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Look Out! Two Things to Watch Out for in a Builder’s Purchase Agreement

First Time Home Buyer and Real Estate Law by Simon Offord, Esq.

Most home sales in Northern California use standardized forms for the purchase agreement.  For example, realtors in the Bay Area typically use either the CAR (California Association of Realtors) or PRDS (Peninsula Regional Data Service) forms.  The PRDS forms are commonly used in Palo Alto, San Mateo, and other peninsula cities.

Most real estate agents, real estate attorneys, and other involved in the industry are familiar with the standardized forms, and thus know what to look for and what to negotiate in the agreements.  However, a different issue arises when buying a home from a builder.

Builders typically have their own, custom purchase agreements.  Each builder will generally have an agreement that is a different from any other agreement, putting buyers in a difficult situation.  The agreements can be upwards of thirty pages, and as they are prepared by the builder, they tend to be builder-friendly.  As a result, it is very important for the prospective purchaser to understand the agreement they are getting into.  This article will discuss a few of the red flags to look for before signing a builder’s purchase agreement.  Future articles will discuss some of the other areas of concern.

Disclosures

The standardized forms typically require the seller to provide certain disclosures about the property after the agreement is signed.  The purchaser will then have a negotiated amount of time to review the disclosures, and if there is something they are uncomfortable with, they can potentially exercise a right to cancel the contract.

On the other hand, many builder’s contracts do not contain any contingency period regarding the disclosures about the property.  Instead, builder’s contracts will typically state that the purchaser has already had a chance to review the disclosures and accepts anything contained therein.  Thus, the situation may arise where the purchaser is handed the disclosures on the date of signing the contract, and may feel pressured into entering into the agreement without having adequately reviewed and investigated the information contained in the disclosures.

As a result, once the agreement is signed, the purchaser is extremely limited in the ways he or she can get out of the contract.  For that reason, it is extremely important for the purchaser to understand everything he/she can about the property before entering into the agreement.

Financing Contingency

Many builder’s contracts required the purchaser to use a certain lender, or at least apply for a loan from a particular lender.  In return, the builder will sometimes provide the purchaser certain concessions for using the builder’s lender.

The area to watch out for in the builder’s contracts is that many times, there is not a true financing contingency for the purchaser.  In the standardized agreements, the purchaser will generally have a certain amount of time to secure financing, and if they are unable to qualify or get the agreed-upon financing, they can get out of the contract.  However, the builder’s agreements do not necessarily provide this protection.

Instead, the builder’s contracts will oftentimes require the purchaser to at least qualify with the preferred lender, and then they are allowed to go out and seek their own financing.  However, if the purchaser is unable to get financing from another lender for whatever reason, they will not be able to back out of the agreement.

Conclusion

These are just two of the issues that can arise when entering into a purchase agreement with the builder.  Stay tuned for future articles that outline additional red-flag areas to watch out for when entering into a purchase agreement with a borrower.

If you are looking into purchasing a home from a builder and would like assistance reviewing the purchase agreement, or if you have any other questions about real estate legal issues, contact Brewer Offord & Pedersen LLP at (650) 327-2900, or on the web at www.BrewerFirm.com.

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