If you are thinking about buying a New Home from a builder, there are a few things you should know about builders’ contracts. Unlike a resale contract, the builders’ contracts heavily favor the seller. For example, even though the builder sales rep may tell you that the home will be ready for you in four months, the contract most likely gives the builder two years to complete the home. Most new homes are ready on time or within a month of the promised delivery date, but you need to know that a lot of slippage in delivery date is available to the builder. To be fair to the builder, if there is a serious slippage it will almost certainly be because of things beyond his control like a natural disaster or a long term strike affecting an important aspect of construction such as delivery or manufacture of needed materials. Even so, you do not want to end up with a moving truck full of furniture and no place to move it to.
Another common issue with the contract is in the area of financing. The builder will require you to apply for financing within a short period of time, and as long as you are qualified and approved for financing you will have to proceed with the contract even if interest rates go up and increase your monthly payment beyond what you thought you would be paying. This is an issue because unless you are buying a quick delivery spec home, you can not lock in your rate until you are within a couple of months of delivery. You can pay extra for a long term rate lock, but that is not usually a good deal. Also if delivery slips beyond your lock date, you may have to pay an extra fee or lock in at an even higher rate. Even if rates go down after your lock expiration date, you will still be held to the higher original rate.
Another aspect of financing is the security deposit. New home builders will want a higher security deposit than is generally needed for resale contracts. The security deposit for a resale contract goes into an escrow account, for a new home it will go into an operating account and will not be available for refund should the builder go out of business. I recently sold a Stanley Martin home at Heritage Crossing in Manassas and could not find any place in the contract where it mentioned returning the security deposit should the buyer not qualify for the loan even though he can’t lock in the rate without a hefty payment until the home is close to completion.
A spec home is one that the builder has built on speculation that he will be able to find a buyer who accepts the builder option choices which may be already installed or mandated. Buying a spec home eliminates the long term rate lock problem, but your options such as flooring type have already been decided. If the home is not quite finished, you may be able to choose a few options, but they will be limited.