[Highlights and bracketed comments

Last year was rough for new home builders and buyers across the country. Housing starts declined month after month and builders large and small shut their doors - devastating consumers caught mid-construction and leaving others with little or no recourse for issues that popped up after move-in.

After several setbacks, Indianapolis member Paul Harlow was able to move in to his $255,000 home last August, with a promise from his builder that the few lingering problems - a dented front door, the wrong transom and two sink holes in his front yard - would quickly be fixed. One week later, the lumber contractor put a $36,000 lien on his property. Two months after that, the builder shut its doors.

Consumers who are able to obtain financing despite the economic climate should pay attention to this trend. You can still find a good builder, but take the extra time to do your research. “Home building is a very competitive business,” says David Jaffe, a spokesperson for the National Association of Home Builders. “A builder who doesn’t pay attention to quality, value and customer service won’t be in business very long.”

[HOT: Buying a home can be exciting, but it's such a complex transaction, technically and financially, that it can get you in trouble if you don't do your homework. Even some of the best educated people make serious home buying mistakes.]

As you start to create a list of prospective builders, check ratings on Angie’s List and make sure the builder carries the appropriate licenses and insurance. Talk to references, but not just those on the list from your builder, which is sure to contain only happy customers. “Go knock on random doors in one of the builder’s subdivisions, and ask how they were treated,” Harlow says.

Also ask the homeowner how their project progressed and whether the builder was responsive to questions and concerns.

Next, thoroughly investigate the builder’s finances. Check with your local courthouse for liens against the builder from subcontractors who have not been paid - a big warning sign of financial instability.

Before you sign a contract, contact a real estate attorney and ask for a “springing provision,” which allows you to pull out of the deal if the builder files for bankruptcy. Most builders don’t like to amend their contract, but if they want your business bad enough and are financially stable, such a provision should be acceptable. If the builder refuses, walk away from the deal.

[HOT: We also recommend "removing" any clause mandating Binding Arbitration, because such clauses block access to courts if disputes occur and protect your builder rather than you.]

Laws vary by state, but consider placing your deposit money in a separate, third-party escrow account. You’ll have more flexibility to terminate the deal if there is a bankruptcy. Another option is a construction loan, which becomes a permanent mortgage in your name once the house is completed and a certificate of occupancy is issued. The builder is paid in phases as work is completed and if they go bankrupt, you still own the property and don’t lose your deposit.

[HOT: Builders often offer incentives to use their own mortgage, title and insurance company. Beware of this tactic, since such vertical integration presents a conflict of interest that can result in inflated appraisals, concealed construction defects, or worse.]

You should also ask your builder for a third-party warranty, which will protect you if the builder goes bankrupt after the job is done. And don’t forget to research the warranty company, too.

The home warranty Harlow purchased from his builder is good through 2010, but the warranty company says they don’t cover any of the lingering issues. That’s not even his biggest concern anymore, however. Of the approximately 33 lots in the neighborhood, only eight have finished houses and a few were just getting started. “My fear is that another builder will come in and build sub-par houses that will bring down my home’s value,” he says.

by Angie Hicks, Angie’s List Magazine
01/01/2009

Source: http://www.angiehicksblog.com/extra-research-critical-before-hiring-builder/

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