DISCLAIMER: I am not an attorney. If there is anything in a contract that you do not understand then you should consult an attorney before signing anything. Your real estate agent cannot practice law nor give you legal advice.
First lesson in Texas Real Estate Law...
Almost invariably... "if it ain't in writin'... ya ain't got nuthin' !"
Please... no verbal agreements!
Buyers need to understand that most large production Builders have their own contracts. These contracts greatly favor the Builder... not the Buyer. They will almost never allow any changes or strike-outs to the contract. If you, the Buyer, want the product then you usually have to accept the Builder's terms. You should ask the salesperson for a blank copy of the Builder Contract so you can be familiar with it.
I make sure my Buyers are especially aware of the "arbitration clause"that almost all builders (in Texas) have in their contracts. You, the Buyer, basically sign away your right to sue the Builder in a court of law with a jury of your peers. Disputes go to binding arbitration not a jury trial. It is an expensive process and you will need representation.
Also I like to call to attention to the section that talks about the closing. Keep in mind that you have to close when the Builder is ready. If they finish earlier than expected they will expect you to close. They will usually give the Buyer at least a 5 to 10 day notice to close. On the other hand, if there are unforeseen delays on the part of the Builder that are out of the Builder's control, then you have to wait on the Builder.... potentially up to 18 months to 2 years. Most delays might be 3 to 8 weeks. Keep in mind... the Builder wants to get the house finished asap. They want to get their money, and move on to the next house.
Most builder contracts give a very short or NO financing contingency. So you must understand that after the contingency period passes (if there is one) the buyer is exposed to lose all of the deposit(s) that has been paid to the Builder if the Buyer cannot close on time. This aspect of the contract especially applies to custom builders and especially the smaller builders that work inside Houston's inner loop area and other very desirable areas closer to the downtown area where large production builders may not be present . Many of these builders give no contingency whatsoever. So you must be very sure of your ability to close the deal BEFORE you sign a purchase contract. They are notorious for NOT returning a buyer's deposits when they are not able to close. As a matter of fact, since 2014 many of the larger production builders have been taking a less tolerant stance on refunding deposits. Buyers must be clear on matters and circumstances where they can lose their deposits! Builders that have their Preferred Lenders will usually allow the Buyer to pre-qualify before signing the contract. In my experience I have never seen a Buyer pay a fee for the service.
Deposits. Initial deposits when signing a contract can vary depending on the circumstance and the Builder. Entry level and mid level builders may ask as low as $1000 to $3000. Others may start higher... $5000 to $15000. Sometimes the builder will accept less depending on individual financial circumstances (ie. cash to be used is in a 401K). On single family homes the Builders usually offer an upgrade and option incentive. If you add options and upgrades and surpass your incentive then you will be putting an additional non-refundable deposit to cover those items that surpass your incentive. You may be asked to put 50% up to 100% of the additional value of those upgrades and options. In my experience... these deposits are almost never refunded.
Community and Developer Expectations.If the Builder is not affiliated with the Developer then the Builder will have a disclaimer in their contract saying that they have no control or liability over what the Developer has promised or what they may or may not do in the future. So the Buyer must do their own separate homework on the Developer and their future plans for the community especially in the areas that are designated commercial and multifamily. I have seen many single family homeowners "surprised" by developers that "changed their plans" and put up apartments at the front of their communities towards the end of the development. Furious single family owners hire their attorneys just to find out that the Developer's move was legal. Check out the Developer's reputation! If you are not sure, you can go to the local planning department to see what may be permitted if the developer does change their plans in the future. There have been many developer bankruptcies in Texas... especially in the last recession (2007 - 2013). Some of these communities still manifest these failures. Others have ended up better off because they were taken over by a bigger and better developer. Texas homeowners rarely receive compensation for their damages when these failures and "surprises" occur.
HOA and Developer fees. At closing the HOA may be charging a new home Buyer a large fee. This is apart from the typical 200 or $250 transfer fee. This fee could be well north of $1000. It may have a name like "reserve fee" or "infrastructure fee" The HOA may also have a large perpetual fee that is charged any and every time the property is sold. They are usually 1/4 to 1/2 of one percent of the purchase price. They will add a real expense to a future home sale in more expensive communities. Be sure to ask about these fees and be aware of them at the time of signing the new home contract.
