The Home Building Process: An Overview
Building a home can be a tedious and time consuming process. To achieve success in such a major endeavor, it is best that you learn about the fundamentals of house construction, building standards, and land purchase. Through the discovery of these crucial information, you become more aware of your rights as a homeowner.
Minimum Property Standards Supplementing Model Building Codes
The office of the MPS or Minimum Property Standards is responsible for the formulation and establishment of standards when building structures under the HUD housing program. Homes that are required to follow the minimum standards supplemented by MPS are single-family homes, multi-family housing structures, and health-care infrastructure.
HUD Minimum Property Standards and their Appropriate Model Building Codes
HUD has kept separate Minimum Property Standards for various types of structures up until the 1980s. After this period, HUD then started accepting model building codes which includes up to 250 referenced standards and locally-formulated building codes in place of older prescriptive building standards.
One major difference between the MPS and other building codes is that of durability requirements. Residential properties and projects that are mainly financed by FHA-insured real estate loans are essentially the collateral for these types of mortgages. Reduced or lack of durability results in an increase in the financial risk on the part of the FHA in the case of default payments.
In addition, model codes did not contain any form of minimum requirements for durability of items such as windows, doors, downspouts, gutters, wall coverings, painting, carpeting, and kitchen cabinetry. At present, the MPS has successfully integrated standards for these items and many more, to guarantee that an FHA-insured home retains high value, since the deterioration of components are not factored in altogether.
HUD Field Office Acceptance in Areas without Building Code Standards
It is a requirement set by HUD, than all properties guaranteed by an FHA mortgage pass one of the many recognized building code, including state or local building standards that are based on the building code recognized on a national level.
In regions where state and local building codes are implemented, only HUD can determine if the given state or local code is similar to the ideal building code. It is important to note that there are certain regions in the United States that do not have or follow building codes. In this case, the HUD field office will impose a building code that is similar to one of the nationally recognized model building codes instead.
Interstate Land Sales
The Interstate Land Sales initiative essentially protects consumers from fraudulent activities as well as abuse in the lease and sale of land. It was in 1968 that the US Congress passed the Interstate Land Sales Full Disclosure Act, a legislation that was patterned after the Securities Law of 1933. This act basically requires land development companies to register subdivisions consisting of more than 100 lots with HUD. In addition, the Interstate Land Sales Full Disclosure Act requires land developers to provide all clients with a disclosure documentation in the form of a property report. This paperwork essentially features all pertinent information about a subdivision. The property report must be provided to all purchasers before any contract or agreement is signed.
The Purchase of Lots from Land Development Companies
As a consumer, you should equip yourself with as much information prior to the purchasing of land. Many lots or properties are being advertised as sites for senior home facilities, secondary home locations, and for recreational or campsite facilities. Be cautious of the investment aspects that may be pitched to you by the sales people. If you are seriously considering on purchasing a lot by promotional land sales personnel, take time before giving out a decision.
Prior to signing of a contract or purchase agreement, be sure to check the following:
- Be aware of your rights as a land buyer
- Research about the land developer
- Collect facts about the specific development you are seriously considering on buying
- Be aware of the decisions you make when under high-pressure from the sales personnel
Bear in mind that if you are planning to buy from a developer that features a subdivision offering 100 or more lots for sale or for lease, it is a requirement for that company to register with the US Department of Housing and Urban Development or HUD. Once registered, a developer must provide each purchaser with a property report that enumerates all information about the property in great detail. A land development company’s failure to provide a property report is a federal law violation, and is thereby punishable with up to five years imprisonment, a penalty of up to $10,000, or both.
The information that is to be filed by the developer and verified by HUD should feature the following items:
- A true copy of the company’s charter and financial statements
- Complete information about the land that is to be developed, including title policy or a title opinion signed by an attorney, as well as copies of the deed and mortgages
- Detailed documentation of health regulations and local ordinances
- Details about the facilities available in the area such as water and utilities, and an approved plan for sewage disposal
- Supplemental documents such as plans and letters from water suppliers and sewer facilities
The land development company must confirm that all provided information is both accurate and complete. A fee must be submitted with the documents mentioned above upon submission to HUD.
