Q: I am having serious problems with the new condo I am trying to buy. We have been in escrow since early March, when we gave the builder a $5,000 deposit, and have had nothing but issues ever since.
First, the lender that the builder said I had to use couldn’t close the loan, so the loan was moved to a second lender. Then the builder lost its FHA approval and just got it back last week. Since they have delayed the process so much, interest rates have risen to the point that the builder cannot live up to the deal it sold me on: I was promised a 4.75 percent interest rate with 6 percent closing-cost credit.
At today’s interest rates we can’t afford the condo. We have met every deadline the builder has given us, and it has not lived up to its end of the bargain. I feel the builder should somehow make it right, but I don’t even know what it could do at this point.
A: You’re definitely in a tough spot. Unfortunately, many buyers of new construction are not aware that they are entitled to use a lender and a real estate agent of their own choice, rather than the builder’s lender and sales representative. Often, the builder will even pay your Realtor’s commission if the agent accompanies you on your first visit to the property.
Opting to use a lender other than the builder’s is a little bit more complicated, as the builder often makes buyer incentives — like that 6 percent closing-cost credit of yours — contingent on working with the builder’s mortgage connection. What a tough set of factors to weigh and balance! Good thing you’ve continued to meet your deadlines — it will stand you in good stead no matter what you decide to do going forward.
Mindset Management
First off, get clear on what outcome you would like. Would you move forward with the purchase if the terms worked for you? If so, your Action Plan A should be designed to see if you can get the builder/seller to "make it right," in your words. If you’d rather ditch the deal and get your deposit back, that will take an entirely different course of action.
Next, because you might end up trying to close this transaction working with the builder’s lender and sales rep, get clear on who works for whom. The loan officer works for a bank that has a relationship with the builder. The sales representative is likely employed by the builder. Neither of these folks works for you. I don’t say that to engender hostility or foment an oppositional stance, but I want you to go forward in this transaction (if you choose to) with the understanding that you are the defender of your own rights here — watching out for your interests is neither their job nor their primary concern.
It might be worthwhile to hire a real estate attorney or consult with a buyer’s real estate broker on an hourly or flat-fee basis until you’ve worked the kinks out of this deal. That would help you manage the feeling of overwhelm and the sense that you are totally alone in this David vs. Goliath-type situation. If you hire someone to watch out for you, they might even be able to negotiate the deal so that the builder covers some of their compensation.
Need-to-Knows
If you want to get your deposit back, and the builder is not and has not been able to put the deal together as promised, you might be entitled to do so. Without seeing the contract, though, I can’t give you a firm answer on that, because many builders use their own contracts that lean heavily in their favor, rather than using the more neutral state association of Realtors purchase contract forms.
In order to know whether you are entitled to a refund of your deposit, it would be important to know whether there was any sort of guarantee of interest rate or other financing terms in the contract between you and the builder — if so, you might be able to recoup your deposit; if not, it’s less likely. Hiring a real estate attorney to review the contract and see if you have any ways to get out of it without losing your deposit is probably the quickest and easiest way to deal with this. …CONTINUED
With that said, if you want to move forward with the transaction, there are lots of factors in your favor, including the fact that the builder is likely very motivated to get the unit sold! The way to resolve the issue of affordability, assuming the builder will play ball, of course, is to figure out a way the builder can buy your interest rate back down to the promised rate. The problem I foresee is that FHA loans generally have a 6 percent limit on the closing-cost credits that sellers can pay buyers; if you are already maxed out on that, expect to hear the builder say that it can’t do anything else.
It’s not quite that simple. There are ways the builder can make this right without exceeding the 6 percent closing-cost credit limit. The contract can be renegotiated so that the builder agrees to pay up front some of the closing costs that were allocated to you, like transfer taxes, escrow fees or title insurance.
That frees up funds from the closing-cost credit to be used to buy your interest rate down. Also, the builder is likely still in control of homeowners association dues, the purchase price and other fees — it might be able to waive dues or otherwise eliminate fees you are currently set to pay in roughly the same amount that is needed to buy the interest rate down to the 4.75 percent you were promised, or be willing to reduce the purchase price to offset the increased interest rate.
Now, it’s not likely that you’ll be able to force the builder to help you with these solutions — most builder-drafted contracts are so strongly worded in favor of the builder that interest-rate rises due to unforeseen delays outside of their control do not automatically give you any recourse except, perhaps, an out from the contract and/or a deposit refund. However, the builder is likely to want to help you close the deal, which you might not be able to do if the interest-rate increase has sufficiently impacted your monthly payment to the point that you no longer qualify for financing. Your real estate attorney or broker might be able to use this argument to negotiate a resolution that allows you to close the deal on the terms you were promised. (And if you can document that the builder stated you were required to use their lender, that is a violation of the Real Estate Settlement Procedures Act, and provides even greater bargaining leverage to resolve your situation.)
Action Plan
1. Decide what you would ultimately prefer to do — close the deal or back out and get your deposit back.
2. Consult with a real estate attorney or buyer’s broker.
3. Talk with your lender about what it would cost to buy the interest rate down to the rate you were promised initially.
4. Get a second opinion on your loan — if another lender can do the deal at a much lower rate or at a lower buy-down cost, the builder might be willing to let you work with that lender without losing your incentives.
5. Have your attorney or broker talk with the builder’s sales representative to negotiate a resolution that achieves your aim.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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