How to Protect Yourself When Buying a New Home

There's an old joke in the construction industry that if you want to build a home, you need an architect, a contractor -- and a marriage counselor. Many people think building a brand new house is a way to avoid buying somebody else's problems.

That may be true, but trust me, you're buying plenty of potential problems of your own. One problem is your own expectations. You may expect a new house to be a perfect house.

These days, houses are built so fast, and county inspectors are so scarce that quality can really suffer. Construction crews can be obnoxiously careless. I found old food wrappers and cola cans inside the walls when I did some work at my own house.

Paying more money doesn't necessarily guarantee that you'll be insulated -- or that your house will. Over the years, I've heard home-building horror stories from people building modest houses and mansions.

Unless you're a construction expert with plenty of time to spend at the job site, you should hire somebody to represent your interests during construction. I'm talking about an engineer or home inspector with experience scrutinizing new construction.

They should inspect multiple times: after the concrete is poured, after the framework is done, during the plumbing and electrical phases and once the house is finished. Before you sign a contract with the builder, make sure this inspector will be allowed onto the property during construction.

Some home building contracts forbid inspectors. You see, the builder owns the property until the house is complete. Some states may require builders to cooperate with your inspector. Find out.

Do Your Homework

If there is one time that you are going to do your homework, this is it. It's the most expensive purchase you'll ever make. The steps below are pretty involved, but well worth the time.

Find out if homebuilders have to be licensed or registered in your state and make sure yours is.

Check the builder's complaint record with your county and state consumer protection offices and/or the licensing division plus the Better Business Bureau. Also check at your local courthouse to see if the builder has ever been sued.

Visit homes constructed by the builder and ask the owners if they are satisfied. Also ask if the builder was good about fixing flaws. Visit entire developments and gauge the quality of the community centers, landscaping and other amenities.

Contact your city or county land planner and find out what the plans are for any vacant land near where you are looking to build.

Hire a home inspector or engineer to be your advocate during the construction process. Make sure your home inspector will be allowed onto the property before you sign your contract. Visit the job site a lot yourself, too.

Have an attorney review your contract with the builder before you sign it. Pay special attention to "mandatory arbitration clauses"" that deprive you of the right to sue the builder in court if you have problems. Cross them out if you can or at least note your objection in the margin. Also be aware that many builder contracts contain language that says you will receive certain features "or similar items." That gives the builder an awful lots of leeway to use materials you're not expecting. Use caution.

Have your engineer or building inspector review the actual architectural drawings for the home with you. What you see in the drawings is what you're getting. DO NOT rely on the basic floor plan printed in the sales brochure.

Keep your deposit on the property as small as possible. If you feel the need to walk away from the deal, you don't want to lose too much money.

Beware new home builders who promise you all sorts of "free" upgrades if you go with their financing package. It's possible you're paying for the upgrades in the form of hidden fees and a higher interest rate. See what kind of financing you can get on your own and compare.

Verify that payments you make for the construction of your home will be held in an escrow account dedicated to your project. If not, the builder could use your money to build somebody else's house, then go belly up before building yours.

If you take out a construction loan (which is like a mortgage for a house that is being built), negotiate your contract so that the builder has to get your signature before getting a "progress payment" from the bank. That way, you can make sure the builder really has made progress before tapping into more of your money.

Keep in mind, it's tougher to lock in a good interest rate when you have a home built. See if your bank will extend the lock-in period if there are construction delays. Alternatively, you can go ahead and close on the loan, but don't let the bank pay the balance of the money to the builder until you are satisfied that construction is complete.

Do a detailed walk-through before closing on your new home. Insist that major flaws be fixed before you'll go to settlement, even if you have a warranty.

If flaws do surface once you're in the home (and they will), document them religiously with a still camera or video camera.

If you have a choice of warranties, choose the fanciest one you can get and, if possible, one backed by an outside insurance company. That way you don't have to rely on the builder alone. Understand and exercise your warranty. Don't procrastinate. Document the date of every call for service. Put requests in writing. Builders are notoriously slow in returning to make repairs. Don't let your warranty time run out.

How to complain:

If you think work was not done to code, contact your county building inspector and ask for a repeat inspection. To complain about a bad builder, try your county and state consumer protection offices first. They can advise you if you need to contact specialty departments too.

It varies from state to state, but you may need to contact the home improvement commission, the department of labor and licensing, licensing and regulation, the department of professional regulation or the board of contractors. Also make your displeasure known to the Better Business Bureau.

Now, here's a great deal: in some states, if a licensed builder or contractor does shoddy work and won't make repairs, the state will pay you back. It's called a "construction recovery fund" or "construction guarantee fund" and it can be a lifesaver.

For an excellent pre-settlement check list prepared by the National Association of Home builders, click here.

For other pre-closing tips from the NAHB, click here.