The property report prepared by the developer should directly go to the purchaser. It is required by the law that a seller provides the property report to a prospective buyer even before a purchase agreement is signed. In addition, the seller is also mandated to have a purchaser sign a receipt recognizing the acceptance of the property report. It is recommended that buyers review the property report prior to signing of a contract.
The following information should be found in a typical property report:
- Distance of the subdivision or property from neighboring communities over unpaved and paved roads
- The presence of mortgages or liens on the property
- The access, location, and availability of recreational amenities and facilities
- The presence of water services such as sewerage systems, septic tanks, and wells
- Prospective and existing utility services and appropriate charges
- Number of homes that are currently occupied
- The present condition of both soil and foundation which may cause potential construction problems
- The specific type of title that a purchaser will receive, and the date as to when it shall be turned over to the purchaser
Read and Understand the Property Report Prior to Final Agreement Signing
As mentioned earlier, a property report is a document prepared by the developers themselves. The government is not responsible for the issuance and release of the property report. It is required by Federal law that buyers receive the property report before contract signing to buy or lease a lot within a given subdivision.
No federal agency may judge the merits or true value of the property.
Buyers may still cancel the contract after carefully reading the property report. Basically, a client may cancel the agreement by giving a notice to the developer at any time before midnight of the 7th day following contract signing or final agreement. If and when you did not receive a property report before coming to an agreement or contract signing, you have all the rights to cancel the contract at any time within two years after signing.
What are your Contract Rights?
If the lot you are about to purchase is under the jurisdiction of the Interstate Land Sales Full Disclosure Act, the final agreement or contract should enumerate your rights as a buyer. In addition, the agreement should explicitly state that a buyer is awarded with a cooling off period up to seven days after the contract has been signed. The cooling off period allows for buyers to cancel the agreement by any reason, and should have all the rights to get his money back. Unless a contract states that the land developer gives the buyer a warranty deed within 180 days following the singing of contract, the buyer has all the right to call off the contract for up to 24 months from the day the agreement was signed. The following information should be clearly stated in the contract:
- An accurate and clear description of the lot so that a buyer may have the chance to document the contract with the local county officials
- Details of a buyer’s right to a notice of any default with at least 20 days after receiving of that notice to remedy or fix any problems
- A limit on the amount of cash a seller may keep as form of liquidated damages; that which is 15% of the principal paid off by the purchaser, or a land developer’s actual damages whichever is greater
Contract Rights Concerning Property Reports
- Under the law, land developers are required to register with the Interstate Land Sales Division prior to any sale of lots to prospective buyers
- The sales personnel of land development companies should supplement a copy of the property report to buyers prior to contract signing
- If the land developer fails to provide a property report, the purchaser then has all the right to cancel the contract up to two years and get their money back as well
- Facts about the development and all other pertinent information should be clearly stated in all paperwork and contracts
- Buyers have the right to void the contract if the land development company failed to register with HUD, or when the company failed to provide you with a property report
- A land developer should commit to realizing all promotional claims when marketing their lots. For instance, if a company guaranteed to provide paved roads, efficient water systems, electricity, gas, and recreational facilities and amenities to its clients, it should make all efforts to make them a reality upon nearing property turn over.
- Buyers have the right to full disclosure of information about the lot that is to be purchased from a land developer. The buyer has the right to a full refund in the case that a developer fails to register the company with HUD
- If and when a seller fails to register the land development company with HUD, the purchaser is still held responsible to pay for contract-based payments to a third party in the event that a contract is assigned to a banking institution or similar agency
- Registration by land developers are kept and retained by HUD, and is made accessible for public inspection and evaluation
- In the event that a seller submitted property reports that include false statements, omitted details, or if fraud practices were utilized for a successful sale, the buyer may sue the seller to successfully recover damages as well as pay for expenses in court against the land development company
The Cooling Off Period
With or without a property report prior to signing of the contract agreement, a purchaser is given the right to cancel or revoke the contract by means of notice to the seller until 12 midnight of the 7th day following contract signing. Ideally, a purchaser should contact the seller in writing if they want to revoke the contract as well as get the refund of money paid so far to the developer.
