This article is the fourth in a series on new construction. The contents of this series of articles apply to commercial as well as residential projects.
When structuring the contractual relationship between a buyer and a builder, one of the first considerations is: On whose land will the project be built? For, if the builder is building on land owned by the buyer, we are addressing a pure construction contract, where if we are building on land the builder owns, and he will convey title at the end of the project, we are addressing both a construction contract and a real estate purchase contract. and a different set of issues will need to be addressed.
Building on land owned by the buyer
When building on land owned by the buyer, the buyer will own the improvements throughout the construction process, and ultimately control legal access to the site. If a falling out occurs between the builder and the buyer, the buyer can remove the builder from the job and complete the project with another builder.
Typically in this instance, the buyer will pay the builder in installments as the improvements are completed. As a result, the buyer will have to obtain his own financing and his own insurance on the project. The buyer also needs to assure that he has not paid more for the improvements in place than they are worth at any point in time, for if the builder walks off the job the buyer must have sufficient funds remaining to complete the project with another builder. Finally, the buyer needs to make sure all subcontractors and material men are paid with each draw, so that mechanics liens do not attach to the project.
Building on land owned by the builder
In a situation where the builder owns the land, the buyer’s is simply buying land, building and other improvements at the conclusion of the construction project. In this instance, the builder wants a significant down payment from the buyer both to show the buyer’s bona fides in performing under the contract, and also in some cases to finance the construction project. But the buyer must realize that this is basically an unsecured loan to the builder, and in the event of the builder’s default of the contract, or a contact dispute, the buyer will have a hard — perhaps impossible time — recovering those funds from the builder.
Under this type of contract, the buyer will not pay installments throughout the construction project, but rather the builder will finance the project himself or with third party funds. The builder will insure the project through closing.
The issue with this type of contract is that buyer loses control of the project: He can’t speed construction, control the job site, or assume control of the property in the event of the builder non-performance.
Also in this type of contract, the buyer needs to protect himself as to quality of title, closing prorations, and other issues typical in a contract for the conveyance of real estate.
Buyer conveys lot to builder
In some instances, the buyer will own the land at the beginning of the project, but convey title to the builder as a sort of down payment. At the end of the construction project, title to the property is then conveyed back to the buyer. The issues in this instance are the same as “building on land owned by builder,” set forth above, as throughout the project, the builder will own the land and the improvements.
Know the type of construction you intend to undertake, and use a contract crafted to protect yourself in that circumstance.
This article is one in a series on the Finney Law Firm blog on new construction. Read more here: