Normally, when someone purchases a home in Utah, the transaction is initiated using a real estate purchase contract, or REPC. In the majority of home purchases, the home is already constructed and is usually being lived in. The standard REPC document is designed to facilitate the buyer’s offer to purchase, the seller’s acceptance, and several elements of due diligence that should take place prior to ownership of the home being transferred from the seller to the buyer. The major components of the standard Utah REPC provide the opportunity for the buyer to secure financing for the home and to be satisfied as to the history and condition of the home.
Purchasing a newly constructed home is a slightly different process. When a person makes the decision to purchase a home that has yet to be built, the contract takes on a different demeanor. In the case of a new construction purchase, the contract has to govern the relationship between the buyer and the builder as the home is being built.
Prior to 2014, contracts for purchasing a newly constructed home were done using a Utah state-approved form called the Real Estate Purchase Contract for Residential Construction.
Buyers and their agents who are working with builders to buy a newly constructed home should use the New Construction Real Estate Purchase Contract (or New Construction REPC), which is the new state-approved form created by the Utah Association of Realtors. I will explain how the New Construction REPC works, and point out how it is different from a standard REPC used to purchase an existing home.
This is how the New Construction REPC works.
A buyer approaches a builder/developer, often in a new development where lots of homes are being built in phases of the housing development, and makes an offer to purchase one of their plans after receiving sales information from the real estate agent representing the developer. The offer to purchase is normally accompanied by an earnest money deposit, which demonstrates the buyer’s serious intent to proceed with the contract.
In the scenario where a new home is being constructed, the buyer would normally be required to provide a non-refundable construction deposit (depending upon the builder’s expectations, this deposit can be refundable; see the below section about negotiations) as a pre-requisite for the builder to begin building the home. This construction deposit (often about 10-20% of the agreed upon price of the home) represents a major financial commitment by the buyer to purchase the home, and also provides some cash flow to the builder that they can use to help finance their own construction costs. Once the construction deposit has been paid, there is much more confidence on both sides of the transaction to move forward with the build.
Remember, Almost Everything is Negotiable
Although there are accepted norms for most of the key elements of the New Construction REPC, including what amounts should be put down for an earnest money deposit and the construction deposit, it’s important to remember that almost everything in the contract is negotiable.
Also, there are often exceptions to many of the standards laid out in the New Construction REPC. That document is designed and intended to anticipate and guide the relationship between a buyer and a builder, and to establish a well-defined legal process and commitment by each to the other, but its various elements can also serve more as guidelines to govern the interactions between buyer and seller, and they can be adapted with some flexibility to individual circumstances.
For instance, I recently found a town home that I put an offer on in a new development in St George, Utah. The development group is well-financed, and they have the cash available to build out their subdivision in phases and sell them without requiring construction deposits. Because of this group’s financial stability, I only needed to give a $5,000 earnest money deposit for a home priced at $475,000. Also, because I will be paying cash for the property once it’s finished, the financing terms of my specific contract with this builder will not be the standard terms spelled out in the New Construction REPC. To put the home under contract, I simply had to demonstrate to the builder that I have the funds available to complete the transaction when the time comes to pay the balance due on the home.
Because the builder whose home I’m buying is confident that their homes will sell, and because they have the capital required to float the entire project for the time between when they started and when they expect to be completed, they allow buyers a great opportunity to put down some earnest money, begin construction, and pay for the completed home in its entirety once construction is finished.
Again varying from the methodology incorporated in the standard New Construction REPC, when I decided to purchase the lot and house plan that I’m having a home built on currently, the home was already under construction. The builder’s attitude is one of, “If we build it, they will come.” This means that by the time I entered into the contract, many of the preliminary elements of the due diligence process, soil inspections, etc., had already been done. In fact, much of the house had already been framed. In this case, the New Construction REPC has been adapted to be a blend of an existing home and one that has not yet been started.
This situation is common with builders who are building spec homes in areas where (and when) real estate growth is strong and predictable. Although you will still typically use most or all of the elements of the New Construction REPC, there may often be significant adaptation of both the terms in that document and the timelines, some of which may not even apply.
As I was looking for nightly rental investments in the vicinity of Zion National Park, I visited a few subdivisions in the St George, Utah area. When I compared the terms of the contract of one of the other subdivisions I researched to the one I decided to put under contract, I noticed significant differences in the terms of their contract. The subdivision I passed on was one that seems to be much less organized and that I found has already reneged on several commitments (amenity timeframes and other promises made about the community that make it attractive for nightly rentals) to people who were the first to purchase in the subdivision.
The point I’m making by sharing these experiences is that the use of a New Construction REPC will vary from builder to builder, and will depend upon their resources and their established methods of doing business with buyers.
Standard, Intended Use of the Utah New Construction REPC
In its intended use format, the New Construction REPC spells out three different phases (defining deadlines for each) involved in the purchase of a newly constructed home:
- Due Diligence: In this phase on the contract, the seller (typically a builder/developer) is obligated to disclose to the buyer any pertinent information about the land on which the home will be built, such as soil and drainage information, as well as any environmental issues that might affect the property. During this phase, the plans and specs (which have usually been available during pre-sale interactions between the buyer and the builder) will be formally presented. During the due diligence period, the buyer is normally required to show the ability to secure financing to the builder, giving the builder confidence that once the home is built, the sale can proceed. This pre-qualification is often done with the seller’s preferred lender, but it does not have to be. Often, buyers are allowed to use their own lenders or to demonstrate their ability to pay for the home without needing to secure a loan. The standard New Construction REPC is set up so that the buyer or the seller can cancel the contract within 4 days of this due diligence period.
- Pre-Construction: A deadline is built into the New Construction REPC for holding a pre-construction meeting, in which the buyer (usually accompanied by an agent) meets with the builder to review plans and specs and come to an agreement on how the ultimate completed home should look and what features it will have.
- Construction: This phase of the contract includes three deadlines
- Construction Loan Funding Deadline: In a case where a seller (builder) needs to have a construction loan to complete a home, that funding must be applied for by this date. In the event the seller is not able to qualify for a loan, the contract would normally be canceled, and the buyer would be entitled to a refund of both the earnest money deposit and the construction deposit. It should not be common for a seller to be unable to secure a construction loan. Usually the funding for a housing development has been secured before lots are even advertised for sale. To avoid a situation where a contract has to be canceled because of a builder’s inability to get funding, it’s a good idea to find out more about the builder and their reputation for stability before making an offer on a new construction home.
- Substantial Completion Deadline: Once the home has been built to the extent that it complies with occupancy requirements defined by the local government, the home is eligible for a certificate of occupancy. The deadline listed in this section obligates the builder to have the home ready for occupancy by that date. Failure on the builder’s part to meet this deadline puts them in breach of the contract, which can allow the buyer to ultimately cancel the contract. There are reasons why this deadline could be pushed back as the construction process unfolds. Change order addendums can often move the date back, as can unavoidable delays that can’t be anticipated such as natural disasters and other “Acts of God”.
- Settlement Deadline: The settlement deadline is not normally listed on the New Construction REPC as a specific date. Instead, it is listed as a number of days after the buyer has received from the seller a written notice of substantial completion. This is essentially the date when the sale transaction for the new home is completed, and the new owner takes possession of the property.
As described above, a builder or developer will often have their own variation of this New Construction REPC. Naturally, their version of a new construction purchase contract would likely read in a way that is most favorable to them, which means that it’s less favorable for a buyer.
For anyone who’s interested in buying a new construction home in Utah, it’s recommended to consult a real estate agent or attorney for help navigating this contract for your use and benefit.