Builder “Incentives”
by Tina Triano, Esq.

It’s that time again when homebuyers hope that they will get a good deal from a builder. Watch out. One contract I reviewed recently was so one-sided I had to call the builder’s sales manager to discuss countering some of the terms. The manager proceeded to say that the contract was approved by the Department of Real Estate and could not be altered. I then questioned her regarding two builder prepared “addendums” that altered the contract’s terms. She then conceded that contract terms were negotiable. The buyers were able to find another new property a week later with much more favorable terms.
Builder contracts regularly fail to have buyer escape clauses, financing or appraisal contingencies, or very short ones. If it takes the builder 5 months to build the property and interest rates go up 2% during this period, the buyer must purchase the property. Make sure you are protected from market changes by putting in a maximum interest rate.
Many builders enjoy an open ended closing date with no penalties for late delivery, but the buyer is penalized every day they go past the builder’s eventual closing date. Penalty clauses are against public policy and are not allowed in real estate contracts, but are commonly written into builder contracts regardless of the rule.
Clauses providing that a buyer’s deposit money passes directly to the builder prior to property completion are common. Never do this. If the builder files bankruptcy, you may never see your money again. If your money is in escrow, you have a much better chance of getting it back. In one contract I reviewed, the buyers had already signed the contract and were trying to cancel. They put money into escrow without realizing a pass through clause existed. A few months later, the builder filed bankruptcy and the buyer’s money was gone. The builder had several lawsuits pending.
Additional but less noticeable strategies employed by builders are “don’t use an agent and save money” or “use our lender and save money.” Savings are rarely passed on to a buyer. Don’t be discouraged to use an agent to look out for you. Every county has “typical” closing costs, or closing costs the buyer and seller typically pay. Closing costs remain fully negotiable. When a builder offers you a credit to use their lender, have an outside lender review the information or better yet, get a non-profit organization like American Home Buyers Alliance to do a comparison for you. You are not under any obligation to use the builder’s lender—that is “steering” and it is illegal.
I reviewed two different builder contracts along with the lender’s Good Faith Estimates last week. Both Good Faith Estimates were charging both buyers over 1% higher interest rates than were currently available at Bank of America or Countrywide. One of the estimates was 7.5% at 1.5 points 30 year fixed conforming compared to 6.5% at 0 points that was currently available on the open market. The builders/lenders were clearly taking advantage of their position with the buyer.

Ways to protect yourself are:
Have the proposed contract reviewed by a real estate attorney. A $250 to $500 investment is well worth it. Builders typically do not use standard CAR or PRDS contracts. Read the fine print before you sign. Do not rely on a real estate agent to possess the legal expertise needed to interpret clauses of a builder’s real estate contract. Have any builder-lender Good Faith Estimates reviewed by an outside expert.
If the company is publicly traded, review their track record. To check out a private builder, review their litigation history and check with the Contractors State Licensing Board for complaints. There is more that you can do to protect yourself, but those are my recommended minimums. Remember, you are the only one who can make decisions that will protect your investment. Don’t wait until after you have signed a contract to get it reviewed.

~Tina Triano is a California Attorney & Real Estate Broker with over 20 years of real estate contract/loan experience and over 15 years of estate planning including the implementation of capital gains tax avoidance methods. Tina is regularly a guest speaker in the real estate community. You can reach her at 408 425-7953 (appointment line) or email her at ahba@garlic.com.