Orlando, Florida: Buyer Beware! There is always something very special about buying a brand new, newly built home. The home smells so nice and everything is so clean and pretty. Buyers who buy from builders sometimes buy new homes like one would buy a new car, trading thier used homes in every few years for a newer models. Sometimes the good outweighs the bad which is good for the builder considering that builders have been pulling the wool over buyers eyes for so long now. Undoubtedly the hazy cloud from the frenzied new home buyers is smoothing over the rough spots that most buyers experience throughout the process of buying and building a new home with a builder. Certainly few buyers realize how one sided the builder’s sales contracts are, favoring the rights of the builder over the buyer in most clauses of the contract. Who could blame the builder, right? But does the average buyer know this? Should they have a lawyer or a real estate agent looking over the contract to point out and interpret for the buyer what they are signing?, you bet!
Did you know that most new home contracts include a clause which states that if the home does not appraise for the contract price, that the buyer is still reponsible for closing and if there is a mortgage the buyer won’t be allowed to finance the new increased balance in most cases with thier lender? I will write more about this later in the article, you won’t believe what happened to this buyer. Sadly, this is not an isolated case. The majority of the builders have this clause in the contract. It gets worse…Most of the builders were asking for a 5% non-refundable deposit, (pause for a moment and go get your calculator). In many cases, with home prices declining, builders are taking buyers deposits who cannot close simply becuase they don’t have this extra cash on hand. Buyer beware!
As a residential real estate agent who’s worked with many new home buyers throughout the years, it troubles me deeply that there aren’t some kind of special interest groups governing these horrilbe one sided contracts. I have worked with a lot of buyers who went to the builder without me bringing them in. (A builder will normally not pay a buyer’s agent if he/she does not accompany and register the buyer on thier first visit. If you demand buyer agent representation through your agent, he/she cannot represent you if you do not have them register you on your first visit.)
A certain buyer, (names not mentioned to avoid law suit), and a certain builder recently entered into a contract for the purchase of a to be built new home in a certain subdivision. The buyer was delighted that the builder offered so many enticing inscentives, 10% of the purchase price toward closing costs if they got financing through the builder’s special lender. Why not?, sounds great!, where do we sign? About 12 months later, after the market tanked and property values declined, the home was finished and the buyer was finishing up the details with the lender and builder. Suddendly, the builders reccommended interest rate for this buyer was at 9% and the buyer would have to pay 3 points (up front interest to lower rate) to get this 9% rate. The buyer checked with an outside lender and he was able to get a 6.1% fixed rate for the same mortgage amount. His credit was good and he felt that he was being taken advantage of. This buyer was fortunate enough to get a second opinion. He did not have to pay any points with his own lender.
Most buyers who are not represented by a real estate buyer’s agent, also are not aware that when the builder says they will pay a percentage of closing costs they are not pointing out that they are including the closing costs which are typically paid for buy the seller as well. Hmm. Something fishy is going on here, right? Read on, it gets worse…
As I mentioned earlier in this article, this buyer’s contract with the builder also had a clause in the contract which states that if the home should not appraise that they would have to close anyway. They would have to come up with the difference. When a buyer has a mortgage, as is usually the case, their lender will not finance the difference, forcing the buyer to come up with the extra cash or forfiet thier entire deposit!
What’s scary for most people to learn here is that the builder’s lender always seem to have a not so conservative appraisal. In most cases if you are to hire another outside appraiser, one who does not have any affiliation with the builder’s loan company, they will not be coming up with the higher values that are often found on the builders loan companies appraisal. In this particular case ( Unfortunately this is happening throughout the industry way too much) the builder’s loan company came in with a (try not to look too surprised) a much higher appraisal. Hmm? What exactly is going on here? Could it be that the builder’s appraisers are feeling pressure to come up with higher evaluations for fear that if they should not, they won’t be recieving any future orders?? Believe what you will, but I’m going to put 2 and 2 together.
If you’re buying a new home, remember to call a seasoned Realtor, one who’s familiar with new home contracts so that they can at the very least point out some of these things to you. Buying a new home is a great thing, but it could be a nightmare. Many new home buyers are forfieting thier large deposits and walking away from thier contracts lately, they simply do not have a choice, they do not have the extra cash. This is causing a larger inventory of available homes that builders have which are ready to move into so the buyer does not have to wait for the home to be built. Rememeber to bring your Realtor with you and make sure that they register your name and themselves as your representative. It doesn’t cost you more, builders factor in the cost of paying agents a 3% commission, If you choose not to include your agent in the sale you should be certain to ask your builders sales representative for a copy of the entire contract so that you can review it at your leisure and submit the contract to your attorney and have them explain the contract’s pitfalls before you sign.