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The fact that it is the standard Utah contract is most likely a very good thing. Next door, here in Idaho, our standard state contract is very neutral. I would hope that Utah's is as well. That is, has protections for both the buyer and seller. Some builders here insist on using their own contract, and it only protects the seller with almost no protections for the buyer.
I would hope that it would have wording in there somewhere that says the money is refundable in case of seller default, but if not, I'll say again, that is important to have.
Nonrefundable earnest money on new construction is a very normal thing. The more customized the house, the higher the percentage of non-refundable.
That's a sizeable deposit. Are you asking for a lot of custom modifications to the house? Typically, when I help people buy new construction they have to put down a non-refundable deposit if they are asking the builder to deviate from his original plan.
The other thing I would say is that if you do agree to a non-refundable deposit I would recommend that you write into the contract that the deposit becomes refundable if it is the builder who defaults on the contract.
This. I agree with Mike that I'm not sure why you'd the builder would require that much of a deposit on a stock floor plan. Maybe it's just because that's what other buyers will give him without batting an eyelash
The builder is probably thinking, "Ok, the price is down $300K from what I could probably sell it for if it was completed and sat on the market for a while, but, who knows? At least I'll make sure that I've got a firm sale and free-up the money I've already risked on this project, so I can safely start another one -- and get the bank to finance the rest."
You are probably thinking, "We've finally found the house we want and negotiated a great price -- and could spend another $250K if we walk away now. But, $250K is simply too much money to risk, on the possibility that something won't go wrong with the deal. What if the builder really botches something up and refuses to make it right; or what if the construction is delayed beyond our financing window?"
The reality is that your 'negotiation' didn't end with you getting the price you wanted. The builder is still 'negotiating' for the terms he wants. It's simply time to go back to the table and say, "OK, we got the price we wanted -- now what is it going to take to help you get what you want from this deal? ... since we both know that a $250K non-refundable deposit is unrealistic and not going to happen. Do you simply not want to sell this house? ... or is there another way that we can buy it --- and, at the same time, ensure that you achieve your goals?
And what do you do when that builder takes your money, pays off his suppliers, files bankruptcy, and closes shop. Sue him? Cant get 250k out of a broke mans wallet....
The builder is probably thinking, "Ok, the price is down $300K from what I could probably sell it for if it was completed and sat on the market for a while, but, who knows? At least I'll make sure that I've got a firm sale and free-up the money I've already risked on this project, so I can safely start another one -- and get the bank to finance the rest."
That's just it--a Buyer should NOT be giving money to the builder under this situation. Instead, it should be placed into escrow and not paid to the builder until closing--after the builder has satisfactorily completed the house.
If a builder defaults on a contract to build a house, it's most likely due to the builder running into financial problems. And if a builder has financial troubles, good luck at getting any money back!
And what do you do when that builder takes your money, pays off his suppliers, files bankruptcy, and closes shop. Sue him? Cant get 250k out of a broke mans wallet....
Exactly!
Of course, if a builder is going to file for bankruptcy, he's probably not going to pay off his suppliers and sub-contractors.
Of course, if a builder is going to file for bankruptcy, he's probably not going to pay off his suppliers and sub-contractors.
Which is why you insist on expanded title insurance. Even a reputable builder with no ill intentions could die in a car accident the day after closing, and not have paid 30-60 days worth of bills. If that happens, all those subcontractors will immediately lien the house. Get the proper title insurance to protect against that.
We pay for that for all homes we build, but if your builder doesn't, you really really should.
I'll take the other side
I think the 250K is reasonable from the builder's point of view.
On a 1.35M house, he's asking for a little less than 20% down
For that, he stops talking to other buyers.
Without it he takes a chance of you walking away.
Normally on less costly houses you put down 10% as "earnest " money
Non-refundable, unless you can break the contract under a contingency in the contract.
You walk away, you lose the 10%
Everything is up for negotiation
Get him down to 15%, $200,000
and put in a completion date
If he misses it (non-negotiable), you get 10,000 off the price for every day late.
When my husband and I were planning to build a custom home a couple years ago, we were going to put $50K in escrow on a $250K build.
That's 20%.
(We opted not to build when our kids protested having to switch schools and leave their friends (even though we were building in the same town). We used the money we had saved to renovate and build an addition on our current home instead.)
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