Investment propertyWhy Are There So Many Deposits When Building a New Home?
Buyers often wonder why buying a new home seems so much more complicated than
purchasing a re-sale home. For an existing home, the initial "earnest money
deposit" is usually enough to take a property through escrow to the closing
date, when you"ll need the remainder of your down payment. Why, then, do
builders ask for more deposits along the way, and where do they all go?
To begin with, deposits for anything beyond the base price and included
features in a new production home will usually be necessary before the builder
can proceed with adding upgrades, architectural options, or custom changes.
Unlike the construction process of a custom home, production home builders
oftentimes put themselves at risk in many ways. When building your home on
your own lot, as in a custom home scenario, contractors are able to take
"draws" from an already funded loan to make these additions to the house.
They can also feel confident that the home buyer will indeed remain the buyer
throughout the entire process.
Production builders are vulnerable in the respect that they may have no
guarantee the buyers will perform, even though buyers may be fully qualified
for a loan. They take the chance that they are individualizing one of,
perhaps, several hundred homes they will build that year, and cannot proceed
with a "deviation from the norm" without ample "good faith" monies from the
buyers making the request. It can cost them not only up-front monies with
their sub-contractors, city or county architectural review boards, and added
labor costs, but also damages should they have to re-sell the home with your
changes to it.
Why do these builders require all this money so soon? Your building
superintendent has the responsibility to his builder to schedule each aspect
of the home"s construction as early as is feasible on each and every home he
builds. A third stall on the garage will require a different permit from the
city and more concrete from their supplier; a master retreat option will force
him to communicate the change to framers, drywallers, electricians, and
plumbers. Add to this fray the corporate office personnel who will need to
generate detailed paperwork, and get pricing (in a building economy where the
prices on new home construction materials can go up daily!) and communicate
all this to the field. What seems like a simple request to you and I to make
a few custom changes can create a whirlpool of activity behind the scenes.
Multiply this times the number of homes in a given community, and then again
by the number of communities the builder offers in the area, and you can start
to understand why all these safeguards need to be in place.
The deposit monies you are required to pass through to the builder for your
upgrades and custom changes are usually a credit to your down payment monies.
The clause in most real estate contracts dealing with "liquidated damages"
should have been explained to you by the sales consultant as the vehicle by
which both seller and buyer are protected should a default of the purchase
agreement take place.
Exceptions to deposit monies automatically becoming a part of the down payment
may be fees required by the builder for unalterable custom changes made to the
house. These fees may not be re-couped by the builder in some cases
(architectural fees for special work done, special permit fees charged by city
or county offices, etc.) and may be deemed "non-refundable". Each builder has
a different way of dealing with these issues, so you"ll need to get a clear
picture from your sales agent how the deposits will be designated. The
addendums to you purchase agreement should state this clearly. If not, as
they say, get everything in writing and signed by both you and the builder.
Builders feel confident in building a new home to your specifications when
timely deposits are put in place by the buyer. After all, the builder,
throughout the entire process until the close, is building the home on their
land with you in mind right up to the walk-through, or formal presentation.
It is their ultimate goal to see your kids playing in the front yard or your
welcome mat gracing the new front porch.