(This is the final article in a series on the topic of new construction.) Like most purchasers of resale properties, most purchasers of new construction must obtain financing in order to close the transaction. However, unlike most resale transactions, many new construction properties are complete months, and even years, after the contract is signed. Often, the time frame within which a buyer should obtain a final commitment for a resale property - e.g., thirty days from contract acceptance - is inserted in new construction contracts, and buyers are confused about what this means to them. Of course, it would be impracticable to maintain a mortgage commitment - even if a full approval could be obtained far in advance of closing - for months or years, until the closing date. Instead, I advise my new construction clients to review their own financial position during the mortgage contingency period. If they find that they are not able, under contemporary circumstances, to afford a mortgage for the subject property, they have a choice to make. Either they can make a calculated risk that they would be able to afford a mortgage by closing, or they can decide that they would not be in such a position by closing time. In the first case, the buyer would proceed to closing; in the second, I would give notice on the buyer's behalf to the seller's counsel, together with a non-approval letter from my client's lender, and the transaction would end. Another area of confusion for purchasers involves the warranty vs. punch list question. In Illinois , a judicially-created doctrine called the implied warranty of habitability applies to all sales of new construction. This doctrine holds that a seller of new construction properties gives the buyer of that property an implied (unwritten) guaranty that the property, being “new”, is free from latent defects, and that should such defects occur within ten years of closing, that purchase has a cause of action against his seller for the same. The same Illinois Supreme Court decision that made this holding, however, carved out an exception to this rule: if, in the contract, a seller offered an express (written) warranty for a given term, in place of the implied warranty, the buyer would have successfully waived the implied warranty, and the express warranty be effective. As a result, no developer's new construction contract fails to include this express warranty; because of the potential exposure if not included, no developer will do business in Illinois without it. The buyer is protected under the warranty, which defines coverage, typically runs one to two years from the closing date of the property, and is usually not transferable to a subsequent purchaser. The punch list is compiled on a purchaser's final walk through of the property before closing. It enumerates those items which should have been completed before closing, but which will probably remain outstanding after that date. Punch list items should be completed “within a reasonable time after closing” (most developers' preference) or “within thirty days of closing” (my preference); the time within which these items must be completed is defined, in any case, in the body of the contract. If these items are not completed within that amount of time, buyers have a cause of action against the developer until they are finished. This differs from the warranty, which covers the finished unit from the closing date. What if latent defects are found in those items remaining to be finished under the punch list? In order to be deemed substantially complete, the property must be habitable, so usually the punch list covers only cosmetic issues or damage sustained to a property since completion, rather than those structural items which would be germane to a “substantially complete” property (e.g., floors, walls, systems). Since punch list items tend to be relatively minor, there is less chance that they contain latent, unforeseeable defects. And all other punch list items are, of course, covered by the remaining term of the express warranty. |
Some clients complain about required flood insurance, but then extend profuse thanks when they receive the check for $20,000 to repair and replace the damaged below grade family room ruined by flood waters. Others complain because their property was described as being built on a piece of high ground within a flood plain zone (that is, elevated out of the flood plain), but do not have an official LOMA as proof. A LOMA? Read further to see what one Flood Certification company writes about how to utilize an elevation certificate to officially remove a property from flood insurance requirements, even though it sits in the middle of an "AE" or "X" FEMA flood plain: Dispute Resolution: The Role of the Elevation CertificateOne of the most common sources of borrowers' objections to purchasing flood insurance is their misunderstanding of the role of the Elevation Certificate . When property owners obtain an Elevation Certificate from their community, their builder, or their surveyor, they may mistakenly assume that flood insurance is no longer needed or required. While the Elevation Certificate certainly serves an important function, it “does not provide a waiver of the flood insurance purchase requirement,” as stated in FEMA's instructions for the certificate. When the FEMA map shows that a property in a participating community is in a Special Flood Hazard Area ( Exhibit 1 ), flood insurance must be required for any insurable structure on that property being held as collateral. The Elevation Certificate may show that the structure is elevated above the floodplain ( Exhibit 2 ), but before the flood insurance requirement can be dropped, FEMA must issue a Letter of Map Amendment (LOMA) or Letter of Map Revision based on Fill (LOMR-F). The Elevation Certificate can support a request to FEMA for a LOMA or LOMR-F. It can also provide elevation information for community floodplain management and can determine the proper insurance premium rate. But it cannot by itself remove a property from a SFHA. Should your customers present you with an Elevation Certificate which they feel refutes the results of the flood determination, we will gladly recheck it through our dispute resolution process. Once we have verified the determination's accuracy, our Compliance Department may be able to assess the likelihood that a structure can be removed from the Special Flood Hazard Area by submitting the Elevation Certificate to FEMA. See First American's Flood Compliance Kit for more information regarding the LOMA or LOMR-F application. Of course, although many people ask their real estate attorney to file the paperwork, it is not absolutely necessary to hire anyone to do the work for you – FEMA describes the process in its instructions. Just remember that FEMA is a government agency and each piece of documentation submitted must be EXACTLY as described in the regulations – no room for error. Good Luck! - Diane Forsythe, Brickton Mortgage "Let your thoughts be positive for they will become your words, Let your words be positive for they will become your actions. Let your actions be positive for they will become your values. Let your values be positive for they will become your destiny." Mahatma Gandhi |
