Understanding Your New-Home Sales Contract

A man and two women discussing details of a project across a table, with documents in front of each of them.

Before you get the keys to your dream home handed over to you, you’re going to have to sign on the bottom line, initial here and initial there on a plethora of documents.

One of the most important ones? The new-home sales contract.

But before you stamp your signature on this stack of papers, it’s pivotal you really understand this all-important document.

To help you sort it out, we talked with two experts — Realtor and co-founder of Home Value Leads Brian Rayl of Dallas, Texas, and Broker Dianne Langston of Quality Real Estate Services in Fairfield, Calif. — to answer common questions about new-home sales contracts. Here’s what they had to say:

What is in a new-home sales contract?

BR: A new-home sales contract has basically the same requirements as a resale contract. It states the projected closing date, the terms of the contract, who pays which expenses and the obligations of both parties. 

What are some of the most important features of the contract I should pay attention to?

BR: The biggest thing to look for is refundability and the dates listed in the contract. Generally there will be several dates such as the date you need to finalize your choices at the design center, dates you need to have financing approved by, your proposed closing date, etc.

DL: The price (you) will pay, the length of time (you) have to apply for a loan and secure financing, any agreed seller concessions. Amount of earnest money or initial deposit, disposition of deposit if (you) fail to perform under agreement, remedies for default by buyer or seller, location of the lot the property will be constructed upon, exterior facade, colors, whether landscaping is included.

Why are these contracts important for buyers and builders alike?

BR: Contracts are designed to put all aspects of the home sale into a written agreement that both sides of the transaction agree to. It protects the builder by ensuring they will be paid for their work and protects the buyer by preventing the builder from selling the home to someone else.

How does a new-home sales contract differ from a resale contract?

DL: Resale contracts not related to builder sales are normally drawn by the State Association of Realtors attorneys. In California, this contract is written to give the buyer an option to rescind the purchase agreement within 17 days of signature for virtually any reason. It allows the buyer to have the property inspected by any professional of the buyer’s choosing. It states the seller will allow access to the property for these inspections. Seller is required by law to complete the Sellers Transfer Disclosure Statement, which requires the seller to disclose any known or suspected defects and repairs to property. These clauses don’t exit in new builder contracts.

Editor’s Note: Builders have a series of inspections throughout the building process, as well as a walkthrough before move in. Should buyers want a third-party inspection, they will have to obtain permission from the builder — those terms will be spelled out in a new-home contract.

How do these contracts change based on lender type? Is there a difference if a buyer uses an FHA loan vs. a conventional loan?

DL: The differences in lenders will usually center on incentives to use a lender that the builder has a relationship with. The seller may offer to pay the buyer’s closing costs and/or loan discount points to encourage the buyer to use his lender. Differences in FHA vs. conventional loan financing center around seller obligations and the appraisal value of the property. The buyer’s deposit can’t be forfeited if the property does not appraise for FHA financing. The property must also qualify for FHA financing along with the buyer. The property must meet minimum habitability standards.

Will the contract spell out the terms of payment or are those terms in a separate contract?

DL: The seller is concerned with the buyer’s payment only to the extent that he may be suspect of whether the financing exists and if the buyer can obtain it. The contract will only quote the payment if the rate can be determined and the seller is aware of the buyer’s down payment amount. Contracts normally spell this information out. The buyer’s payment most likely will not be a condition of the agreement.

What is some additional financial information that may be included in the contract?

BR: Generally a builder will provide incentives for using their preferred lender. Maybe they will pay part of closing costs or provide a free appraisal. However, those terms are never located in the contract itself. 

What if I need to sell my current home before I can buy a newly built one?

BR: Most builder representatives are not real estate agents and therefore cannot list your home for you. Many will have preferred agents that they work with that will offer to sell your home for a reduced commission. Your purchase, however, will not be contingent on you selling your home. 

Will the contract include information about easements and land, mineral, water rights, etc.?

BR: The contract will generally mention mineral rights. Most builders these days retain mineral rights and do not pass them to the buyer. The rest is usually covered in a title policy that will be separate from your purchase contract.

Will my design and options selections be included in this document?

BR: No. The contract will have a date on when these options need to be finalized. It will also define how much of those option costs will need to be paid at that time and if those option costs are non-refundable.

What if there are any delays in construction? How does this affect my contract?

DL: Delays in construction and Acts of God are generally deemed beyond the builder’s ability to influence. Contracts are not written to allow for per-diem charges by the buyer against the seller. The buyer will generally have to wait. There may be a reference to the seller’s ability to complete the build and remedies if the builder can’t finish and they may be limited to the return of the buyer’s deposit.

What should I keep in mind for homes such as condos, townhomes, etc?

BR: Keep an eye out for homeowners or condo association dues, transfer fees, management fees, etc. Generally the builder will retain control of the association until they are finished building and selling all of the homes. Also keep an eye out for specialty fees.

What if I need to make a change to something in my contract?

BR: Once the contract is signed, it can be very difficult to change anything in the contract. This is why it should be read carefully up front and reviewed by your Realtor and/or an attorney before signing it. Once signed by both parties, it is a legally binding agreement and can only be changed if both parties agree to the change. 

DL: Need is different from want. The buyer should ask for a copy of the agreement that will be utilized to reserve a property and take it home to review. The buyer should discuss with the seller’s representative exactly what their concerns are and ask if it is possible to negotiate their concerns. The builder’s decision will be based upon sales in the development, buyer’s financing and whether the change will modify the builder’s design. Customization of the builder’s product generally must be paid for in advance with these funds forfeited if the buyer fails to close escrow.

Drew Knight is a freelance writer for Builders Digital Experience (BDX). You can find him online at LinkedIn.

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