Under federal law, purchasers should be given a cooling off period, to make sure they are making a sensible decision. The right to cooling period when purchasing land cannot be waived.
Important Details about the Interstate Land Sales Division
The HUD unit that is responsible for implementing the law should carefully assess a developer’s statement of registration. The agency that essentially registers the land sales operators is the Interstate Land Sales Division. Aside from full disclosure purposes, this agency is not concerned with land-use planning and zoning, therefore they have no control when it comes to checking for the quality of a given subdivision. This office does not dictate or provide standards on what type of land can be sold, and to whom, or at what amount a lot can be sold. In addition, this division cannot assume the role of a purchaser’s legal team, but will make the effort of assisting purchasers in securing the rights that were provided to them by the Interstate Land Sales Full Disclosure Act.
Essentially, HUD is mainly responsible for the following activities:
- Authorized by law to conduct public hearings and investigations
- Facilitate the subpoena of witnesses and secure important evidence against the developer
- Help in seeking court injunctions, which in turn prevent law violations
- Facilitate criminal indictments
- Office that is duly recognized to facilitate investigations
What are Exemptions from the Law?
Buyers should also be aware of the fact that not all promotional sales of land are under the law. If a particular land sales is said to be exempted, it is automatic that they require not registration from the HUD. This also means that a purchaser will not receive a property report.
The following are conditions in which the federal state allows exemptions without verification or verification from the HUD:
- The sale of tracts or housing programs featuring less than 100 lots
- Lots within subdivisions that are 20 acres or more in size
- Lots where commercial, residential, or industrial structures have been erected, or when a sales contract mandates the developer into building one in a span of two years
- Lots that are exclusively being sold to legitimate residents of the state where a subdivision is located
- Lots that successfully meet local and standard local codes, and which are zoned for single-family homes, or are clearly limited to a single-family home under enforceable codes and restrictions
- Lots that are contained in two more sites with lesser than 100 lots each, with the aim of following a common promotional plan
These are just some of the most common exemptions when purchasing a land from a developer. However, bear in mind that there are other exemptions that are duly covered by the law. If you are unsure if your sale is exempt or otherwise, it is best to contact the Interstate Land Sales Division instead.
Learn More about the Developer
To ensure a sensible and wise land purchase, knowing your rights as a buyer is a must. In order for you to fully exercise your rights, you must ensure the honest and reputation of the developer that is offering you a lot on a subdivision.
Never forget to ask questions. Whether you have found out about the development online, by phone, via email, at a promotional lunch, or from a random sales agent at a shopping center, make it a point to know everything that you can about the property and the company that sells it as well.
Always make sure to get all promises in verbal or in writing. Make sure that the company is registered with HUD or is entitled to an exemption instead.
Do not forget to ask for the copy of the property report. Take as much time as you want in evaluating it carefully. If you are still hesitant in finally signing an agreement, it is best to delay the signing of contract until you have clear answers to queries.
Make sure to seek the expertise and recommendations of independent brokers within your locale, to check if offered price is expensive or otherwise.
In addition, make sure to check out the feedback from buyers who have purchased lots in the past.
Check for the seller’s reputation with organizations such as the Better Business Bureau, and your city’s chamber of commerce.
Ask local and municipal personnel about existing regulations and ordinances that have direct effect on the property you plan on buying.
Things that you Need to Know about the Lot
Once you have chosen a subdivision to purchase a lot from, make it a point to inspect and view the property up close. Never commit to an agreement unless you have seen the actual property. It is recommend that you hire an InterNACHI inspector that can conduct extensive and thorough assessment of the subdivision and lot as well.
