Buying new construction Buying new construction (December 17, 2004)

Look for clear, detailed plans and spelled-out costs

by J. Robert Taylor, J. D.

I am considering buying a home that is still under construction. What are the main things I should be concerned about?

First, the standard purchase contract used by the real estate industry is geared to re-sale housing and not new construction, so if a standard form is used it may have to be substantially modified by your agent. If the form comes from the builder then you should read it very carefully as often these contracts contain terms that vary significantly from those contracts used in resales and may result in much higher closing costs to the buyer.

Second, buying a home that is not yet complete is somewhat difficult since the buyer cannot see or inspect the final product prior to making the offer. In many larger developments the builder produces models that buyers can view so that they can get a clear understanding of how the final product will appear. The purchase contract should obligate the seller to provide you with clear and detailed plans and specifications for the completion of the project for your approval.

Third, the agreement should specify the cost of adding any options not included but desired and your ability to specify colors or other finishes at no extra cost.

Fourth, the agreement should indicate the warranty being provided by the builder/owner.

Fifth, you should retain the right to inspect the building prior to closing so that any defects can be corrected prior to closing. An occupancy permit and/or final permit is not a guaranty that the construction is complete or is done without defects. Hire a professional building contractor to inspect the completed project and to assist you in creating a punch list for the builder to complete prior to closing. Prior to the expiration of any builder warranty or within a year after the purchase, whichever comes first, have the home re-inspected by a professional contractor who can determine if any problems have developed in any of the structural systems of the home. Often once the house seasons defects appear that were previously covered up.

What is the agent's duty of confidentiality? I recently made an offer on a property that ended up having multiple offers and I sense that my offer was shared with others; can agents do that?

Your agent has a duty to protect the confidentiality of your offer with respect to any other person outside of those you have specifically authorized your agent to release the information to. This would normally include the seller and the seller's agent. Once the offer is presented to the seller it is fair game under normal circumstances for the seller to share your offer with others.

In other words the seller has no duty of confidentiality towards you as a buyer, prior to entering into any contract with you. This means that the seller can share your offer with others in an attempt to get other potential buyers to sweeten their offers. In theory the seller could instruct his agent to share the offer with others in an attempt to obtain a more favorable offer.

An agent's duty under that law is to be a fiduciary with respect to his/her client with a primary obligation of care, honesty and loyalty. This means that the agent must follow the instructions of his client and must have as his/her sole objective to protect the interests of the client.

The law clearly indicates that an agent does not have a duty to reveal confidential information about another party where it would not impact the agent's fiduciary obligation to the client. Once your offer is presented it is no longer confidential.

It may not seem fair that the contents of the offer could be shared with others, but in reality there is no easy way to prevent that from happening, particularly in a highly competitive market. However, your agent has a clear duty to protect the confidentiality of your offer. It should not be shared with anyone unless you have specifically authorized the information to be released.

Consider the situation that is becoming common practice, where your agent "faxes" in your offer to the seller's agent. Once it sits in a fax machine of a large office where virtually anyone might view your offer, your confidentiality may be compromised. Make sure your agent presents your offer personally to the seller if at all possible and if the seller refuses to hear presentations, then your agent should present the offer directly to the seller's agent. At least then you will know that your offer has been appropriately delivered to the seller or the agent and protected from casual observers who may compromise your offer.

The standard form contract in our area has a clause that states that you agree to have the detail of your transaction disseminated on the Multiple Listing Service (MLS). Having agreed that such details can be disclosed to third parties may waive your right to have the transaction remain confidential. In order to avoid having your name and the purchase price in the newspaper and on various other quasi-public databases you can request that the title company recording the grant deed not record the county transfer tax on the face of the deed. This makes it more difficult for third parties to find out how much you paid. The sales price will be printed in the MLS database, but the buyer's name is not included in the MLS database.

Before offering confidential information to any person make sure that it is in your best interests to do so and make sure your agent follows the same policy.

J. Robert Taylor, J. D., a real estate attorney and broker for more than 20 years, has served as an expert witness and mediator and is on the judicial arbitration panel for Santa Clara County Superior Court. He is 2004 chairman of the Palo Alto district for the Silicon Valley Board of Realtors. Send questions to Taylor c/o Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA, or via e-mail at btaylor@taylorproperties.com.

E-mail a friend a link to this story.