What Are Red Flags in a New Construction Contract?

Watch for broad habitability waivers, mandatory arbitration with class action waivers, unlimited material substitution rights, unreasonable closing penalties, and severely limited inspection rights.

The Short Answer

While most builder contract provisions are standard, some clauses are more aggressive than others. Here are the red flags that should prompt extra scrutiny or professional review.

High-Risk Clauses

Habitability waiver — the builder asks you to waive the implied warranty of habitability, your strongest legal protection. Class action waiver combined with mandatory arbitration — eliminates your ability to pursue group legal action and forces individual private proceedings. Broad limitation of liability — caps your potential recovery at the purchase price or less, excluding consequential and punitive damages.

Financial Red Flags

Extremely high or non-refundable earnest money deposits. Daily closing penalties with no cap and no grace period. Price escalation clauses with no upper limit. Builder holding your deposit directly (not in escrow). No financing contingency or extremely short contingency periods.

Construction Red Flags

Unlimited right to substitute materials without notice. Severe restrictions on independent inspections. Extremely limited punch list provisions. No guaranteed or estimated completion date. Force majeure clause that covers essentially any delay.

What to Do

The presence of red flags does not necessarily mean you should not buy the home — but it does mean you should understand exactly what you are agreeing to.

Have the contract reviewed by an attorney experienced with new construction contracts.

Use a contract review service to get a quick assessment of the highest-risk provisions.

Compare the contract terms across different builders if you are considering multiple communities.

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