or final look, but they still don’t understand. It’s better if we’re there to explain what’s going on,” Fitch says.
But Nikchevich recommends that buyers, particularly those new to the process, specify in a contract that a third party inspect the premises before the closing, and try to hold back some funds at the closing if items on their punchlist have not yet been corrected. Some builders won’t agree to either contract change, he warns.
– Terminating a sale. Most contracts address this possibility but don’t offer an out once a deposit has been collected, a contract has been signed and the digging has begun. The only exception is if the builder defaults or doesn’t deliver the product according to specifications, James says. But even then, many won’t give back escrow and upgrade funds, two points that Gonzalez likes take care of in a contract. “Sometimes, I’m successful; sometimes not.”
– Delivering the product. Most builders give themselves leeway with the delivery date by stating that they’ll guarantee the completed home within a set number of days or months after a foundation has been completed or by a certain time frame according to their best efforts. But they also give themselves leeway, saying that extraordinary circumstances such as terrible weather or an act of God might delay delivery. “Most contracts don’t let the owner pin down a date,” Gonzalez says.
Home buyers often find such timetables too vague, but make little headway in getting them changed. “We would have liked a tighter window on delivery, but the builder said no because of the potentially bad winter weather. We’ve had to make do with a completion date some time between April and June,” says Eric Noreen, who’s home is being built in Vernon Hills.
When it comes to the actual closing, many builders are more flexible, when pressed. “We offer some leeway for extenuating circumstances, but it’s not an open book,” says James. “Then again, we try to follow the golden rule, trite as it might sound.”
