Inappropriate Contracting: Avoid FARBAR Contracts for Residential New Construction

There is an alarming trend in which residential builders, real estate agents and sellers enter into contracts for new construction using the “As Is” Residential Contract for Sale and Purchase. Also known as the FAR-BAR Contract, the document is a valuable tool in most residential real estate transactions. However, it is ill-suited for the new construction context.

Simply stated, the FAR-BAR Contract (created by Florida Association of Realtors and Florida Bar, hence FAR-BAR) assumes that the home exists at the time the contract is entered into. As a result, it fails to address many issues that arise during the construction process. These issues, combined with external factors such as supply shortages, labor shortages, construction and governmental delays, and increasing interest rates, have highlighted the inadequacies of the FAR-BAR Contract in the new construction context in recent months.

PRICE INCREASES

The cost of building materials has also skyrocketed in the last two years. Savvy builders account for this in their new construction contracts, often including increased building costs to the buyer or allowing the buyer to select alternate materials. However, the FAR-BAR Contract only addresses items such as closing costs, prorations and legally required disclosures – not increases in the purchase price due to external factors.

FINANCING CONTINGENCIES

Often when a FAR-BAR Contract is used for new construction, the buyer may waive their financing contingency, as many operative financing provisions do not apply to new construction projects. Buyers are also required to apply for and diligently pursue financing within relatively short timeframes under the FAR-BAR Contract. These timeframes cannot apply to new construction projects that could take a year or more. Buyers waiving their financing contingency also waive their right to back out of the contract without penalty if they don’t obtain financing by closing or the home appraises for less than they are borrowing. That could result in buyers forfeiting their deposit to the builder.

PUNCH LIST ITEMS

Typically, most obligations under the FAR-BAR Contract expire on the date of closing unless specifically mentioned. New construction contracts, on the other hand, often acknowledge that punch list items will need to be completed after closing, as noted in writing in a post-closing addendum. Unless that happens or the seller trusts their builder to come back after closing, those defects may take far longer than necessary.

REQUIRED DISCLOSURES

Florida law requires several disclosures be made in construction contracts depending on the specifics of a particular transaction. For instance, builders need to provide notice of the Florida Homeowners’ Construction Recovery Fund, provide pool safety riders, affiliated entity disclosures, energy rating guidelines and construction lien notices, just to name a few. Unfortunately, builders may not be aware of these specific disclosure requirements and may face penalties for failing to include these items.

The above issues are just a few of many that can arise when using the FAR-BAR Contract in the new construction context. The general framework of the FAR-BAR Contract does not adequately account for the unique aspects of a new construction project, and many provisions are difficult to apply should issues emerge. Therefore, while no contract is necessarily perfect, the contract should be tailored to appropriately fit the transaction to ensure that expectations of the parties are clear from contract formation through closing.

Alessandro Secino, Esquire, is a member of Henderson, Franklin, Starnes & Holt, P.A.’s real estate department. In addition to commercial and residential real estate, he has a developing practice in water rights law and works with the Condominium and Homeowners’ Association practice group. He may be reached at alessandro.secino@henlaw.com.