Real Estate What to Watch Out For When Buying in an Unfinished New Home Development

By Ilyce Glink

Buying a new home has never been a riskier proposition -- particularly if you're buying in a development where fewer than half the homes have sold.

In last week's column, I addressed a reader's argument that when a borrower buys a home in a lemon development, the lender should assume some of the risk.

My feeling is that the buyer is fully responsible for deciding whether to buy a new home, which new home development to buy in, and which lot or property to purchase. Lenders merely provide the borrowed capital necessary to build or buy the home -- they don't benefit from the appreciation of the home over time.

But the reader asked about other issues that arise when a person buys a home in a new construction development that gets into financial trouble. Here are some important issues to think about if you're buying a new home in an unfinished new home development:

Certificates of Occupancy. In some parts of the country, you can't close on a residential new home purchase unless the local municipality has issues a certificate of occupancy for the newly built property.

If you are buying in a location where the certificate of occupancy is required, make sure you see a copy of the issued document before closing on the property. If the lender refuses to provide it, go to the local municipality and ask for your own copy. You may even want to insist on seeing the original certificate before you agree to close on the new home.

If you have closed on a new home purchase, and a certificate of occupancy should have been issued but wasn't, you should investigate how the closing was able to occur without this necessary piece of paper.

In some parts of the country, closing agents and settlement agents will not close on a new construction development unless they receive the certificate of occupancy. Some lenders will require that the certificate of occupancy be at the closing table before funding on the loan.

But if you live in an area where a certificate of occupancy is not required, you might have to close without one. If that's the case, you'll have to rely on a contract negotiated by a real estate attorney to protect you from an unscrupulous developer.

New Home Contracts. In some states, buyers and sellers hire attorneys to help them close deals. In other states, the only attorney a new home buyer ever sees during the whole process is the closing attorney. That closing attorney will be present at the closing and represents the buyer's lender. That attorney owes no fiduciary duty to anybody except the lender, even though the buyer is paying the closing attorney fee.

But when it comes to a new construction deal, it doesn't matter to me what the local custom is. You should have an attorney review your purchase contract before you sign it. New home contracts are notoriously one-sided in favor of the developer. If you do not have an attorney representing you and making changes to the contract to make it more even handed, you'll be stuck if there's a problem with your new home.

(If the developer or builder goes belly up, you may be stuck, with or without a strong contract, but you're best off being protected legally.)

Ideally, your contract should give you the right to inspect the home at critical points during construction, so that you know that the building is going up properly. Your contract should also give you the right to cancel the contract and get your money back if the developer is unable to build the home according the required plans, if the construction is shoddy, or if the developer failed to comply with certain contract requirements. You should also have the right to walk from the deal if the developer delivers the unit significantly late.

The developer may say that the company will not negotiate any changes to their "standard" contract. If that's true, you need to understand the risks associated with that purchase -- and a real estate attorney will be able to explain these risks to you.

Local Building Inspectors. In some parts of the country, government inspections of new construction developments can be quite casual or minimal as they're being built. Building inspectors might spend a couple of minutes at a construction site and only view random units in a large development.

Most cities are not equipped to have their building inspectors undertake detailed inspections of each home or housing unit that is going up. So you should make sure that you hire your own professional home inspector to inspect the home during construction and just prior to the closing.

Just because a home is newly built doesn't mean it won't have problems or be built incorrectly. You need to know what the issues are so you can create a punch list of items to be fixed and attach that punch list to the contract at closing.

Reputation Matters. If you're buying a new home or a condominium unit in a larger building, you should make sure you're buying from a reputable builder with a long tradition of quality.

During the last 10 years, many folks hung up a shingle and proclaimed themselves to be "quality builders." Some were; plenty were not.

Do your due diligence before purchasing from any builder. Use the Internet to search for news relating to the builder and the builder's finances. Check for complaints from other home buyers. Check with the city and state to be sure the developer is properly licensed, and try to find out if any complaints have been filed against that developer.

You might also want to knock on the doors of other homeowners in the development and ask if they've had trouble with the developer or if they know of any red flags. You'll find most homeowners are happy to share their experiences, both positive and negative. You should also knock on the doors of any other development the builder has completed in the past several years.

Bad things happen to good people, even if they take every precaution when purchasing a new home. The recent recession has been extremely tough on developers, many of whom have gone under because they couldn't sell enough homes.

But by looking at a few of these important issues ahead of time, you might be able to protect yourself.

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Real Estate | What to Watch Out For When Buying in an Unfinished New Home Development