Get a New Home Warranty

You've probably heard horror stories about new houses that begin to disintegrate soon after the buyer moves in -- the roof leaks, the basement floods after the first big rain, or the doors won't close. This shouldn't be a problem if you buy from a reputable developer -- but not all developers are reputable, and you may not be sure about yours.

Your best bet is to buy a house with a new house warranty from an independent insurance company. Typically, they cover workmanship and materials for one year; plumbing, electrical, heating, and air conditioning systems for two years; and major structural defects for ten years.

You can also buy a new home warranty on your own, but you'll have to shop carefully to find one that covers major structural defects.

Protect Yourself Against Delays

It's best not to close escrow on a new home until the work is completed. You don't want to leave the builder an opening to delay construction into the indefinite future.

Unfortunately, however, in a hot market you may be forced to close on a home that isn't finished (or even started). If so, you'll be asked to sign a very one-sided contract. You will be given numerous deadlines (to make deposits, agree to design changes, get loan approval, sell your present house, and close escrow), but the developer will have great leeway -- sometimes up to a year from the target date -- to deliver the house.

Do what you can to negotiate a fairer deal. Most important, you want to establish a reasonable date at which you can cancel the contract and get all of your money back if the developer doesn't deliver the house. Again, make sure it's in writing.

If you must close escrow because you need to move in, but significant and costly work remains, insist that the necessary funds be taken out of what you're paying the developer and placed in a trust account after escrow closes. Then ask for a written agreement stating that if the work is performed on time, the money will be released to the developer; but if it isn't, the funds go to you to hire someone else to do the work. If the developer refuses, at least make a list of what needs to be done, assign a completion date to each, and have it signed by the developer.

If the developer fails to make a good faith effort to do the work, you may be able to sue in small claims court if you have out-of-pocket losses, such as rent or hotel bills, because you could not move in on time. For more information on small claims court, see Everybody's Guide to Small Claims Court, by Ralph Warner (Nolo).