With some home builders and developers buckling under the strain of slow sales, tight credit and falling prices, buyers worry about finding a financially sound seller that will be around to fulfill future promises.
"The answer is to ask, ask, ask," said Nick Retsinas, director of the Joint Center for Housing Studies at Harvard University. "If the home builder or developer won't or can't answer questions, it should raise red flags."
Despite that, many consumers fail to fully investigate their purchases.
"It's shocking how little due diligence buyers do," said Alan Lev, a developer who is president of the Home Builders Association of Greater Chicago, which has about 1,200 members, 200 less than a year ago.
With prices down, it may be a great time to buy -- but only if the deal is solid.
Here are a few considerations:
Do your homework
Investigate the builder or developer scrupulously. For publicly held companies, check audited financial statements filed with the U.S. Securities and Exchange Commission. Look for a low debt to capital and cash ratio. See if they are carrying vast tracts of undeveloped land, a heavy expense.
Check with the Better Business Bureau. If complaints exist, make sure they are few and minor.
Check county records for major lawsuits or liens for large sums.
Talk to officials, aldermen and real estate attorneys in municipalities where they have active developments. Does the builder have a good reputation for quality? Have they faced safety or building code violations?
Contact a title company with whom they do business to learn if there have been problems at closings such as waivers that haven't cleared, subcontractors who haven't been paid or unfulfilled buyer contracts?
Ask lenders if they would consider originating a mortgage loan for a property in the development. If not, it may be wise to look elsewhere.
Question the developer: How many homes have you sold? How long have they stayed on the market? Are assessed real estate values going up or down? If a condominium development , what is the ratio of owner occupants to investors? If it's less than 60 percent, it may become more of a rental community. Are there deed or association covenants that limit non-occupant owners?
Visit properties they have built. Ask owners if they're happy, if the builder has finished and fixed everything. Check-out resident blogs for the tone of the comments. Are they worried about quality of construction or management? Does a professional outside firm manage the property?
For condominiums, do the board meeting records discuss financial deficits, new assessments, other charges or problems? If it is a resale, state law requires the seller provide financial statements that may, however, not be audited. If it's a new building, check that assessments are reasonable compared to similar buildings.
For a custom-built single-family house, set performance milestones such as sidewalk construction or tree planting, and tie payments to their completion.
For any property, protect earnest money by placing it in escrow held by a third party such as a title company. State law requires that condominium deposits be placed with an insured depositary institution.
If the unit is partially complete, the buyer may be able to choose features such as appliances, flooring and countertops. Since upgrades are a major builder profit center, carefully price the items at a home improvement store. If the price isn't right or to protect against builder failure, it may favor the buyer to instead negotiate a price reduction on the base unit. If the buyer agrees to upgrades and must pay at selection time, place the money in escrow.
Establish a tax proration escrow account with the buyer's and seller's share for the first full year tax bill. This ensures that the bill is paid immediately regardless of the seller's financial situation later. If taxes aren't paid promptly, the tax collector may place a lien on the property. Don't accept cash or a price reduction from the seller in advance; it may not cover their share of the bill.
The warranty should cover defects for one full year so the buyer can check features, amenities, and systems during all four seasons. To overcome doubts about the builder, it may be prudent to make the manufacturer or installer responsible.