5 Ways to Protect Your Buyer When Building a Custom Home

I would preface my comments by stating that my comments don't apply to new construction homes where the buyer is purchasing after the home is completed.  For custom homes, here are my comments:

(1)  Before you retain a builder, review the public records looking for lawsuits, mechanic's lien claims and other problems.  Look for current or open building permits.  Contact prior and current customers.  Do the due dilligence necessary to select a qualified proferssional.  Low costs is offen most problems.  Verify insurance and licensing (if applicable).

(2)  Retain an attorney to review the construction contract prior to signing.  Never pay an upfront deposit such as 1/3 down for work to be performed.  For any deposit, make sure that it is held by an escrow company and not directly by the builder.

(3)  Require that the construction plans and building specifications be detailed and complete.  The requirements should be fully itemized.  The devil is often in the details.  Poor or incomplete specifications lead to disputes regarding change orders (ie. additions).  Address unknown conditions at the outset as opposed to during the project.  Require any change to the construction plans and specification be submitted and approved in writing by the owner and lender.

(4)  Require a detailed, itemized construction budget that includes a list of subcontractors and suppliers and the contract amounts.  Require draws to include a certification of work completed, a description of materials delivered and cost to complete signed by the general contractor and material subcontractors and suppliers (ie. use an dollar amount to determine who is material).  The draw requests should include conditional lien waivers stating that the subcontractor is owed X for work performed or materials provided and that any claim for mechanic liens is released as of the date of the draw request, conditioned on the payment of X to the subcontractor.  The draw should also include an invoice with the property address and a check with the invoice number as proof of payments made by general contractor (ie. no commingling or bulk purchases).

(5)  Use a title company with an experienced escrow department to provide title insurance coverage (including a date down endorsement and mechanic's lien endorsement).  Use vouchers with subcontractor and general contractor as joint payees.

(6)  Use a disbursing system that requires all draws to be approved by owner and builder prior to submission to the lender for funding and title company for disbursing.  Retain an owner's representative to measure work progress and physically inspect the work performed by the builder and subcontractors.  It can be your architect or there are specialists who perform this type of work.  Require weekly inspections and progress reports (including photographs).