The Expert Podcast

So can a home builder working on a new construction for a pre-agreed contract cancel your contract or charge you more for the home after it's complete? Well in this current real estate market and also the supply chain issues of lumber and materials, new home buyers are finding that many of their contracts are becoming void where the builder will come back and say we want you to pay 50,000 more for this house or we're just canceling your contract outright. How is this possible? Is this legal?

What are the options you have as a home buyer? Well let's first look at how this is happening. Most new construction contracts have built into it what's called an escalation clause and the escalation clause basically says if these materials cost more than x amount percent of what we figured we can charge you more because the price went up or if the labor cost goes up more than a certain amount we're allowed to adjust the price of this house accordingly to reflect that cost. So every new home builder has this escalation clause likely built into their new construction contract and it allows they can substitute materials they can adjust the purchase price based on those escalating costs and there's also an inability to convey title which is another clause that will come up a little bit later with the process.

The most important thing is if your contract has an escalation clause it basically gives the builder an open checkbook to be able to adjust your price if those building costs go up. So first you have to decide did the building cost actually go up or is this builder just trying to add additional profit right and they'll have to justify how much the building costs went up during the time the contract was in for. So if you signed a contract in December of 2019 and the house was completed in January of 2021 and they want 20% more for the house, did the building expenses go up that much during that time frame?

There's also an additional clause called a duration clause and a duration clause allows the builder to say look we couldn't start or finish or make progress on this house within the time frame that the contract allows so we're just going to cancel the contract outright. Forget about escalation clause, forget about adding fees clause, we're just going to cancel it and the reason they might do that is because if you contracted for a house for let's say 300,000 and come to find out the building costs went up sure but now the market for that house is 500,000 they might cancel your contract just to resell it to somebody else for more money. Is that fair? Well it doesn't sound fair to me but your contract probably says they're allowed to do it so make sure you look at your contract.

How does this play out in real life? Well here's a story from South Florida where some buyers, the Misons, contracted to build a house for 297,000 dollars in February 2021 about a year ago. There were delays and permitting issues because of supply chain, even permitting issues have delays because the government agencies that do permits sometimes are understaffed they have to close down because of COVID many things come up so there's delays and now that delay allows the builder to say we couldn't start within the appropriate time frame so now we can cancel the contract but if you give us 60% of your equity keep you in the contract. What do you mean by that? Well now the house is going to be worth let's say 380,000 so you're making a profit you need to give us part of that profit so the buyers are gonna have to pay an extra forty thousand for the house. Is that fair? Well that's something for the court to decide.

Most contracts have an implied good faith component to them so you may need to get legal advice from an attorney. There's also part of a contract to keep you from being blindsided that's what's called force majeure where if there's some outside force that is unexpected that makes this building project become difficult or impossible or not be able to fit within the guidelines of the original contract the builder may be able to extricate from that contract based on them saying so.

The first thing to find out is do you still want the house? If you still want the house now look at if the actions of the builder are legal if they're legal you may not have too many options but you can't just take their word for it just because they interpret the contract to say a certain thing you want to get good legal advice to see if you have any options to negate them canceling contract or increasing the dollar amount.
Certainly it's fair if building materials went up dramatically which they did for the builder to say look we didn't anticipate that you know the lumber in your house was supposed to cost fifty thousand it's costing ninety thousand they're not going to eat fifty thousand if it went up two or three grand they'll probably eat that but if it did go up that much they're not going to eat it however if it went up 10,000 and they're looking as a windfall then that's something you might want to find out about right.

We're not attorneys we're not giving you legal advice you might want to get that from an actual qualified attorney but keep in mind you may have options if you want to still pursue the house and what are your other options are there other homes that are of interest is it worth paying the extra money certainly as this person said it's heartbreaking when that happens what do you do and you have to either start over or just take that builder at their word unless you can find out that you have valid legal pursuits.

If the material costs have gone up that's one thing or the duration clause says that the builder can cancel if they're unable to start construction well see if that's actually true did they start construction within six months and they just couldn't finish it so make sure that your scenario actually matches the contractual trigger that the builder is using as a clause to get more money.