Are you buying new construction in New Jersey? Real estate contracts for new builds are substantially different than the standard Realtor contract (in most cases heavily favored towards the developer).
Watch the video or read the transcription to learn about how new construction home contracts work in New Jersey! Buying, selling, or transferring real estate? Call us at 201-389-8275 or visit the Contact Us page for attorney assistance with real estate purchase and sales. Join our newsletter for regular updates on NJ real estate law.
VIDEO TRANSCRIPT:
This is Earl White, Real Estate Attorney. This is a video about the differences when you’re buying real estate and specifically in the purchase and sale contract.
When you’re buying a new construction property from a developer such as Lennar, Pulte, or Toll Brothers and a more traditional existing build standard sale on the market. The real estate contracts can be very different, and in fact are quite heavy handed in favor of the developer when you’re buying that type of property. So we’ll go over some of the major differences in this video.
First one to be aware of the difference is how the deposits are handled. You probably know in the beginning of a real estate sale, the buyer puts down what’s sometimes called the good faith, the earnest deposit, and that money’s held pending the closing, and at the closing contributed towards the down payment and closing costs.
Now for a new construction contract, that deposit is normally set to be what’s called liquidated damages. That means if the buyer for some reason, breaches the contract or can’t perform as they’re required to, under the contract, that deposit is going to be forfeited. In regular deals, the deposit normally is not automatically forfeited.
Normally the contract will be drafted such that in a regular sale, if a party can’t perform, then the other side has some sort of harm to them and you would compensate them for their harm if it went to court. Otherwise, it would settle between the parties about some amount of money.
It’s not just, “Oh, I made this deposit and I lose that deposit ’cause I can’t perform.” New construction contracts, usually the deposit is going to be called the “liquidated damages,” and if the buyer can’t perform, that deposit’s going to go right to the developer and the buyer’s going to be out of luck to have any chance to dispute that or get their deposit back because it’s going to be laid out.
That’s how it works in the contract. So you have to be very careful with new construction contracts. And at least be aware that that’s the risk you’re taking if something happens. And it’s a long process.
New construction, you could be under contract for a year if not two years. So you have to make sure that you’re aware of what you’re getting into with that deposit.
Next is the appraisals. So in a standard of real estate sale, oftentimes in the attorney review process will add in an appraisal contingency that essentially allows the buyer to renegotiate price in the event the property appraises for less than the purchase price.
I’ll try to get it in, but I’ve never been successful in getting an appraisal contingency in a new construction contract. So I’ll always try, but I’ve never been successful.
So the appraisal is essentially not going to be a relevant factor in terms of whether … It’s not going to be out for the buyer if the property under appraises.
In fact, the contract likely is going to be set up that in the event the property under appraises and that the buyer is then still going to be obligated to make up that money, assuming they don’t have some other cancellation, some other reason they can cancel the contract. It’s not going to be just based on the appraisal. And so that ties it to the next question. The mortgage contingency.
The new construction contracts, you usually, nine out of 10 times you will still get a mortgage contingency, but the difference is it’s a 30 day period to get from when you leave the attorney review process. So 30 days to get the mortgage approved.
The difference here is that the closing might be in two years. So even though you got proof in 30 days, you have to make sure that approval or your status to maintain this approval, such as your employment, your job, doesn’t go away because basically you have two years to maintain this.
Because if you don’t, once you get that mortgage permit in and have 30 days, if you lose it and can’t get a mortgage for whatever reason by the closing, as mentioned, that deposit is going to be damages and there’s going to be no … In regular sale, I’ll usually get language that says, “If you lose a mortgage commitment for reasons beyond your control, job loss, death, illness, that you can get your deposit back.”
But new construction contracts, that’s never going to get through. So you have to maintain. So the mortgage entity’s going to work that you get that 30 day period.
Once you’re approved in that timeframe, you have to keep it going or you’re going to lose that deposit in the end. Inspections also work very differently for new construction. Obviously, you’re not going to do an inspection in the beginning once you leave return review like a regular sale.
But some of the developers can be heavy handed in limiting who they will allow the buyer to bring to the property for the inspection. I’m usually pretty successful in modifying the new construction contract to allow for the buyer to bring a home inspector when they go to the property.
But you will see the contracts where they say, “The buyer may not bring anyone to,” you’ll see, “may not bring anyone to the property besides themselves.”
And I always found that to be a bit off-putting and unfair because the buyer’s not a licensed inspector. So how do they know what they’re going to look for?
But usually you can get that modified, but it’s definitely something you to watch for if there’s going to be a contractual limitation, limiting who can do the walkthrough. In terms of timing, obviously that inspection on new construction is going to happen once the build is completed down the line and not going to happen in the beginning.
And in terms of what you find at the new construction, the contract will always require to allow the developer to fix the items after the closing. So most contracts, any repairs that were required to be done, they’ll have to be done before the closing.
And if for some reason the seller could not make all the repairs, renovations, whatever they had to do, then the closing can be delayed or an escrow held. There’ll be some solution.
The buyer will have some remedy to either delay the closing or reach another agreement. With the new construction contracts, the seller almost always reserves the right to make repairs, renovations following the closing.
And one other difference is that for the new constructions, there’s always a 10 year home warranty, which within the first year of that home warranty, the home warranty protects the buyer. Within the first year of that 10 years, you get protection against any defects in workmanship.
So the developer’s position is you have a whole year where we’re guaranteed to fix any defects in workmanship for a year. So there’s no reason you should insist that we make the repair now.
So obviously I would prefer that the buyer has more leverage, but those contracts are always going to have some language in there that requires the buyer to close and give the seller the opportunity after the closing to repair whatever items were not caught or not fixed properly or built properly at the time of the closing. Another consideration difference in the contracts is that for a standard of sale, seller usually needs to deliver a final certificate of occupancy from the city where basically someone from the city comes out, looks at the property, says “There’s no code violations, open permits, or any hazards,” something to that extent.
For new construction contracts, they virtually always will have a provision that forces the buyer to close with a temporary or conditional certificate of occupancy. So this would be where the city says, “We’re approving the sale, but there’s some conditions outstanding that the developer has to complete within some period of time.”
So obviously as the buyer, you’d prefer to have a full certificate of occupancy ’cause that means there’s no issues outstanding relating to the unit. But a lot of times the developers will have that contract provision that lets a temporary one go. And why is the temporary one there?
The reason that that’s there is sometimes when you’re doing an entire project like a development, there could be something not specific to your unit, but something relating to the entire development that the city’s resisting to give a full CO. There could be a soil issue, there could be some overarching project that the city’s just not comfortable giving COs yet, but they’ll give temporary ones.
And also, to be honest, it can help the buyer too because usually if you’ve be waiting two years to complete the sale, you don’t want to wait another year to get a full CO. As long as the property’s largely done, you’d be satisfied to take the temporary CO and get the closing done so you can complete the sale and move on with your life.
Okay, so those are some of the key differences with the new construction contracts to standard real estate sales. If you need help with any real estate sales transactions, feel free to give me a call at 201-389-8275.
This guide applies to buying a fix-and-flip or rehabilitated home in Newark, Jersey City, Hoboken, Paterson, Elizabeth, Union City, West New York, Bayonne, East Orange, West Orange, North Bergen, Clifton, Bloomfield, New Brunswick, Atlantic City, and across Bergen County, Essex County, Hudson Couny, Union County, Morris County, Somerset County, Atlantic County, Monmouth County, Middlesex County, Ocean County, and Passaic County.