Purchasing New Builds: Risking Your Earnest Deposit

Jonathan Dalton, Phoenix Real Estate AgentWhen one of my clients from Calgary purchased her new build, she asked the agent what would happen to her earnest deposit should the builder file for bankruptcy.

“You’ll lose it,” she was told. And based on the builder-written contract, that was the absolutely correct answer. But it wasn’t the absolutely necessary answer.

Purchasing a new build is a negotiation and not all of the negotiations involve the base price of the home being purchased. When someone asks me if a builder negotiates on price I always say no because the base price – the price we see on the MLS and on the builder price sheets – almost always remains untouched.

Where the flexibility lies is in the incentives being offered. Some builders will tell you that there is an incentive of x for purchasing a spec and an incentive of y for buying a home yet to be built. But that’s not always the final answer. If the builder truly wants to move some inventory, you might be able to get spec incentives on a new build.

The same goes for the earnest deposit. Almost every builder contract (it probably is every one but I’m going to hedge) says the earnest deposit will go into the builder’s own account. Builders do that because they’re using this money for continuing expenses. Contrast that with a resale purchase where the earnest deposit is held in a neutral escrow account.

Depending on the resolve of the buyer and the builder’s nned to sell, however, it’s possible to have the earnest deposit held in escrow. Most buyers don’t know to ask the question or are willing to accept the first answer.

That’s where a real estate professional enters the equation. It’s our job to represent our buyers’ best interest and to remain unemotional during the negotiating process. We know that you really love the house … but that doesn’t help your negotiating position. We often can serve as the bad cop in dealing with the builder.

For my buyer from Canada, such work resulted in an additional $3,000 savings. The sales agent wasn’t always particularly pleasant about it but at the end of the day he and his sales manager saw the simple truth – regardless of what’s already been offered to my client and to others, it seems really stupid to see a willing buyer walk away over $3,000.

At the same time, there was no budge on the earnest deposit. Fortunately we’re dealing with a short build time and a builder who to all appearances is solvent.

Those are becoming increasingly difficult to find. All of the old cautions about using smaller builders are starting to become applicable to the big builders as well.

To wrap this up, how can you protect your best interests as a buyer on a new build? Bring a real estate agent with you on your first visit. We only can represent you if we’re there and register you on your first visit. Besides, it’s likely we’ve visited a few more models in a few more communities … we’ll be able to tell you what’s common in terms of design, build time and the like based on our experience.

And most importantly, we’ll be able to help you negotiate a better deal than you’re likely to receive negotiating with the builder independently.

[tags]Phoenix real estate, new home builds, real estate negotiating[/tags]

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.