Giving Up Big Deposits on New Homes

May 6, 2006

On the front page of the Washington Post business section this morning is an article about new home buyers walking away from their deposits to get out of this market. In the Metro region cancellations are up over 100% from this time last year (5% to nearly 13%). Deposits can be tens of thousands of dollars plus 50% of the price for upgrades. On a million dollar home with a 7.5% deposit and $100,000 in upgrades, the loss to walk away is on the order of $125,000. It appears the two biggest issues as reported are:

• Builders are lowering their prices and buyers who wrote contracts several months ago see values declining, and
• Rising interest rates are causing some buyers to wonder if they can really afford a new home.

I can agree with the analysis but they leave another important fact out of the article: new home buyers usually have a home to sell to extract equity for the purchase. Homes just aren't selling for what they did several months ago and are sitting on the market much longer. If you can't sell, you can't buy. New construction contracts always favor the builder and they rarely, if ever, consent to a home sale contingency.

Builders are less than sympathetic and will take a buyer to court to force the sale. Angry buyers are seeking legal help to get some or all of their money back. Nobody wins.

Read the full article here.

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