Home Buying in Freehold>Question Details

Lia, Home Buyer in New Jersey

We are in attorney review for new construction. The builder has a clause, which states that in the event that

Asked by Lia, New Jersey Tue Apr 15, 2008

there is a rise in the cost of materials, he will pass the additional cost to us. We have accepted that term with the stipulation that he must be able to prove that there was an increase in cost. He will not agree. Any ideas how to get around this?

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Since your post was in April, I assume you have already made your decision. If you have a chance to update us, please do.

If you have not made a decision, my advice would probably be to walk....and let the builder know that you are willing to revisit the possibility of putting the deal back together if and when he can agree to modify this clause. He may come back; he may not. If not, it wasn't worth the risk.
1 vote Thank Flag Link Fri Jun 13, 2008
Deborah Madey, Real Estate Pro in ,
I've worked for home builders for YEARS, and not seen this clause- typically, they reserve the right to subsitute materials for "like" materials (subjective, but much better than an open ended increase that you'd have to absorb). This sounds like a dicey proposition for you- I'd take a pass.
Web Reference: http://optionsrealty.com
1 vote Thank Flag Link Fri Jun 13, 2008
As a representative of a major home builder for years, I can assure you it is unreasonable for a builder to ask for an escalation clause (to raise the price) in this market. Even when the market was strong for sellers, few buyers will agree to this. I hope you did not. It is just another point of negotiation. They have no problem trying to get more money from you. Don't agree to it. Most builders will still sell you the home. If this builder will not, then he is not in tune with the current buyer's market and walk away.
0 votes Thank Flag Link Mon Feb 8, 2010
Late but hopefully NOT sorry......we agree the best course of action is to "walk away." This may result in their viewing things a little clearer and favorable to your position. Stick to your position, it is very reasonable.

Good luck,
The "Eckler Team"
0 votes Thank Flag Link Mon Jun 16, 2008
I would not sign anything with this builder until your attorney read the contract thoroughly. I have bought all new construction and once I sign the contract that is the price. He can not do any cost because material gone up. I would flip the question to the builder and say, if you get a good deal on material and the price goes down, do I get a credit.
0 votes Thank Flag Link Mon Jun 16, 2008
Hi Lia
Many builders do include clauses like this. The best way to contend with this issue is to have a real estate lawyer represent you. That person will review, revise & try to negotiate terms to protect you with your purchase.
0 votes Thank Flag Link Fri Jun 13, 2008
I just finished a house where the contractor used a bait and switch approach like this. Unless the builder can prove the increase in materials by estimating his current and then future materials costs, which tells you what the labor costs, you should NOT go with this builder. What did your attorney say?

In my case, the builder was taking payments, then trying to get more for already agreed upon estimates. One way around this is to negotiate a labor only contract. They provide you the list of materials, and you make the purchase. This removes the 'carrying' charges for the builder, also ensures your builder isn't building somewhere else with your resources, but it does take involvement and quick response to needs. I pretty much spent 1/2 my days on this alone.
What ever you choose, DO NOT give a builder your purse, which is what this contract clause is equal to. If he doesn't agree to your stipulation, it sounds like it isn't a clean transaction. Steer Clear!!
0 votes Thank Flag Link Fri Apr 18, 2008
You are in a tough place here.
You want your new home, but the builder wants price protection. Perhaps as someone else mentioned, putting a percentage or dollar limit on the possible price increase is a good way for a comprimise.
Unless you have an unlimited budget, I personally would be very wary of a basically unlimited price increase on a home in the construction phase.

Hope you can work it out.
Sharon Kozinn
Web Reference: http://www.sharonkozinn.com
0 votes Thank Flag Link Tue Apr 15, 2008
I agree with robert totally I have dealt wit new construction before , I would also think twice about using this builder before you sign anything. Have your attorney also review the contract.
Web Reference: http://www.njproperty.info
0 votes Thank Flag Link Tue Apr 15, 2008
Unfortunately until you both sign the contract it is either parties’ choice at anytime to modify and accept or alter the conditions of the contract. One option might be that you put a limit on him say 5% increase. Also, suggest to him that if cost went down would he be willing to reduce the price. Do you have a realtor? If so, he/she should be able to negotiate this issue for you. If not put yourself in the builders position. Trying to understand his point of view will help you negotiate stronger. Know also that to truly negotiate with full power you have to be willing to walk away from the deal. That being said… I still think however it is perfectly reasonable for you to expect him to show you the cost increase. The reason, I am guessing here, that he doesn't want to show you the increase is that would reveal his profit margin. Builders hold this very close to their chest for obvious reasons. Try setting a cap on how much he can increase cost on you as I mentioned above. I personally would walk away if he isn't willing to justify the increase in costs. I am guessing your view is something like this; If you buy a car and it is a factory order, you pay in full and they deliver. If there is a strike in the factory or the railroads explode or whatever other cost occur to the manufacturer, well that is the cost of doing business. BUT with homes, the builder is paying as he goes and more than likely he is caring a construction loan with an aggressive bank asset manager breathing down his neck, so if he agrees to build your home in a year and it is for 1.2 million then all of a sudden there is a weevil attack on the lumber industry and his cost double he could lose everything. Not really a solution but maybe it will help you in seeking an arbitration point. He wants to build the house for you, that is his business, he just doesn't want to lose his shirt doing it. With the current economic fear going on he is just probably trying to protect himself. Suggest that he put a cap on costs and maybe add a clause that if the cost go down he will reduce the price... Let me know what you decide. I will also check with my partner and see what she thinks. She has several years working on the home builder’s side of the deal. She will respond soon I am sure.
0 votes Thank Flag Link Tue Apr 15, 2008
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