by Maurie Backman | Updated July 19, 2021 - First published on May 30, 2021
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When building a home, negotiating this clause in my contract saved me a lot of money.
Once my husband and I made the decision to grow our family, we knew the starter home we were living in wasn't going to cut it. That's when we decided to purchase a new-construction home.
Some new-construction homes are presented to buyers once they're fully built. So while you get the benefit of owning a home that has never been lived in, you miss out on the opportunity to customize it. However, the home we bought was built from the ground up, and we got to decide how many bathrooms we wanted, what type of flooring we wanted, and what paint colors would grace our walls.
Of course, buying new construction is generally more expensive than buying an existing home, especially when you're making comparisons within the same neighborhood. So my husband and I wanted to make sure we weren't getting in over our heads. As such, before we signed our purchase contract, we read it very carefully. And with the help of our lawyer, we got one clause removed that otherwise would have cost us a lot of money.
Keep reading to learn more about the escalation clause and why it may make sense to try to get it removed.
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When you buy a new home that's being constructed, it's common practice for builders to put an escalation clause into a contract. That clause states that if the cost of construction comes in higher than expected, the builder has the right to pass that higher cost onto the seller, up to a certain percentage.
Our builder, for example, wanted to include a 10% escalation clause, which had the potential to make our home cost 10% more. We said no.
The price we agreed to pay for our home was, in our minds, a fair one. And we weren't looking to go higher. Our builders pushed back, but our lawyer made it clear that we'd walk away from the deal. In the end, the builders backed down, and the clause was removed. That, in turn, prevented us from potentially having to pay a lot more for our house.
Escalation clauses for new construction can be a particularly dangerous thing in today's market. This is especially true when the cost of lumber and other building materials seems to be going nowhere but up. If you're buying new construction today, be sure to look out for an escalation clause in your contract and aim to negotiate it.
That said, at the time we bought our home, it was a pretty even housing market. That means there was a decent supply of inventory. On top of that, we weren't particularly desperate to buy new construction. Rather, the opportunity just happened to present itself.
These days, however, the housing market is extremely tight. So sellers and builders have the upper hand. As such, while it may have been easy for us to get that escalation clause removed from our contract, you may not have the same luck in today's market. If that's the case, you'll need to make sure you have enough wiggle room in your home-buying budget to potentially pay more for a house.
Don't let an escalation clause derail your home-buying goals. If you can't negotiate it out of a contract, make sure you're able to not only afford that higher price, but also qualify for a high enough mortgage that allows for it. The last thing you want is to get your heart set on a new-construction home, only to realize you actually can't swing it due to an escalation clause.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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