Arranging to have a new house built is a popular option for homebuyers, especially those who can’t find exactly what they’re looking for at a price they can afford on the pre-owned market, or who figure that they’ll avoid the maintenance and repairs that come with an older home.

But all too often, problems arise: the house wasn’t “built right,” or it’s missing some things, like the promised upgraded faucet handles, or the design specifications weren’t followed exactly, or the first rains reveal leaks.

Reviewing the Sales/Construction Contract for a Newly Built Home

You will no doubt be asked to sign a contract with the seller-builder, perhaps even before the land has been cleared for construction. Signing a contract is a good thing—a well-written one establishes your expectations and prevents misunderstandings.

You will, however, want to review the contract language carefully. Be sure to insist that it include the following, to help reduce the risk of post-construction problems (and to save you from having to possibly file a lawsuit later):

• Detailed plans and specifications of the work so that the builder’s tasks and duties are clear.
• Your right to give the builder a ”punch list” of defects and omissions (like cracked walls and missing light fixtures) within a reasonable time after taking possession, like ten days, with the seller-builder having a reasonable time to fix the problems, like 30 days.
• A guarantee from the seller that all work, nonstructural as well as structural, will be free of defects for at least one year, or a service warranty or insurance program paid for by the builder/seller.
• Protection of your down payment from any financial problems the seller-builder might run into; having the down payment placed in escrow is a good idea.
• A detailed list and description, including manufacturer names and styles, of things like faucets, countertops, door knobs, cabinetry, flooring, and other components, fixtures, and finishes that are to be installed in the home.

Protection Against Home Defects; Seller Warranties

Some state laws, and almost all courts, recognize an “implied warranty of habitability and fitness for use,” which makes the builder-seller responsible for any construction defects in the home that are not readily apparent to the buyer when performing a normal inspection.The implied warranty doesn’t require the seller to build a perfect home, but to build one that is not below the standard that a buyer reasonably expects. The implied warranty covers:

• Reasonable workmanship, meaning that the home must conform to the standards of construction normally met in the locality in which the home was built. In most cases, this is concerned with structural defects.
• Fitness for habitation, which requires suitability for living purposes, and usually relates to the useful occupancy of the house or problems that make the house unsafe to live in.

Some examples of defects that amount to a breach, or violation, of this implied warranty include sagging ceilings, cracked walls and foundations, a leaking roof, and faulty electrical wiring.If a buyer tells the builder-seller of a breach of the warranty and the builder refuses to fix the defect, the buyer has several remedies, such as:

• Rescission, or cancellation of the purchase contract. This remedy is usually available only where the defects in the house are substantial and would require major effort and significant funds to repair.
• An award of money damages, which is the most common form of requested legal relief where there’s been a breach of the implied warranty of habitability. Damages that the seller might have to pay the buyer are typically measured by (1) the lowered market value of the property as a result of the defects, and (2) the cost to repair the defects.

Homeowners’ Warranty Plans

One way to protect against having to pay for maintenance and repairs in the new home is to buy, or better yet negotiate to have the seller-builder buy, a “homeowners’ warranty” or “new-home warranty,” or to enroll in a warranty program.

Essentially, this is a long-term home warranty that covers defects and repairs in most aspects of a new home, covering everything from a leaky roof to defects in floor finishes, during the warranty period.

In some states, new home builders are required to provide express warranties and required or encouraged to enroll in either a state-run warranty program or a private program that is state-approved.

Typically in these programs, the builder-seller pays a registration fee and a yearly membership fee, plus a premium for each house built. These payments are typically rolled into the sale price of the house.

In almost all states, the buyer and the seller have an option to pay for a home warranty from a private company. The parties can negotiate who pays for the warranty, but if the builder-seller agrees to provide it, the cost is usually added back into the sales price.

The warranties vary from state to state and from company to company, but typically offer:

• a two-year warranty against defects in electrical, plumbing, heating and cooling systems, as well as cosmetic features like floor finishes and carpeting, and seals in windows in doors, that arise from the builder-seller’s failure to follow approved building or installation standards, which are defined in the warranty itself, and
• a ten-year warranty on “major structural defects,” such as cracks and leakage in the foundation, sagging steel support beams, and sagging roof supports, again that arise from the builder-seller’s failure to follow approved building standards.

Under some new home warranties, the builder-seller has the responsibility to make repairs during the first one to two years of the warranty period, with the warranty company taking responsibility for the remaining eight years.

In other warranties, the builder is required to make repairs for the full ten years. Be certain to read the warranty carefully, or seek the advice of an attorney with experience in real estate law, before you buy the warranty or agree to it.

Questions for Your Attorney

• I don’t have a home warranty, my builder-seller has tried to fix my leaking roof three times, it’s still not fixed right, and he refuses to “fix” it again? What are my options?
• If I buy a new-home warranty for my house, is the cost tax deductible, like mortgage interest or property taxes?
• My builder and warranty company both say that the cracks in my basement walls are not covered by the warranty. Can I do anything to get them to fix the cracks?
• Can I refuse to pay a portion of the purchase price until the builder-seller fixes everything on my “punch-list” of items needing attention?