Selecting an ethical developer to manage the design schemes of a new home is not like choosing a new coffee table from a catalog. It’s the type of life altering purchase that calls for due diligence. It happens all too often. Unsuspecting homebuyers assume that developers are financially stable, professional and will deliver a new home as promised.
Unfortunately, by the time most people realize there’s trouble on the home front, the damage has already been incurred. If only, the buyer had read the terms of their contract; if only the buyer had done their homework; and if only, they protected their purchase with title insurance and an escrow account.
With a glut of real estate properties on the market, developers face a myriad of financial setbacks: a surplus of unsold property, construction loans, as well as mortgage payments. The vast majority of consumers invest more time researching a vacation than the builder of their new home.
Losing tens of thousands of dollars is the potential peril of buying a property with an inept developer. This was the case for one homeowner, who was left with a $35,000 bill in cherrtwood slabs, a $40,000 down payment, no home or legal recourse.
In another illicit developer scenario, a lien was placed on a property forcing the new owners to pay off thousands in back taxes. It’s the underlying reason homeowners should research the background of any developer. While the indications of a risky builder are hard to identify, there are several areas to scrutinize the company’s previous track record and a few strategies to warrant financial protection:
Meticulously research the developer’s background
Determine how many developments the company fulfilled. Investigate if the builder owns any land with unfinished homes. If the percentage of vacant lots, undeveloped property, and incomplete projects are higher than the number of completed projects, it’s indicative of a developer with a high debt to capital and cash ratio. In other words, the homebuilder is encumbered with imminent financial responsibilities, and could file bankruptcy without delivering your home.
Although, many a developer, who has failed to deliver on a job, holds a current license, be sure to confirm the obvious. Also, confirm the developer’s background to determine which counties, he or she holds a license.
Contact the title insurance company
Title companies have an overwhelming blueprint on how development companies work. Because, these agencies are responsible for processing the paperwork involved in real estate deals, they provide a canvas of a developer’s transaction history. Be sure to contact the title company that the developer uses to close their property transactions, and gather the following information:
- Volume of transactions the title company has completed for the developer?
- Is the developer prone to smooth closings or ones riddled with problems?
- How many (if any) unfulfilled buyer contracts has the contractor had?
Contact previous homeowner clients
Instead of contacting the developer’s reference list, obtain a list of names of the homebuilder’s completed projects. Then, take the time to learn about previous customer satisfaction with the homebuilder. Try to visit development properties during the weekend when owners are more apt to be at home. Ask if they were content with the final product.
Check other resources
Conduct a look up on the Better Business Bureau site. If there are a few complaints, it could be a sign to proceed with caution. Also, check with your state’s Attorney General’s office and other local officials (i.e. Aldermen). Remember to contact local counties and municipalities to determine if the developer has a negative record or history in areas outside of your region.
Another good way to check the legitimacy of a developer is a mortgage. Contact a lending institution to determine if the developer is loan worthy. In cases, where the financing company says that they would not approve a mortgage for the developer, back away from the deal.
Interrogate the developer
Be sure to pose as many questions to the developer about the property, their work and the terms of the contract-as possible:
- Number of total home sales
- Span of time homes remain on the market
- How many occupants own their property
- Number of investor owned units in the development
Remember, if the number of total owned occupancies is fewer than 60 percent, the property could convert to a rental building.
What is the background of their subcontractors?
Ideally, a developer should have a slew of regular subcontractors who have been working with the company for a while. A homebuilder should be able to demonstrate a sense of expertise.
Have they had any building code infractions?
Since, this information is usually publicly available, this is a good way to gauge the developer’s credibility.
Are there any financial deficits the building faces?
Any question that a developer is unable to answer is a sign of a potentially unsavory or unsatisfactory home buy.
Be contract wise
Home closing statistics indicate that 33 percent of all closings have a snag, requiring repair prior to the final title sales transaction. Detail-oriented contracts are vital to minimizing risk. A well-written contract documents a representation of the business transaction (product or service) negotiation and defines each party’s rights, obligations and exclusions. Be sure to ask a developer to outline any risks associated with doing business with them.
For example, in California-if a homebuilder goes bankrupt, the homeowner can be held liable to pay for any outstanding debt. Moreover, the unpaid business or contractor has the right to place a lien on the owner’s property. TheConsumerJournal.com recommends, “Prior to signing any agreement, hire an attorney to review and provide professional advice on any state laws that could pose a potential financial duress and/or any ambiguous terms of the developers’ contract.
Opt for title insurance
Protection from unforeseen circumstances is what makes title insurance such a commodity. According to the American Land Title Association, nearly five percent of each dollar spent on title insurance premiums goes toward a claim. In other words, if it weren’t for title insurance, homebuyers would be susceptible to the muck and mire of title disputes, tax payments, etc. (From state-to-state, the rules of title insurance vary).
At the end of the day, the ultimate defense for buying a new home entails an extensive homebuilder investigation, investment in title insurance and an escrow account to protect your earnest money assets.