12 Things You Need to Look for in a Pre-Construction Contract

If you are purchasing a pre-construction property, the contract is the only thing protecting one of the largest investments you will ever make. Not only do you want to check it thoroughly, you will also want input from an experienced real estate attorney to ensure that you are properly protected.

Important provisions of a pre-construction contract include:

1. Standard clauses – Your attorney can tell you if all the standard clauses are included in the contract. They can also tell you if it is applicable for the area you are buying in. Furthermore, they should be able to tell you with any non-standard clauses that may be of concern.
2. Seller – The name of the seller should be the legal registered owner of the property.
3. Title transfer – Some contracts give the developer time to transfer title after final possession. You want the property title transferred into your name as soon as the sale closes.
4. Mortgages, liens, taxes – Once the property title has been transferred to you, be sure it is clear of any mortgages, liens or taxes incurred by the developer.
5. Property description – The pre-construction contract should provide specifics on the land parcel and home size. If you are buying a condo, it should include the unit number, floor plan with the room dimensions, etc.

Addendum on the Important Provisions of a Pre-construction Contract:

1. Price – The contract should detail the total price of the home, payment terms and method and payback specifics if you are using developer financing.
2. Adjustments – If the contract has an adjustment clause stating that the developer can increase the price by a fixed percentage at closing, be sure that increase is tied to things that can be documented such as a rise in raw materials or labor costs. If you are paying cash, ask the developer to remove this clause.
3. Timeframe – There should be a start and a finish date in the contract for construction of your new home. You may want to add penalty payments if the developer is late in delivering the property after a certain date.
4. Building materials – The pre-construction contract should state the quality of the materials and finishings that will be delivered. Be sure you do an inspection prior to closing to ensure you have gotten what you paid for.
5. Fixes – The contract should include a timeframe for fixing any problems you may encounter with the construction work.
6. Assignment – Check the pre-construction contract for assignment rights. You may want to assign the contract to another buyer before you close but not all contracts allow this.
7. Withdrawal penalties – If you back out of the sale after you sign, your contract may stipulate certain financial penalties. Make sure you understand and can live with these.