Home building contracts vary considerably, so it is a good idea to get a sample home building contract from all the contractors and home builders you are taking bids from. Look over the contract and have your attorney look over it as well. Here are a few red flags and green lights to look for as you comb through home building contracts.
• A complete and detailed list of all the materials to be used in building your home
• A waiver of subcontractor liens, so that if your home builder neglects to pay a subcontractor you cannot be held liable
• A description of the work including reference to your house plan number and date
• Terms of payment including a projected schedule of withdrawals
• Completion timeframes
• A clause stating that variations to the agreement must be in writing and signed by both parties
• A warranty of at least one year on all work and materials, but five or ten years is better.
• An exact price that the home will cost to build
• A specification that the owner receives a list of the subcontractors, which the owner has a right to decline
• A list of all the contractor’s obligations to the buyer
• Specifies who is responsible for workmen’s compensation and general liability insurance
• Specifies who is responsible for fire insurance and damage insurance to the home site
• An explanation of the owner’s right to terminate the contract
• An explanation of the builder’s right to terminate the contract
• The biggest red flag is an arbitration agreement. Anything that states that the buyer is wavering litigation rights, or giving up rights to have a dispute litigated in a court of jury trial, should be headed for the waste basket without a signature. Never sign anything like this. While some builders see nothing wrong with this clause there is a whole lot wrong with it in practice. Many of the nation’s absolute worst corporate builders use these clauses to avoid lawsuits on lemon houses. Just say no to arbitration clauses.
• A time and materials contract may not be in your best interest. These contracts are designed to protect the builder, at the expense of the home buyer. Rather than express an exact price for labor and materials, they allow these numbers to be flexible, based on man hours and the current price of materials. If the price of lumber rises, your home may cost a lot more than the estimated cost. If subcontractors take an unusual amount of time, you pay for their slacking off. In addition, since the contractor takes a certain percent of the cost of building the home as a fee, he raises his fee for the waste of time as well. In these circumstances instead of sharing the expense, the contractor actually makes more money for striking a poor bargain on materials, and allowing the subcontractors to take their time.
It is very important to take any and all contracts to your attorney before you even consider signing them. Do not allow anyone to rush you on the decision to sign a contract. It is common practice for many businesses to hand you a document and a pen, and point to an x and say, “Just sign here,” but you do not have to do so. Instead tell them you wish to have your attorney look it over first. It is a good idea to request a sample home building contract with your bid, so that you can compare the contracts long before it is time to sign them.