Real Estate Law: Tips for Purchasing New Construction

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Buying your first home, or any home for that matter, is usually a very exciting experience. It is even more exciting when you are purchasing new residential construction. However, it is important that you work closely with a realtor and your real estate attorney, to avoid a couple of common pitfalls when purchasing new residential construction.

What New Construction Purchasers Should Know

One of the first things I look at when representing a new construction purchaser, is inquiring as to whether this is a custom home or whether it is part of a larger development. If the former, the Buyer needs to be more concerned about making sure that the Buyer has negotiated a number of pre-settlement inspections before closing. In addition, the Buyer should also insist upon an escrow of some of the Seller’s sale proceeds to help to make sure that the builder/Seller completes punch list items after closing. If the latter (i.e. part of a larger real estate development), the aforementioned concerns are slightly lessened if the subject property is one of the first properties to be built in the development. In my experience, and with all due respect to builders, the Buyer has less to worry about when it comes to making sure that the Seller finishes the punch list items after closing when there are other lots to be sold as the real estate developer wants happy Buyers to convince subsequent people to purchase the remaining lots. On the other hand, my experience has been, unfortunately, and with all due respect to the local real estate developers, that the Buyers are less protected with completion of post-closing punch list items when the subject property is one of the last, if not the last, lot to be purchased in a particular development.

The Agreement of Sale

In addition, it is extremely important that the Buyer makes sure that the Agreement of Sale contains a very accurate, and comprehensive list, of all specifications, finishes, etc. that the Buyer expects the builder to deliver at closing. In my experience, one of the biggest areas of dispute between Seller of new residential construction, and Buyers, is a failure to comprehensively agree upon specifications and then the Buyer finding out at the final walk through that particular items are missing. If it is not in writing, and the developer has initialed the specification, the Buyer has little to no leverage to insist upon delaying closing until the specification is constructed.

Substantial Completion

Finally, another area of dispute between Sellers of new residential construction and Buyers, is the definition of “substantial completion.” Generally, Agreements of Sale for new residential construction provide an outside settlement date, but this date is really just a target and is not a firm date. Generally, the builder negotiates that a settlement can happen as late as a year, or sometimes more, after the date that the Agreement of Sale is signed. Unfortunately, the Buyer fixates on the target date and forgets that same is just a goal which is a rude awakening for that Buyer if settlement is delayed by reason of weather, the builder is stretched across a number of different projects, etc. The opposite scenario can also sometimes be a problem for a Buyer.  For example, if the Seller is insisting that closing be conducted even before the property is finished. Generally, Agreements of Sale provide that the Buyer must go to closing, and pay the full purchase price, when the property is “substantially completed.” That term is usually defined as the date that the Seller is able to obtain a Use and Occupancy Permit from the local municipality. Once done, the Buyer must go to closing even if there is a punch list of items that need to be completed that is long as his arm. Again, this underscores the importance of trying to negotiate a punch list, and an escrow for same, before the Agreement of Sale is signed.

Work closely with your realtor, and real estate attorney, to address the above issues. Contact us for all of your real estate and title insurance needs.

— Written by David A. Megay, Esquire