New Construction Closing Dates

Further to this string of three posts, I think we need to talk about new construction closing dates. I received a call about ten days ago from a former client whose brother was pulling his hair out regarding a new construction purchase. He was TOLD that the home would be ready in July or August, or at least that is what he heard. All of a sudden he got a call telling him that closing was in 2 days.

It was a very large, well known builder of moderate priced homes in this area whose contract stated they had about 60 days to build it and then the buyer had 2 days after that to close it. The buyer’s first language was not English and relied more on what he was told and did not read the contract specifics. I jumped in and resolved the problem for him. All worked out and I won’t give the details of how I did that, as that is not the point of this post.

The point is that buyers of new construction must know that builders ALMOST ALWAYS have a condition in the contract that the buyer must close within X days after the home is completed. Unless the builder takes a contingency on the sale of your home AND a contingency on the fact that the sale CLOSES, you are required to close within 10 days or less usually of the time the home is completed. Builders often do not put close dates unless it is a spec house already built. They do not want to carry that house after it is completed, they want to close. Read your contract carefully with regard to when you will be required to close and do not rely on “proposed completion dates” or verbal representations by the sales people.

Usually there is NO PENALTY to the builder if the home is built later than expected and there is a per diem charge to the buyer if the buyer does not close within the X days of the completion date. Also the builder does not have to extend the close date, so paying the per diem may not even be a viable option for the buyer. If you cannot buy unless you sell, you need to be sure you understand the complexity of meeting these builder contract requirements. Matching a sale to a new construction purchase is extremely challenging and ridden with potential pitfalls.

About ARDELL

ARDELL is the Managing Broker of Sound Realty in Seattle/Kirkland. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has over 22 years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. Follow Ardell on Google+

Comments

  1. Good points, Ardell. From a buyer’s point of view, it seems that poor communication by all parties is commonplace due to the length of the new construction process. The transaction is no longer top of mind for everyone but the buyer.

    In our case, we can get out of our contract if the home is built 60 days past the original completion date. Of course, by that time we would have spent a considerable amount of money on upgrades that are unrefundable, and were finalized before lumber drop. In the current real estate climate, the process almost feels like the builder is no longer working in the contractual buyer’s interest.

    I just recently learned, and I’m not sure if this is specific to our builder, that completion is calculated in business days and not in calendar days. Some crucial knowledge that can throw a buyer considerably off schedule.

  2. Darren, the builder is almost never working in the buyers interest. He IS generally THE SELLER, so how could he work in the buyer’s interest? It’s kind of an oxymoron to think a builder represents a buyer’s best interest.

    As to calendar vs. business days, I don’t do much new construction and never have as I don’t feel I can add as much value as I do on resale. But here’s a fast fact for everyone using normal mls forms. FIVE DAYS or less automatically means business days and SIX DAYS or more automatically means calendar days. Talk about KISS…NOT!

  3. Darren, the builder is almost never working in the buyers interest. He IS generally THE SELLER, so how could he work in the buyer’s interest? It’s kind of an oxymoron to think a builder represents a buyer’s best interest.

    As to calendar vs. business days, I don’t do much new construction and never have as I don’t feel I can add as much value as I do on resale. But here’s a fast fact for everyone using normal mls forms. FIVE DAYS or less automatically means business days and SIX DAYS or more automatically means calendar days. Talk about KISS…NOT!

  4. Good issue to address. When I’m selling or listing new construction and I’ve listed hundreds and hundreds of builder homes, I always advice my clients to stay really flexible on the closing date, but the builder can not control all the issues, like inspections and weather, strikes, marches downtown, etc and the stated closing date is only a moving target. They try because the longer they take the more interest they pay, so they want to close as bad as the buyer does and I’ve never seen a spec builder ever allow a penalty to be assessed. attorney or no. The buyers have to close within days of the CO, but the builders can go out sometimes 60 days. So if you want the new construction, then you go along with the nature of the product and plan to stay with friends, relatives or a hotel if your home sells before your new house is ready or if you’ve given notice and must move. It’s all in the expectations of the buyer and if they’re prepared long ahead of time, it’s not usually an issue. And whatever you do, don’t count on the builder allowing you to put your things in the garage on a Friday night becuase the moving van will cost you $500 over the weekend. Most builders have been burned too many times and just can’t be flexible. (though sometimes tears will help) I had one builder refuse to allow the buyers entry even though he had his money but the clerk closed the counter in front of the runner trying to record. They had to wait until 10am Monday morning to move in. Not very good PR for that builder.

  5. Ardell, thanks for this great article. Buyers of new construction are always surprised at builder demands and omissions at the last minute. Lets define “complete.” Most reasonable people think complete is what they are buying in a state of completeness. As in “it is done.” In our part of the country “complete” is when the county or local jurisdiction issues an “occupancy permit.” This is a judgement by the local jurisdiction that the new home is inhabitable. If the builder has the “permit” to occupy then by contract terms the buyer is forced to settle within a required period of time. All major systems work and all has passed local code. In fact, in most cases it is never “complete”. On the final walk through we get to create a “punch list.” Hopefully it is short…sometimes very long with up to a year for the builder to complete. Good builders are committed to making it right. Bad ones may never be seen again. In a seller’s market, new consruction contracts are rarely negotiable. In a buyer’s market…maybe, A BIG MAYBE, a little flexibility, usually on price and incentives. Builders cannot guarantee completion dates and are rarely on time. Too many variables that are not entirely under their control. Building a new home is not a perfect science. Your readers should check out this article we published over a year ago. Good advice for buyers of a new construction home. Setting buyer expectations up front is very key. Having an experienced agent by their side is priceless.

