Buying new construction can feel like a dream come true.
The allure of sparkling appliances, fresh materials, and the promise of being the first to call a house home is hard to resist. But beneath the shiny surface lie significant pitfalls that buyers need to navigate carefully.
New construction deals often come with challenges that require close attention, patience, and expert guidance to avoid costly mistakes.
Contracts Are Developer-Friendly
When it comes to new construction contracts, they are almost always slanted in favor of the developer.
These agreements are specifically designed to protect the developer’s interests, leaving buyers with minimal safeguards. This is why having an experienced attorney is critical—someone who can read the fine print, ask the right questions, and push back where necessary.
Very often, the development has its own brokers, and buyers find the development online so they do not have the benefit of a broker representing them and helping them understand the issues and problems that could arise with new construction. The contracts are often ones which lawyers refer to as “contracts of adhesion” where there is no negotiating. The buyer either needs to accept the contract as written or go somewhere else.
Many buyers are unaware of the risks until it’s too late, particularly when the developer uses the down payment as funding to begin construction.
Complex Stages of Development
New construction deals can take many forms, depending on the project’s stage.
Buyers might encounter anything from an empty lot to a partially completed home. In some cases, the buyer is purchasing the land and waiting for the developer to build the house. This two-step transaction can create uncertainty, especially if the developer hasn’t completed necessary processes like subdivision approvals.
For example, a developer might plan to divide one lot into two or three, but approval from the local municipality could delay the entire project. If the approval fails, the earnest money, property size, and overall price can vary drastically. These variables create added risks and underscore the need for meticulous attention to detail.
Lender Holdbacks and Unfinished Work
Even when construction nears completion, problems can persist.
Developers often obtain a certificate of occupancy before completing all the work, leaving buyers with unfinished details like electrical covers, misaligned cabinets, or incomplete painting. These minor issues are usually captured in a “punch list”—a list of items requiring touch-ups or fixes post-closing.
The challenge? Making these fixes get completed after the sale. Reputable developers will agree to a holdback, where the lender holds a portion of the funds until all punch list items are resolved. Untrustworthy developers, however, will resist holdbacks, prioritizing their payment over finishing the job.
Without this safeguard, buyers risk years of delays, unfinished work, or, worse, substandard construction that leads to bigger problems like flooding or structural damage.
Protecting Yourself as a Buyer
One of the biggest pitfalls of new construction is that buyers fall in love with the property, specifically the model home. They love the idea that they will be the first to occupy the property and use the appliances.
Model units are polished and staged to perfection, but the actual home delivered may not live up to those expectations. This emotional attachment often clouds judgment, making buyers less inclined to scrutinize contracts and construction details.
It’s the attorney’s role to protect the buyer, but even the best legal efforts can hit roadblocks when developers and lenders refuse to provide buyer-friendly terms. Without proper protections in place, buyers can find themselves dealing with lingering issues long after closing, with little recourse.
New construction deals come with significant risks that many buyers overlook. From one-sided contracts to unfinished punch list work, the pitfalls are numerous and often complicated. Buyers must rely on their attorney, real estate broker, and lender to ask the tough questions, insist on safeguards like holdbacks, and confirm the developer delivers what was promised.
Don’t let the sparkle of new construction be a distraction for your clients. Encourage them to protect themselves, ask questions, and work with professionals who will advocate for their best interests. Make sure they read reviews about the developer so they know the quality of the company with whom they are doing business. Because when problems arise—and they often do—they’ll want to be prepared.
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella has represented thousands of home sellers and buyers, landlords, and commercial and investment property owners. For more information, schedule a consultation today.
