Whether it's a first home, the "dream" home or a lakeside cabin, there are some dangers to watch for when building a home:
- Make sure the seller actually owns the property
- Check for restrictions. There may be ordinances that prohibit utility sheds or require screening for your beloved recreational vehicle
- If you intend to operate a business from home, find out if there are any municipal or homeowner association rules.
- The lot may be subject to covenants that dictate the size, type and color of home that can be built. In large new developments, a developer with several house models to choose from may allow only a certain number of a particular model to be built on a block.
- Is the lot served by utilities? If so, has the developer paid for them, or are there pending assessments?
- Visualize the area surrounding the lot once the area is fully developed. Will your idyllic view of the pond be blocked by the neighbor's porch?
The Purchase Agreement
Building a custom home usually involves making separate contracts with an architect and a builder.
Most buyers typically select a model from a builder. The buyer then chooses any modifications, much like choosing the options on a car.
The builder and home buyer then enter into a contract. Usually, the buyer purchases the lot and makes payments.
Regardless of the type of contract, a couple of long-standing legal doctrines come into play:
- Parol Evidence Rule: Unless fraud is involved - which is very difficult to prove - this rules invalidates any promises and representations the builder made before the contract was signed. All promises must be in the written contract to be enforceable.
- Statute of Frauds: This doctrine prohibits verbal modification of contracts involving real estate. Modifications to the contract must be in writing.
The contract with the builder usually contains "allowances." For example, a carpet allowance of $5,000 means that carpet selections costing up to $5,000 are included in the contract; anything above the allowance amount is extra.
Choosing items and dealing with details that regularly come up during construction can be very time consuming. Under the contract, a builder can charge the buyers repeatedly for any delays they cause.
Once your home is complete, it's time for closing. Bring your checkbook, with plenty of blank checks. Most closings are conducted by a professional "closer" from a title company or lending institution.
You should walk out of the closing with a clear title to the lot and home, and a large manual detailing all the warranties and how the appliances work.
If the closing takes place while there are unresolved issues between you and the builder, money should be put into "escrow," a special account where the funds can be held until a specified event (such as landscaping) takes place.
Although it varies from state to state, the responsibility of the builder for the buyer's problems can be summarized as follows:
- Warranty period: In most instances, the builder is obliged to deal with almost any problem not caused by buyer neglect for one year after closing. The one-year warranty is akin to "no fault" insurance.
- Statutory warranties: Some states have laws providing warranties on new home construction.
- Statutes of limitations: The buyer has a certain amount of time under state law to sue the builder for breach of contract and/or negligence.
- Statutes of repose: Many states have laws that extend a statute of limitations against a builder or design professional where the defects are hidden. To get this protection, an owner must act promptly once a defect is discovered.
Greg Bistram is a real estate litigator in the St. Paul, Minnesota, law firm of Briggs and Morgan.