  6. Russ Cofano says:

    All of these posts are excellent. One thing that Merv points out punch list. It is extremely important for any buyer of new construction to negotiate a “drop dead” date for all punch list items to be completed. Depending on the list, this should usually be within 30 days after closing. I have been successful in getting builders to agree that if they don’t finish the punch list in the specified time, the buyer can then hire their own contractors to do the work and the builder become liable for buyer’s costs incurred in completing the punch list work. In best case scenarios, we also try to get a holdback for the amount of money the builder estimates will take to complete the items so that the buyer has a fund to go against in case the builder does not perform.

    One other very important thing. At least in Washington (and I presume other states as well), there is little warranty protection for the buyer of a new construction home. I think we talked about this in another post here on RCG but it bears mentioning again. Make sure you get a written warranty for post-closing defects.

    Russ

  7. Russ Cofano says:

    All of these posts are excellent. One thing that Merv points out punch list. It is extremely important for any buyer of new construction to negotiate a “drop dead” date for all punch list items to be completed. Depending on the list, this should usually be within 30 days after closing. I have been successful in getting builders to agree that if they don’t finish the punch list in the specified time, the buyer can then hire their own contractors to do the work and the builder become liable for buyer’s costs incurred in completing the punch list work. In best case scenarios, we also try to get a holdback for the amount of money the builder estimates will take to complete the items so that the buyer has a fund to go against in case the builder does not perform.

    One other very important thing. At least in Washington (and I presume other states as well), there is little warranty protection for the buyer of a new construction home. I think we talked about this in another post here on RCG but it bears mentioning again. Make sure you get a written warranty for post-closing defects.

    Russ

  8. I am used to the builder warranty being full for the first year with a year end, one time, round up of nail pops and settlement cracks. That type of builder warranty along with a decreasing limited warranty for the remaining 2 – 10 years is my expectation. That is in all five states where I have worked, but again my experiences in new construction are limited. I avoid representing people in new construction, though do have one contract running now for completion in October.

    I’m pretty sure you can buy that last part yourself. There is a warranty company called 2-10 that I think provides that after the first year warranty for new construction. If the builder doesn’t provide it, look into buying it yourself. If you have the one year warranty, make sure to mark 11.5 months on your calendar, as too many people let it expire.

  9. 3 cents says:

    To Russ:

    I agree with your statement that a buyer get a “drop dead” date for all punch list items…BUT what if the date comes & goes & there are still some items unpunched? You correctly point out that unless you have a clause that puts a “consequence” to missing the date, the builder will tell you to ‘drop dead”.

    A good consequence clause for unfinished items is a reimbursement clause BUT it must go hand in hand with some escrow holdback . otherwise reimbursement means you have to sue the builder & who wants that?

    An escrow holdback MUST be insisted upon by a buyer’s attorney as “normal” and not a “best case scenario”. Builders have lawyers & they understand this reasonable demand.

    It is best to put the punchlist escrow language in the contract at signing so the buyer is not put in a badly leveraged position trying to negotiate the “best case scenario” at the closing table.

    As always, just my 3 cents

  10. 3 cents says:

    To Russ:

    I agree with your statement that a buyer get a “drop dead” date for all punch list items…BUT what if the date comes & goes & there are still some items unpunched? You correctly point out that unless you have a clause that puts a “consequence” to missing the date, the builder will tell you to ‘drop dead”.

    A good consequence clause for unfinished items is a reimbursement clause BUT it must go hand in hand with some escrow holdback . otherwise reimbursement means you have to sue the builder & who wants that?

    An escrow holdback MUST be insisted upon by a buyer’s attorney as “normal” and not a “best case scenario”. Builders have lawyers & they understand this reasonable demand.

    It is best to put the punchlist escrow language in the contract at signing so the buyer is not put in a badly leveraged position trying to negotiate the “best case scenario” at the closing table.

    As always, just my 3 cents

  11. Also important is what happens when the builder does not complete the home by the estimated date. If the borrowers lock expires due to the home not being ready to close, the borrower will pay either the original lock rate OR the current market rate, WHICHEVER IS HIGHER. This is standard industry practice by lenders even though it doesn’t seem fair to most borrowers. It’s important to choose a lock period wisely. Builder delays should be considered when choosing lock period. http://www.reddoorhomeloans.com/

  12. The borrower could shop at this point, especially if rates are more favorable and they were working with the builder’s preferred lender to start with.

Trackbacks

  1. [...] The above fictional conversation is a close representation of the recent sellers’ market and new construction. As she is very prone to do, Ardell has written an excellent post at RCG about the potential perils of new construction. [...]

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