Also, make sure to check out the plans of the developer in the future, as a means of preparing yourself as a future owner of a property within that subdivision. Here is a list of questions that you need answered before going through the process of contract signing:
- What is the probable size of the development upon completion?
- What are the specific zoning controls that are being implemented in the area>
- What are the amenities that my family and I should expect in the future?
- What types of provision has been formulated by the developer to guarantee complete construction, organization, and maintenance?
- What are the promised provisions for sewerage needs and water service requirements?
- Does the contract include all of the promised facilities and utilities?
- Will there be any access roads or streets to and from your property? How will public roads and infrastructure be constructed and realized by the developer? Who will be responsible in the maintenance and upkeep of these infrastructure? How much will the entire road access cost?
- Will you be provided with accurate and clear property title? Are there any lines, encumbrances, and reservations that exist with the development of a subdivision?
- Are you going to receive a deed of contract upon payment, or some form of recordable sales contract instead?
- What becomes of your payments? Are they going to be forwarded to a special escrow account to pay off the property, or are they directly going to the developer’s account?
- In the case of the developer defaulting on the mortgage or bankruptcy, will I be losing my lot or investment made to date in order to satisfy a claim against the land development company?
- Upon turnover and once a developer moves out, who will take out community management?
- Will there be any restriction in the use of a lot as campsite until you have the money and time to have a housing structure built in it?
- Will I be paying for annual fees or special payments that are to be paid off regularly by homeowners?
Be Aware of what you are Doing
Do not forget that interstate land sales promotions are typically conducted in high-pressure conditions, which unknowingly forces buyers to commit to an agreement. The next thing you know, you have already signed a sales agreement, and have begun on making payments for a lot in a subdivision that you didn’t even like that much in the first place. Always have presence of mind, so you don’t end up with a purchase that you will always regret.
Top Nine Dishonest Sales Practices
- Making false or inaccurate statements about a property’s current and resale value
Most sales personnel will only present buyers with generic facts about a certain area’s population growth as well residential and industrial development. In addition, they will misrepresent facts when it comes to real estate price levels, as if it specifically applies to the lot you want to purchase. These information will let you believe that the precious piece of land you have acquired is indeed an excellent investment which will undoubtedly increase in value as years pass.
Furthermore, there will be sales agent that will assure you that developers will be more than happy to resell the lot upon request. Unfortunately, this promise is not kept by both sales personnel and developer, as future resale is difficult and close to impossible. It is speculated that up to 40% of profit goes directly to advertising campaigns and payment commission to agents. If you are already paying a premium to the developer, it is highly unlikely that other prospective buyer would pay you more than what you are actually paying the land development company.
In most cases, you may even have to sell the lot for less than its actual price. If you try to sell a lot, bear in mind that you are in tight competition with your own developer, which owns more valuable and extensive acreage within the subdivision too.
You will also find it difficult to obtain the help of real estate brokers as these experts generally find it impractical to manage the sale of lots within subdivisions, and will therefore not accept this type of listing.
In the view of expert land investors, a lot that has been purchased via interstate land sales is not an investment at all. One should remember that the value of a piece of land is based on the following elements:
- Existing supply
- Current demand
- Ability of a buyer to re-sell the lot
According to the Urban Land Institute, the land must ideally double in value every five years, in order for owners to assess and justify it as an important investment.
- Failure to provide deeds or title insurance agreements
In the field of promotional land development, documentation relating to the sales transaction are usually not delivered as promised. Most contracts or deed are only delivered to the buyer once the last payment is made, following the terms ascribed in the contract. A dishonest land developer will usually fail in delivering the deed on time, as evidenced by a long delay or waiting time for buyers.
- Abusive treatment and high-pressure sales practices
There are many high-pressure tactics sales personnel implement to get a sale of lots. There are sales agents who drive customers around the subdivision featuring citizen band radios that provide commentaries on the ongoing selling of lots. Some customers are misled by the information they hear, as they are made fool to believe that desirable lots are running out rapidly. Due to the condition, the customer is then forced to make a hurried decision.