Builder's Right to Substitute Materials and Vendors. This clause will give the Builder to change and substitute materials, furnishings, brands, vendors etc. Such an action may be caused by shortages, changes in market conditions, product discontinuation by manufacturer (this is common), disputes between Builder and vendor or supplier, problems with material quality or just the desire of the Builder to save money.
This article addresses just a few of the terms you will find in a Texas Builder's New Home Contract.
ONCE AGAIN... I ENCOURAGE BUYERS TO ASK THE BUILDER SALES REP TO SEND THEM A PDF OF THE SALES CONTRACT FOR REVIEW. Some of these contracts are relatively short and others are REALLY long.
I wanted to mention to you again the importance of getting your own Inspector to monitor the process of building your new home. If you give some thought about all the different stages and aspects of your new home, I think you will find it difficult to count how many different human beings that will show up on that work site and impact the finished product, for good or for bad. I was considering just the foundation. By the time it is poured and finished I figure there will be at least 8 to 9 different workers involved and we are barely getting started! I figure that by the time your house is finished, well over a hundred fifty to 200 different tradesmen and their helpers will have been on that site. Now you have to ask yourself; what factors could potentially impact this phase (foundation) in a negative manner? As for the humans….we have; incompetence, an honest mistake, apathy and/or damage done by another trade, a worker having a “bad day” and lastly….unauthorized persons on the site. Then, you also have the possibility of rain or a simple minor cave-in that could create a real defect in the foundation. It’s really a relatively simple phase, but arguably a very important facet of the finished product. Can you begin to see the potential for at least a minor disaster?
I know that the Builder has their own third party Inspectors…. but they do not work for you, their job doesn’t depend on you, they don’t report to you nor do you receive a copy of their inspections, and their inspection criteria probably is not always the same as a TREC* / IRC** Inspector. Also remember that the construction supervisor is probably monitoring more than ten houses at any one time and sometimes in more than one community.
So…I want to encourage you to consider at least a Three Phase Inspection using a TREC Inspector of your choice. These are the 3 phases: 1.)Foundation 2.) Frame-up (right before drywall is installed) 3.)Final (all appliances installed and functioning). Most TREC Inspectors have a price for this service, so it is easy to shop around. You can ask if they offer any “extras” along with their service such as photos and a walk through with you after the inspection is done.
Here is the link for the TREC web-site Inspector Main Page….lots of info, much more than I am giving you here: http://www.trec.state.tx.us/inspector/default.asp
You will find that the overall cost is much less than 1/2 of one percent of the house and you will probably sleep better also . I have never seen an inspection cost surpass $900... and that was a 5000 sq.ft. house.
I also want to encourage you to visit the work site as much as possible and watch what is going on at the site. You will get to know and understand your future home if you follow the building process. It also puts the contractors and the Supervisor on notice that you are watching. Always take notes and / or pictures of anything that appears to be a problem and report them to the Supervisor ASAP. Follow up to make sure that any “issues” are really fixed. Do not address any issues or problems directly with the workers. If the work site seems to be very messy and disorderly then mention that also…that is usually a bad sign and is contagious. A disorganized worksite screams out to all of the other contractors: “Hey, no one is watching here….do what you want!” If something is not being addressed or at least acknowledged then contact me or go above the Supervisor’s head. Always keep your communications with the Supervisor on an amiable tone and use tact. You might even want to take him a snack, sandwich or something to drink when you have a face to face meeting with him. You definitely want him on your side until your house is finished.
There is one more very important reason to have your own Inspector. Most Texas Home Builders include an “Arbitration Clause” in their contracts. This clause takes away the consumer’s right to sue the Builder in a court of law. If there is any dispute that cannot be settled then you will be going to “Binding Arbitration”. Having your own Inspector will help you to avoid such a situation and potentially help you if you do end up there.
I hope I have not rambled on too much. Please feel free to call me if you have any questions about this subject or any other matter related to your new home.
*TREC: Texas Real Estate Commission
**IRC: International Residential Code (The State of Texas adopted this residential building code in 2002)
Stuart B. Scholer
Licensed real estate agent in Texas TREC # 498891
Broker: 5th Stream Realty TREC # 9005999
7941 Katy Freeway # 787 Houston, 77024
Texas New Home Rebates
Copyright July, 2012 ©