newconstruction

New Construction

PRENDERGAST & DELPRINCIPE

3540 W. 95th St. Evergreen Park, IL 60805 Ph: 708-424-7300 Fx: 708-424-8922

WHAT YOU SHOULD KNOW BEFORE YOU SIGN A NEW CONSTRUCTION CONTRACT IN ILLINOIS

1) Earnest Money Deposit.
Don’t give anybody any initial money unless you are absolutely sure there is an Attorney Approval provision (see below). Don’t commit on the contract to providing the balance of earnest money unless you: a) have the full amount liquid, and b) all attorney review and inspection issues have been resolved. It is not as easy as you may think to get it back, even if you are legally entitled to it. It is always a risk.

2) Attorney Approval/Modification.
BEFORE YOU SIGN ANYTHING!!! Make sure that your contract has a provision that explicitly states that your attorney will have at least five (5) to seven (7) days to review the contract. It is imperative that you have a licensed attorney review your contract. New construction contracts are notoriously long and skewed against the Purchaser. An attorney can sort through the legalese and put things into plain terms for you, so that you have a better understanding of what you’re getting into. Without a provision allowing your attorney to make changes to the contract, he or she is virtually powerless, and you are in effect STUCK. You can’t just get out of a legally binding contract.

3) Get It In Writing.
It doesn’t matter what you’ve been told verbally, in the world of real estate, if it is not in writing it doesn’t count. A handshake doesn’t cut it. Whether it’s substituting one counter-top for another, or a closing cost credit, memorialize it in writing. It could just be a letter from lawyer to lawyer, or a memo from the builder’s representative.

4) Mortgage/Financing Contingency.
Standard real estate contracts usually contain a provision that makes the entire Agreement contingent on the Purchaser’s ability to obtain a “written mortgage commitment” from a lender, by a specified date. This date is important.   Most Purchasers are dependent upon their lender to provide the necessary funds to close. So, if the lender can’t give you the loan the deal is dead. This provision allows the Purchaser to cancel the deal (and get the earnest money back), provided that they give written notice to the Seller before the specified date. Don’t assume you will get the loan; be sure your contract is contingent upon it.

The “commitment” is NOT a “Prequalification”, “Pre Approval”, or “Approval Letter,” which are just the initial step in the loan process. A written mortgage commitment is an entirely different document, which details the necessary conditions that must be cleared by the lender in order to provide the loan.

5) Reputation/Standard One Year Builder’s Warranty.
Your construction experience is intrinsically tied to the quality of the Developer/Builder: quality of character, as well as quality of craftsmanship. Know your Builder. Talk to others who have closed on and live in the properties. Ask hard questions: treatment, delays, response time, workmanship, etc. It’s the difference between a dream come true and a nightmare. You will get a Standard One-Year Warranty at closing, which provides you with the ability to contact the Builder to repair certain, very limited items, within one year from closing, with proper notice. This is only as good as your Builder. If they have treated you poorly during the buying process, they will ignore you afterwards. Get as much done prior to closing as possible.

Just before closing, you and the Developer/Builder will walk through the property and make up a “Punch List” – items to be completed within a reasonable time (e.g. 30 days) after closing. These items do not affect habitability – usually small things that can be done after you move in. Be thorough. The more comprehensive the list – the better.

6) Closing Dates and “Die Dates”.
The timing of the building process is hard to pin down. Developers never like to lock in an actual closing date. They can’t be sure that all their materials will get to them on time, problems with municipalities, labor issues, or how long to finish the project. So Developers usually give estimated closing dates. It is obviously better for a Purchaser to have a specific date stated, rather than an estimated time period. Then it’s easier to show unreasonable delays in the event of a default by the Developer.

Some, but not all, contracts will provide a date, usually around six months after the estimated closing date, that is considered the “die date”. (A date by when closing must take place or the deal is dead.) Everyone knows that there can be delays in closings, however at some point ENOUGH IS ENOUGH. Usually a Purchaser has entrusted the Developer with a hefty sum in escrow to entice him to start work. Well, the Purchaser doesn’t want to wait years for completion. If there is no “die date” specified, then the Developer could conceivably keep finding reasons to delay the closing for months and months. At some point the Purchaser doesn’t care anymore and just wants to move on and find something else, and take the earnest money elsewhere.

Again, Attorney Approval can usually resolve this.

7) Per Diem Fees.
On occasion Developers are burned by Purchasers who do not go forward with their deal in a timely fashion. To combat this, they penalize Purchasers for any delays of the Purchaser or his lender, relating to the closing date. So the Developer holds all the cards. He decides when it’s ready to close, and if the Purchaser delays for any reason, he issues a fine. (approximately two hundred dollars ($200.00) per day, for each day of delay.

A Purchaser might feel this is okay because they are sure they will be ready to close on time, however it’s not necessarily the Purchaser alone we are worried about. It is entirely possible the lender may not be ready to close on time. Typically during Attorney Approval, we try to eliminate this fine, with occasional success.

8) Real Estate Taxes.
The pro-ration of real estate taxes is critical, especially in Cook County. Taxes are paid in arrears; assessed valuations change every three years. It is absolutely critical that an attorney negotiate the proper percentages in advance, in writing. It could cost you thousands of dollars, if not calculated properly.

9) Certificate of Occupancy.
Most cities and municipalities have ordinances stating that someone cannot live in a property until they have come through and deemed it livable. Developers don’t like this. They want to get their money as fast as they can. So most contracts will specify that closing will be set once the architect deems the property is “substantially complete,” as provided in the blueprints.   This puts you in a position of possibly closing (paying for) a property you can’t legally use. Again, Attorney Approval can usually resolve this.

BOTTOMLINE: THE NOMINAL FEE YOU PAY AN ATTORNEY COULD SAVE YOU THOUSANDS!

© 2007 Prendergast & DelPrincipe

All writing on this website is provided for generic informational purposes and should not be construed as legal advice of any nature. An attorney or other appropriate professional should always be consulted before making decisions that may affect one’s personal, legal, or financial status.