Homebuyers would do well to take some caution, and understand the nature of an earnest money deposit when dealing with purchase agreements - and in particular, new home builder purchase agreements.Â When one purchases a new home in a subdivision in California, typically the builder's own purchase agreement is used, as opposed to the standardized form approved by the California Association of Realtors.Â Â In the builder's contract, the treatment of earnest money and the circumstances under which you may be entitled to a refund vary greatly.Â Â
The process of going through a well-appointed model home, and sitting down with a sales person can all be very glamourous and exciting.Â Â Often there is an "immediate urgency" implied, as builders strategically release only a few homes at a time in order to imply demand and limit the buyer's immediate choices.Â Â So the buyer feels intimidated into making quick choices and signing large (generally over 75 pages), confusingÂ contracts.Â
I was recently approached by a buyer who had been trying to cancel his new home contract and get his earnest money deposit back.Â The contract had a clause wherein he could get his money back if he didn't qualify for the loan - HOWEVER - the lender was wholly owned by the builder, and that lender extended an offer of credit, and approved the loan, even though the debt to income ratio was 52% of his gross, social security fixed income.Â Â He couldn't afford the payment reasonably - and yet the builder told him "too bad" you're approved and you can't back out under the loan contingency clause.Â Â
This wasn't the end of the story.Â After discussing what this client should do next, I helped him draft a letter to the builder, copy it to their legal department, and demand his earnest money deposit back.Â Long story short - he was finally successful in effecting the return of his deposits, but this resolution came at great difficulty, stress and some legal cost.Â Â Unfortunately, this was not an isolated event.Â Â Another client recently had a similar problem with a different national builder.Â He found that the builder actually had a policy of first rejecting any request to return deposits with a form letter instructing the buyer that if they did not agree to the builder keeping the deposit they must arbitrate.Â Â In my humble opinion, this is a shameful practice.Â There are times when an earnest money deposit deserves to be kept by a seller for a trueÂ breach of contract, but to "color" the buyer's inability to afford the payment after full financial disclosure as a breach of contract is just plain bullying.Â Â Shame, shame shame.Â Â
Keep in mind that this is a buyer's market and regardless of how pretty a model home may be, there is rarely a true urgency that would justify rushing into a contract that you simply don't understand.Â Â Contrary to what a builder may lead you to believe...nearly everything is negotiable.
Including the terms of their contract.Â
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