Most builders have a final walk through with the buyer and the builder’s representative. Defects are noted on a “punch list”. The builder’s typical procedure is to repair or fix punch list items after closing. And many times if the builder is offering a warranty (typically one year), he’ll suggest minor defects (especially cosmetic issues) be “collected” to be fixed at about 11 months into the warranty (because they’re only going to be fixed once).

Having worked for a builder (and he was one of the good guys), I can assure you you’ll never have more leverage than you do before closing. Once the transaction is closed, the builder has been paid and your leverage drops to nil. His incentive to repair or fix items is largely a matter integrity and maintaining his reputation.

Additionally, most builders subcontract out actual construction. An electrical contractor handles the electrical, foundation contractor the foundation, roofer the roof, etc. Part of their contract is a provision that they will handle any rework or repair issues associated with the work they originally performed. Subcontractors are selected by bid plus how well they performed on the last project – including any repair or warranty work. Getting subcontractors to come back for warranty repairs after they’ve been paid can be like pulling hen’s teeth.

With today’s mortgage mess/credit crunch portending a downturn in home sales, there are builders (especially smaller builders) and subcontractors who are not going to be in business when it comes time for punch list and warranty work.

Sure you can always sue, but sue who? Chances are your builder has built “firewalls” around his business and limited his liability by setting up a corporation or LLC for the plat/project. Getting a return on the $8-10,000+ in attorney’s fees it’s going to cost you to go to court could prove difficult.

I suggest your most prudent approach, especially in today’s market, is to insist any significant repairs completed prior to closing.

But check your purchase and sale contract. If you’ve accepted the builder’s standard addendum(s) you may be in trouble. Chances are, there’s a clause in there saying you agree to close notwithstanding outstanding punch list items.

That’s one reason why an experienced, expert agent would have recommended a home inspection even for a new home (builders generally hate having a home inspection). As part of the home inspection contingency, your agent would have protected you by required repairs be completed as a condition of closing overriding any provision to the contrary in the builder’s standard addendum.

If you or your agent missed that potential trap in the builders addendum, hopefully you’ve also saved some money on representation (your agent). You might need that money for repairs or to consult your attorney.

Representing a buyer client purchasing a new home, we’d drafted a purchase and sale agreement from standard MLS (multiple listing service) forms. Then came time to scrutinize the builder’s “standard” addendum.

Ever notice how many new home builders seem to have disjointed addenda? They don’t flow. Seems like the result of one, or both, of two things: they saw something in some other builder’s contract they liked, or they got sued for something and don’t want it to happen again. Presto… a new clause added.

I digress. This builder’s addendum looked familiar. I realized I’d seen it or something very similar four or five years earlier. Now I was suspicious. And then I found it, tucked into a long, seemingly insignificant paragraph.

The clause that says (and I’m paraphrasing here):
in the event of any dispute, the builder reserves the right to return the earnest money to the buyer and terminate the contract.

I was surprised because this was ground covered four or five years ago – an illusory contract. I’d suspected it the first time I came across the clause and run it past our corporate attorney (while I was with John L Scott – so you know who).

Sure enough, he confirmed it: the clause rendered it an illusory contract, unenforceable by either party. Naturally, I struck the clause and we proceeded to negotiate other terms.

The builder’s agent didn’t object to removal and didn’t seem surprised at it’s the presence. I didn’t think much about it until now, now that it again popped up four or five years later.

What if the seller included the clause making the contract illusory on purpose?

Most buyers (and unfortunately many agents) aren’t going to recognize an illusory contract (let alone know the ramifications). They’ll think they have a binding contract. If everything goes as planned, the sale will close as anticipated – regardless of the validity of the contract.

If a dispute arises, they can back out at no cost to themselves – besides, it’s an illusory contract, unenforceable by either party.

If they get caught, that is, an astute buyer or their agent calls them on the clause, they can remove just say, oops… and be in no worse position.

Let me make the usual disclaimers – I’m not a lawyer, and am not providing legal advise. Consult your own attorney, your mileage may vary, etc, etc.

But check the addenda fine print. If you spot language similar to the above, you may just want to ring up legal counsel for advice.