The new construction subdivision contract and the cost escalation clause; what should you do?

The new construction subdivision contract and the cost escalation clause; what should you do?

The builder's contract and sales and purchase Agreement

​​Once you have identified the subdivision builder and the location that fits your liking and need, it is time to review the builder's contract. The contract is different, and it is in addition to the Sales and Purchase Agreement (SPA). 

A sales and purchase agreement in real estate is a binding legal contract between the buyer and seller of a real estate property - in this case, the builder. Keep in mind that although the standard SPA is used for most real estate transactions, builders may use a modified version of the same SPA. It is advisable to have your lawyer and real estate agents review the builder's SPA and contract.

The Builder's contract and your lawyer

The builder's contract is a large document with many terms and conditions to protect the buyer and builder even more so. As you may expect, the builder's lawyers have the terms and conditions drafted to protect the builders' interests. That is all the more reason you need your team of the lawyer, real estate agents, insurance broker to guide you through your most important purchase. You need to plan ahead of time and give your lawyer enough time to review the contract and advise you accordingly.

The complete terms and conditions of the contract are beyond the scope of this article. In this article, I'll be focusing on some crucial terms in the builder's contract.

What is the cost escalation clause?

First, you should determine if the contract has a cost escalation clause and the exact terms with the clause. Most people prefer knowing exactly how much they are paying for the purchase house. However, the cost escalation clause changes that and allows the builder to increase the price based on certain conditions. 

Your new construction home may take 12 months to 18 months to finish. If we assume, most of the construction goes according to the plan, and a complicated construction process does not get even more difficult by contractor, material, and weather condition delays. During this period, material prices may increase more than what builders have in their books, adding to home construction costs. Having the escalation clause allows the Builders to charge the buyer for the additional expenses.

It is not uncommon to get 20,000 - 40,000 additional charges added to the house's agreed purchase price. You may imagine the shock of such an unpleasant surprise. You need to know what is in the contract and make the decision that is best for you. 

Making the right decision

You should know that not all the builder have the escalation clause. Even if they do, the good news is some are willing to remove or negotiate the terms of the clause. If the escalation clause is something you are not comfortable with, you should discuss it with your real estate agents. It is all about the negotiations, and you have to make sure to hire real estate agents specializing in new home construction.

Keep in mind that you may have a hard decision to make. You may have heard it is said, "no deal is better than a bad deal." I always advise my clients, if they are not comfortable with the deal they are getting into, walk away. There are still other opportunities.

---

Author

The above Real Estate article was provided by David Khosravi, a leader in his field in North York, Willowdale Real Estate, Reach out to David via email: drdavidkg@gmail.com or by phone: 416.990.2424
Are you thinking of selling your home? I will be glad to share my marketing strategies with you.