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Contracts


You Need an Attorney

Hire an attorney who specializes in real estate contracts. A good lawyer is necessary to make sure you are protected when buying real estate. It costs much more to hire a lawyer to repair legal problems than it does to hire a lawyer to prevent the situations from occurring. When preparing contracts, specific legal words and phrases need to be used. You may think you can review or write a contract however a good attorney is needed to be sure your contract is complete, properly worded, and enforceable.

Put Everything in Writing

All legal agreements should be put in writing and signed by both parties. Verbal agreements are harder to prove and enforce. Verbal agreements may also cause more misunderstandings.

Building Contracts

Specifications and Plans

Any contract for building a home should contain detailed plans and specification giving the types of materials, grade, species, color, and product brands that will be used to build a home. If the specifications aren't detailed then you may not get what you are expecting. Schedules can be included in the specifications to show how various parts of the home are finished. For example window schedules, appliance schedules, room finish schedules. Allowances should describe how much money is budgeted for things the homeowner needs to pick out.

Allowances

Specify the allowances should be at builders cost or subcontractor's cost (rather than retail cost or marked up to include builder's overhead). The builder's overhead is already figured into the cost of building the home and should not be added in again as part of the allowances. Also, the builder should provide actual receipts or invoices to prove what was paid for items. Do not accept a price quote sheet (those sometimes show retail price but not the actual price a builder pays).

Deposits

Usually a deposit is paid up front to the builder. The contract should indicate how much the deposit is and what happens to the deposit if you need to cancel the contract. A deposit is mainly asked for so that the builder can make sure you are a serious customer. Avoid using your land as a deposit because doing so will put the title to the land in the control of the builder and this can make it more difficult to cancel the contract if needed. It is best if deposits are put in an escrow account and only given to the builder after work is satisfactorily completed. Your attorney can help you set up an escrow account.

Insurance

This clause says who pays for fire and loss insurance on the property while the home is being inspected. Also, do the subcontractors carry their own worker's compensation insurance? Does the builder have liability insurance? You may want the contract to state you get a copy of the builder's insurance certificate in case you need to make a clam.

Subcontractors

The subcontractors used to build your home can have a big impact on the quality of your home. You may want to have the subcontractors names listed in your contract.

Substitutions

Sometimes the specified product may not be available or may need to be changed. Specify any replacements or substitution must be of equal or better quality. It would also be a good idea to require homeowner's approval before substitutions are made.

Money Clauses

The total cost of the home should be listed in the contract. In addition, it is helpful to have a breakdown on when payments will occur and what work and materials are included in those payments. It is fine to pay the builder's share of the profit for work that is finished, but you don't want to pay the builder for more then the value of the work and materials completed at each phase. This payout breakdown may become helpful if you need to escrow money for work that needs to be finished. The payout breakdown is also important in the event you need to fire the builder and hire someone else. If you have overpaid for work that was done then you will have more problems completing the home with the funds you have left.

Also you may want a clause to make the final payment contingent on having the home satisfactory completed and having lien waives from all subcontractors and suppliers. If the home is not completed or has problems you'll want to put the money in an escrow account and have the builder paid under the condition that the builder completes the work that is still needed. Also, who is responsible for paying fees such as building permits, utility costs and other fees incurred while building the home?

Labor

In general there are two ways the cost of a home is calculated (fixed cost or cost and materials - see the hiring chapter for more details). For new construction a fixed cost contract is preferable because the total cost is agreed on before construction begins. If a "cost and materials" contract is chosen then you won't know the price until the home is finished and there is more room for padding the price of the home. The contract should specify all aspects of work. If the homeowner is planning to do some work that should be listed. The cleaning of the finished home, the grading, and the landscaping are all types of labor that might not be included if they are not listed in the contract. Be sure removal and disposal of debris or old fixtures is part of your agreement (especially if you are doing remodeling work).

