“We spent your $160,000 building the house…”
When dealing directly with a local builder, new home buyers should know that the deposit that their builder will collect with the contract is treated differently in custom home purchases than in local resale transactions.
- Escrow Accounts
- Operating Accounts
- Builder default
As I have driven around Vienna recently, I have seen some new homes that have been under-construction for a year. Although I can only speculate, it is obvious that something has gone wrong somewhere in the process.
One scenario may have to do with the builder getting too busy and mismanaging his projects. Or another scenario may be that the buyer has not made selections on time, demanded a redesign, or run out of money to fund the project.
Yikes! Neither paints a very happy picture.
Custom home buyers can derail the timeline too…
Many small builders have been buying tear downs in McLean with grand plans to build, yet another, craftsman style home with an impressive Wolf range and Sub-Zero appliances. Priced over two million, the typical contract will ask for ten to twenty percent down when the contract to purchase is signed.
In new construction, “Contract Deposits” are part of your payment for the house. And, if you are the lucky buyer, then it’s important to know that the builder is using these funds to build your house.
Anyone buying a resale home will also deliver a deposit when a sales contract is signed.
But, these deposits are treated differently because they are put into an escrow account. In Virginia real estate, that check needs to be deposited into an escrow account as required by Title 38 of the U.S. Code within five business days of the ratification date.
Essentially that money gets locked up until all parties agree to disburse the funds ~ such as when the closing occurs.
Your money is in an Operating Account
If you are buying a new home you should consult with your real estate agent or hire an attorney for a few thousand dollars to help you strategically release your deposit.
You should have done a little due-diligence to assure yourself that your builder is solvent and has happy customers.
But picture this scenario… the old rambler in Vienna still isn’t torn down, and, your builder is asking you for $180,000 up front.
Builders know that permits and inspections can often hinder the start of a building project. Any delays are addressed in their contracts as “beyond our control” because they are, yes, often beyond their control.
For example, when your builder has demolished the old house and starts digging, he may find that the soil is too sandy and require an additional ten dump trucks to haul away soil and the another seven with new soil. This may require an additional permit and or inspection from the county, and delay the delivery date.
So here are some tips for protecting your deposit with your builder:
- Deposit half with the contract agreeing to deliver the other half when the foundation is complete.
- Deposit half with the contract agreeing to deliver the other half when… this one is up to you.
If the new home is already 50% complete then you should have a good target for finishing.
But, if they haven’t started tearing down that old McLean rambler yet, then you should try and stagger your deposit.
Here is another tip:
- Give the entire deposit with your contract.
Candidly, there are some streets in McLean where demand is high and supply is low. Playing games with a builder who is reputable might just kill your opportunity. So, deliver the funds at the time you sign the contract.
If your builder is in default…
Your builder may not finish your house within the time of your contract and, technically, be in default.
If that happens then then you will need to re-read your agreement to see what the limits are and how much money you are entitled to receive. Typically it is the amount of cash you have already given as your “deposit” and any cash for “upgrades”… and that’s it.
It is rare in McLean or Vienna new home construction to see any builder not finish a home, but it did happen back in the “Great Recession” when easy credit lines dried up overnight.
Although I haven’t heard of anyone on the brink of disaster recently, be thoughtful when you are agreeing to put down a size-able chunk of change. Look at the big picture:
- is the old house still sitting there?
- does the builder have unfinished projects?
- are there finished architect’s plans?
- have permits been approved?
- is the house already under construction?
- is it a finished “spec” house?
It is perfectly reasonable to ask to give half now and the other half on a particular date like when the foundation has been poured. You and your builder should be happily on the same page to build your new home in a timeframe you both can live with.