Can any of you spec house builders tell us how things went down for you and your client, contractually, if you agreed on the sale well before the house was completed?
In reading some articles recently about Hovnanian Enterprises and Toll Brothers, having made deals with buyers for new home deliveries even before ground was broken, and the buyers now trying to reneg on their purchase contracts because of housing price slumps, it seems as if it is possible to have an iron clad agreement that goes a long way toward preventing buyer back-out.
Ideally, we want to lock in a buyer even before we commence sitework, just as Hovnanian and Toll Brothers (and many others) have done, but finance the project ourselves, and have a closing upon completion.
Replies
Call your real estate lawyer.
"Put your creed in your deed." Emerson
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
You said, "Call your real estate lawyer."
I tried, but only got his voicemail, and he won't be back for a couple weeks.
I thought that in the interim, I would solicit some experiences here. Do you have any?
The story I read about this topic in a recent WSJ article discussed how buyers, having made sizable purchase deposits, and having signed "ironclad" purchase agreements, were now seeking to back out of the deals, and even forego the deposits.
The homebuilders, wanting and needing the closings at agreed-upon pricing, were unwilling to take the deposits and let the buyers walk.
Apparently the contracts for purchase were pretty detailed, and gave te sellers good protection, in that buyers were finding significant difficulties in trying to back out, and were looking at "significant" legal fees to make the attempt.
I want a deal as ironclad as that, as a seller. What have you done?
Gene,
I live and work in the land of Toll Brothers. I can't drive 15 minutes without seeing a sign or development.
Yes, they and several other builders have problems with "Back-Outs"
I'm sure you can write a contract that wil prevent a buyer from backing out when he/she/they are perfectly capable to purchase the home but have had a change of heart.
on the other hand.............many of these buyers have had not a change of heart but rather a change of circumstance. And now? They are no longer ABLE to buy the house.
How do you deal with that? Come closing day, they can't secure the financing, all the contracts in the world aren't gonna get you paid.
I guess it depends where you are located but in some parts of the country, fortunes are turning overnight.
Also, don't forget. Toll Brothers, K Hovanian as well as Pulte have been victims of speculation. Not long ago you could buy a Toll Brothers house at preconstruction prices and put it on the market the day you closed and make $30 or $40K after ALL your expenses. That's no longer the case and it's less of a hit to walk away from a $10K deposit than to try to salvage a house that has not appreciated but is still gonna cost you 10% to sell.
when they build condos on the beach, most are sold before ground breaking. these are 12 stories, 200 unit style for close to 500k to one mill.“Ilsa, I’m no good at being noble, but it doesn’t take much to see that the problems of three little people don’t amount to a hill of beans in this crazy worldâ€.
I'm sure some of the buyers are less than honorable, but some blame for this mess has to fall on the sellers as well. Several of the big builders were offering "closeout" discounts and freebies to encourage buyers and try to kick-up flagging sales. How would you feel if you signed a contract for a $500K home and then nine months later, just before you close, you find the builder is selling the same home for $420K? And what does that tell us about the rest of the players, the lawyers, brokers, RE agents, appraisers, etc.?It's often said that desperate people do desperate things, and it looks like desperation and panic have overcome rational thinking for some of these builders. Stories are coming out now about malfeasance and outright fraud in the rest of the process, so I expect things will get worse before they get better.
I'm sure some of the buyers are less than honorable, but some blame for this mess has to fall on the sellers as well. Several of the big builders were offering "closeout" discounts and freebies to encourage buyers and try to kick-up flagging sales. How would you feel if you signed a contract for a $500K home and then nine months later, just before you close, you find the builder is selling the same home for $420K? And what does that tell us about the rest of the players, the lawyers, brokers, RE agents, appraisers, etc.?
In the late 80's I was working in a HUGE development in New Jersey framing when EXACTLY that happened. When sales got week, They dropped prices in some cases from $420 to $350 or $375 overnight.
You should have heard some of the residents complain about how they had killed their value and equity.
Didn't have to listen too long because within a few months nobody was building anything anyway.
Interresting subject .
Reminds me of a discussion a freind of mine and I was having last week. I think its relative to this discussion.
Hes selling two peices of property and he put in his aceptance that he would vacate the premises 30 days after closing and the buyer balked. I told him I dont blame the buyer . I would not close on a house I could not have poss at closing . Pretty simple checker game really. Hes not moving with out the money first and they are not handing him cash at closing with out poss.
My answer is to h^ll with earnest money they can get back if they change their mind. A 10 percent non refundable down payment , not deposit is necesary to satisfy both parties. Of course if the buyer doesnt have the cash then theres no sale anyway in this case so you could lose 5 sales to 1.
Anyway in the end the owner has his property and 10 percent . He can do it again.
But then if you have more than you speak about its not really a spec. Youre kinda wanting somthing that aint so. They really should own what they are paying for meaning they should own the lot before they invest their hard earned money. Not a contract. My banker wont do it and neither would I. The folks with the money are in the driver seat not the folks working for them. Investing in real estate with out a deed is bad business IMO.
Tim
Gene,
I worked for many years for a very small spec builder. Unless times were very tough, he almost always avoided getting to tied up with a buyer before the house was completed.
If you do so, then you end up building a custom home for a client with YOUR money. One of the reasons some people do specs is to avoid the interactions and conflict that come about in such situations.
Ask yourself why you would agree to such a one sided deal anyway? The market could very well go up beyond all expectations. then you've just screwed yourself out of some good coin.
Getting cold feet? Build something YOU would live in, or can rent out in your market. Then, at least you have a back up plan.
Eric
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Gene Davis,
A bad deal is a bad deal all the way around.. Not only is it bad for the customer it's also bad for the seller.. While a contract can calm buyers remorse, it can't make money appear or jobs secure etc..
I briefly worked for a company that once the contract was signed they enforced everything.. very unprofitable.. they spent too much on lawyers, earned a reputation as someone nobody wanted to deal with, and in the end were forced out of business.