Time Frame

It's a good idea to put a start date and completion date in the contract. If the home isn't finished within a reasonable grace period then you may want a penalty fee in the contract. For example if work goes past the finish date you may need to cover additional moving, rental, and storage costs. If the home construction doesn't start by a specific date then you may want the ability to cancel the contract. It is also reasonable to allow the builder additional time for things beyond their control such as weather delays. If you request a penalty fee for late completion then it is also reasonable for a builder to ask for the same fee as a reward for early completion. For example if you want $300 a day for each day past the completion date then it is fair to reward the builder $300 for each day they finish before the required completion date. This late/reward fee is common in commercial contracts and if you expect a penalty fee in your contract then a builder might ask for a similar reward fee for early completion.

Change Orders

Anytime changes are made to the home's specifications a change order should be created that describes the changes and the price of the changes. You should also get details on how change orders are calculated. Some builders add a processing fee for making change orders and some builders have a minimum amount that is charged for a change order. Also, if a change order is made to correct an error made by the builder then the customer should not be charged. Change orders should be created and signed before the changes are made so that both the builder and buyer agree on the change and the price.

Inspections

You should be allowed to inspect the home while it is being built. It should be clear that the builder will allow you to visit the site to see how work is progressing. If the builder wants to severely limit your access to the home during construction then this could be a warning sign. In addition, you will want to have a walkthrough inspection of the home. It is best to schedule this final walkthrough date several days or even a week before you plan to close on the home.

Warrantee

Any warrantee for labor and repairs should be stated in your contract. Most states have what are known as "implied warrantees". Usually if the builder doesn't offer a warrantee then by law the builder is obligated to provide an implied warrantee. The implied warrantee means the home is suitable to live in and the work done was of reasonable workmanship. Usually implied warrantees on homes last for 10 years. In some construction contracts the contract tries to waive your rights to implied warrantees. If you sign an agreement like this you may give up your right to sue the builder if your home is faulty.

Trees

You may want to list the trees that need to be protected and how they will be protected. If any protected trees are damaged then you may want to include penalties in the contract. If the builder is penalized for harming trees you care about then the builder may be more likely to make sure his workers are more careful around the trees you want protected.

Release of Liens

Before closing on your house, you should have signed lien releases from all subcontractors and suppliers how worked on your home. If you had paid all the money to your builder and the builder didn't pay the subcontractors then you may later find yourself liable for paying off those debts. Lien waivers are signed receipts that prove people have been paid. Lien releases should be notarized to prove that the real persons have signed the releases.

Building Codes

Building codes can vary from state to state and even from cities or townships within the same state. Most areas follow national building code guidelines. If you are building in an area that has little or no building codes then you may want to list a standard building code in your contract that you want the builder to follow. If building codes are not enforced in your area, you may also want to hire your own inspector to be sure the builder is following the code specifications you have agreed on.

Association Guidelines

If there are subdivision covenants that affect the construction of your home then you may want to list them in the contract to be sure the builder satisfies those requirements

Building Permits

All building permits should be applied for under the contractors name rather than your name. If the contractor's work doesn't pass inspection then this helps protect you from being financially liable for changes needed to pass inspection. Also, several permits may be needed for a project (such as a tree removal permit, grading permit, demolition permit, septic permit, building permit, etc). You local building department can tell you what types of permits are needed in your area.

Manufacturers Specs and Literature

Many of the items you buy for your home will have product information, specifications, and warrantee information included with the products. You may want to specify the builder must save the information for you and provide a convenient place to store these items.

Certificate of Occupancy

In some cities a certificate of occupancy is given by the building inspector when the finished home passes the final inspection. This means the inspector considers the home to be in a condition that it can be occupied. If these certificates are given in your city then you don't want to move in until after the certificate has been given for your home. Otherwise if an inspection is done after you take possession and building code violations are detected then you may be obligated to pay to have those violations fixed. If the inspection is done before you move in then the builder will be obligated to cover those expenses. Some builders try to add a clause to their contracts saying they can close on the home before a certificate of occupancy is given. Do not allow this clause to be in your contract.

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