More offensive practices include embarrassing the customers with abusive language whenever they decide to delay their decision to buy property. In worst cases, where a customer is hesitant to buy a property, they are then left in isolated places without transportation or is mainly managed by the sale’s agents themselves.
- Failure to recognize refunds and contract agreements
Sales promotions facilitated via mail, email, and telephone calls mostly offer refunds if and when a property has been misrepresented, or the buyer decides to inspect the property within a pre-determined period of time and then decides not to buy the property altogether.
Once a customer requests for a money back, he is met with numerous delaying tactics, ranging from accusing its own sales agents of coming up with their own money-back guarantee. In most cases, a refund is provided to buyers who decided to back out the last minute, while some are given their money back but only after long waiting times.
- Providing false facts about the subdivision
Property reports offer an added level of protection among its buyers. Sales agents who want to make a sale will often provide incomplete and false information to prospective buyers.
Most commonly, misrepresentation often involves the following elements or factors:
- Legal title and claims against it
- Latent dangers such as cliffs and swamps within the property
- Unusual physical and geographical features resulting in poor drainage
- Restrictions on use of recreational facilities and amenities
Make sure to carefully read the property report and look out for generalizations, omissions, and unproven statements that may lead you to believing unsubstantiated claims. If you want to gain full understanding of the property report, seek for the services of a lawyer who can explain to you all the details in simple form.
For companies that market sales in terms of credit, make sure that they provide you with options and terms of financing. The Truth in Lending Act also requires for developers to provide information such as overall cost, annual interest, and total finance charges too.
- The failure of a company to develop a subdivision as originally planned
Most consumers base they purchase of lots within subdivisions on amenities and facilities promised by developers. Major attractions include golf courses, Olympic-size swimming pools, and a marina may not be a reality for some purchasers. In some cases, developers who run out of budget or are not meeting their sales quota find themselves with the dilemma of whether to pursue the construction of their promised amenities or simply abandon these projects altogether.
- Failure of the developer to fulfill sales inducements
Just like promised amenities that fail to materialize, developers may promise prospective buyers with -perks such as all-expense paid vacation trips, free gifts, trading stamps, and other inducements as a means to lure more people into buying lots in their subdivisions. Most commonly there are attached conditions to such inducements, and that these treats will only be given to clients who are to buy lots and pay in full.
- Bait and switch tactics
Lots in subdivisions are often advertised at unbelievably low prices. Of course, prospective buyers are lured in and only to find out that supposed cheap lots have already been sold to other clients. Buyers are then pressured to buy the more expensive lots. There are cases wherein lots that are sold at cheap prices are located in unfavorable locations, such as near the side of a cliff or in a rather inaccessible portion of the property. Low-cost lots within a subdivision usually are too small and bear undesirable features. Prospective buyers are also provided with free lot certificates with values ranging from $50o to $1000. When a buyer attempts to cash it in, the developer simply deducts it from the total value of the desired lot that is to be purchased. This bait and switch technique most often has a delayed fuse.
Buyers who have purchased a lot without actually inspection them in person, will be surprised once they actually visit their lot and development. Low-cost lots are often placed in remote areas, or those that are extremely far from other homes, commercial establishments, and health care centers. They end up with a lot that is insufficiently developed, and are extremely undesirable for home construction. When the buyers complain of this problem, sales agents will then attempt to sell the more expensive lots. Clients are then forced to pay additional fees in order for them to transfer from an undesirable lot, to one that is more suited to their liking. For those who are unwilling to switch to a more expensive lot, clients are left with a useless lot with low value once sold on the market.
- Failure of a Company to Grant the Rights of Buyers as Stated in the Interstate Land Sales Full Disclosure Act
Sales personnel fail in delivering the property report to buyers prior to contract signing of the sale agreement. Oftentimes, the property report is withheld by sales agent until a contract has been signed, and until full payment has been received by the company. There are also instances when the property report is provided to the purchaser along with other documents and paperwork. Unfortunately, sales people do not stress the importance of the document, making the consumers completely unaware of their rights as title holders.