Arranging to have a new house built is a popular option for homebuyers, especially those who can't find exactly what they're looking for at a price they can afford on the pre-owned market; or who figure this is a good way to avoid the maintenance and repairs that come with an older home.
But all too often, problems arise after the buyer moves in. Perhaps the house wasn't "built right," or to the design specifications. Perhaps the promised upgraded faucet handles are missing, or the first rains reveal leaks in the window frames.
If you're in the market for a newly constructed home, you can potentially avoid some of these problems and protect your legal rights by:
- paying close attention to what both sides are agreeing to in the sales or construction contract, and
- making sure you receive an adequate home warranty from the builder against defects in construction.
Reviewing the Sales/Construction Contract for a Newly Built Home
You will no doubt be asked to sign a contract with the seller-builder, perhaps even before the land has been cleared for construction. Signing a contract is a good thing—a well-written one establishes your expectations and prevents misunderstandings.
You will, however, want to review the contract language carefully.
Terms the Sales/Construction Contract Should Include
Be sure to insist that the sales/construction contract include the following, to help reduce the risk of post-construction problems (and to save you from having to possibly file a lawsuit later):
- Detailed plans and specifications of the work. You want the builder's tasks and duties to be clearly delineated.
- Your right to give the builder a ''punch list'' of defects and omissions within a reasonable time after taking possession. Ten days after moving in should give you enough time to check for issues like cracked walls and missing light fixtures. Then it's appropriate for the seller-builder to have a reasonable time within which to fix the problems, like 30 days.
- A builder/seller's guarantee. This should promise that all work, nonstructural as well as structural, will be free of defects for at least one year, or that the builder/seller will provide a service warranty or insurance program that they've paid for from an independent company.
- Protection of your down payment from any financial problems the seller/builder might run into. Having the down payment placed into an escrow account (with a third party) is a good idea.
- A detailed list and description of components, fixtures, and finishes that are to be installed in the home. This should cover things like faucets, countertops, door knobs, cabinetry, and flooring. The list should also include manufacturer names and styles, so that they can't swap out a cheaper substitute for what you were expecting.
Can I Ask for Changes or Amendment to the Sales Contract?
Legally, this is supposed to be a mutual agreement, so you can always ask for changes before the agreement is signed. Practically, however, you are likely to find that the builder hands you a boilerplate set of paperwork and expects you to simply sign, with no complaints. If you're not prepared to negotiate hard, bring in a lawyer or real estate agent from the beginning.
Protection Against Home Defects; Seller Warranties
Some state laws, and almost all courts, recognize an "implied warranty of habitability and fitness for use," which makes the builder/seller responsible for any construction defects in the home that are not readily apparent to a buyer who performs a normal inspection.
The implied warranty doesn't require the seller to build a perfect home, but to build one that is not below the standard a buyer reasonably expects. The implied warranty covers:
- Reasonable workmanship, meaning that the home must conform to the standards of construction normally met in the locality in which the home was built. In most cases, this is concerned with structural defects.
- Fitness for habitation, which requires suitability for living purposes, and usually relates to the useful occupancy of the house or problems that would make the house unsafe to live in.
Some examples of defects that amount to a breach, or violation, of this implied warranty include sagging ceilings, cracked walls and foundations, a leaking roof, and faulty electrical wiring.
What Remedies Are Available to a Home Buyer After a Builder Breaches the Warranty
If a buyer tells the builder/seller of a breach of the warranty and the builder refuses to fix the defect, the buyer has several remedies, such as:
- Rescission, or cancellation of the purchase contract. This remedy is usually available only where the defects in the house are substantial and would require major effort and significant funds to repair.
- An award of money damages, which is the most common form of requested legal relief where there's been a breach of the implied warranty of habitability. Damages that the seller might have to pay the buyer are typically measured by (1) the lowered market value of the property as a result of the defects, and (2) the cost to repair the defects.
Ongoing Protection From Homeowners' Warranty Plans
One way to protect against having to pay for maintenance and repairs in the new home is to buy, or better yet negotiate to have the seller/builder buy, a "homeowners' warranty" or "new-home warranty," or to enroll in a warranty program.
This is not insurance. Essentially, it is a long-term home warranty that covers defects and repairs in most aspects of a new home, covering everything from a leaky roof to defects in floor finishes, during the warranty period.
In some states, new home builders are required to provide express warranties and required or encouraged to enroll in either a state-run warranty program or a private program that is state-approved. Typically, the builder-seller pays a registration fee and a yearly membership fee, plus a premium for each house built. These payments are normally rolled into the sale price of the house.
In almost all states, the buyer and the seller have an option to pay for a home warranty from a private company. The parties can negotiate who pays for the warranty, but if the builder-seller agrees to provide it, the cost is usually added back into the sales price.
The warranties vary from state to state and from company to company, but typically offer:
- a two-year warranty against defects in electrical, plumbing, heating and cooling systems, as well as cosmetic features like floor finishes and carpeting, and seals in windows in doors, that arise from the builder/seller's failure to follow approved building or installation standards, which are defined in the warranty itself, and
- a ten-year warranty on "major structural defects," such as cracks and leakage in the foundation, sagging steel support beams, and sagging roof supports, again that arise from the builder/seller's failure to follow approved building standards.
Under some new home warranties, the builder/seller has the responsibility to make repairs during the first one to two years of the warranty period, with the warranty company taking responsibility for the remaining eight years.
In other warranties, the builder is required to make repairs for the full ten years. Be certain to read the warranty carefully, or seek the advice of an attorney with experience in real estate law, before you buy the warranty or agree to accept it.