A Guide To Navigating A New Construction Purchase
Monday, August 23, 2021
Buying a new home or condominium Unit can be a daunting process. Buying a new home or condominium Unit that is not yet built and only exists on paper is even more daunting. Below are some helpful tips to navigate a new construction purchase.
Research the Builder
To a certain degree, a Buyer is going into business with the builder. The Builder will determine the design and workmanship of the new property. The Builder also controls the timeline of the process. The Buyer will want to check the Builder’s reputation, reviews (if available) and should research if the Builder has a history of finishing projects on time. It also is recommended that the Buyer should meet with the Builder up front.Establishing a trust-based relationship with good communication is key.
Ensure That You Have a Comprehensive Purchase and Sale Agreement (“P&S”)
The P&S is signed early in the process. It serves a roadmap for the transaction. The P&S can only contain the terms agreed upon in the Offer, but it can contain many of the issues and milestones that will occur during the building and closing process.
Initial Legal Issues
The Buyer will want to check if there are any zoning issues (including whether a variance is needed), or any environmental issues prior to signing the P&S. The Buyer’s attorney should include language in the P&S to confirm the Builder has not received notice of these issues.
Negotiate the Spec Sheet
The Spec Sheet needs to be agreed upon by the P&S signing. The Buyer will work with their realtor to negotiate with the Builder the appliances and fixtures types/costs. If the Buyer is not familiar with items on the Spec Sheet, it is recommended to meet with the Builder to obtain additional information, and then research further.
The Buyer should ensure that the Builder has a clear process in place for upgrades to the Spec Sheet which will occur later in the closing process.
For single family purchases, a Builder can cobble together various lots. The attorney should ensure that the correct lots to be acquired are referenced in the P&S. The P&S should also reference any open order of conditions with the municipality that will need to be closed or will remain open. For a condominium, the attorney should review the condominium documents in advance of the P&S, or if the condominium documents are not available, then include a condominium document contingency clause in the P&S.
One-year Builder’s Warranty
For all new construction purchases, a one year Builder’s warranty is required. The Buyer’s attorney should review the Warranty to confirm who is issuing it, where a homeowner can file a warranty claim, what items are included, and what items are excluded.
All new construction purchases should have plans containing an engineer’s stamp attached to the P&S to be incorporated by reference. If a stamped plan is not available, the attorney should add a contingency clause ensuring the Buyer has a chance to review the plans to their reasonable satisfaction.
Certificate of Occupancy (“COO”)
The municipality issues a COO when the project is completed. The COO ensures that all permits have been signed off on by the municipality and any prior permits have been closed out. The COO sets the date of the closing. The closing is typically 7-14 days after issuance of the COO. COO language should be included in the P&S.
Mortgage Contingency Clause
The mortgage contingency clause is market dependent and is determined at Offer in coordination with the realtor. If a Buyer is in a competitive bidding process, the realtor may advise the Buyer to waive the mortgage contingency. If the Buyer does obtain a mortgage contingency, the timing is often complex, because the lender may only have a 90 or 120 day rate lock. The Buyer is advised to consult with their attorney and lender to work through the timeline.
For a standard purchase, a home inspection is done prior to the P&S. In new construction purchases, a property may not be built to the point where a home inspection can occur until several months after the P&S is signed. Thus, it is important to have a written request for a home inspection. Allowing multiple home inspections including a final walk through also is recommended since the completion of the construction work is ongoing.
Appraisal, and Re-Inspection
If the mortgage continency clause is waived, the attorney should add in a clause into the P&S that the Builder agrees to cooperate with the Buyer’s lender, including allowing access for an appraisal and a re-inspection.
A Buyer is almost at the finish line. The municipality has issued the COO, the lender has approved the closing, and then a final inspection/ walk through reveals items need to be completed. Adding a requirement to the P&S that allows for a Punch List of items to be completed after closing gives the Buyer leverage to require to the Builder to complete all remaining items and deliver a beautiful new home.
Ordinance of Law Coverage for Master Insurance Policies
Tuesday, September 12, 2017
Many lenders are now requiring that in older buildings, Condominium Association’s carry “Ordinance of Law” insurance coverage. Failure to obtain the coverage can delay or imperil a closing. Ordinance or Law coverage is extra coverage that pertains to the added cost of rebuilding, by enforcement of ordinances or laws regulating construction and repair of damaged buildings. Older structures that are damaged may need upgraded electrical, heating ventilating, HVAC and plumbing based on city codes. The lowest limit available is $25,000. There is typically an additional premium to add to the existing coverage.
Since it is the Buyer’s lender that is requiring the change and the Association has never had to address the issue, there is work involved to educate the Trustees about the necessity of the added coverage.
One insurance agent I contacted highlighted the importance of ordinance of law coverage, stating “[p]lease understand this is extremely important coverage. I’ve recently seen two claims where owners were assessed several thousand dollars due to a building code issue resulting from a claim.”