I got a great question from a client today in response to my February Market Update: If developers let buyers make conditional deposits on unbuilt homes in production, with a condition being the sale of the buyer’s old home, how long do they typically allow that to go on, and how do they know that the sellers aren’t holding out for an unreal price? (FYI, this client is a lawyer, thus the one sentence paragraph…)
Builders will typically tell you that they don’t do contingenct sales. But, they may make an exception for you because you’re extra special (and, they really need to sell the home.) So if you purchase with a contingency on the sale of your existing home, they’ll expect you to get the old house on the market well before your scheduled close date, and they’ll expect you to price it to sell. (And if you delay closing, they’ll charge you $200/day.)
If you reserved your new home a year ago when prices were 20% less, you’ll have instant equity waiting and will be more motivated to sell quickly. (Why haggle over $5K on your old house when your new house is worth $100K more than you’re paying for it?) In this scenario, the builder doesn’t have much to worry about.
Problems may arise, however, as inventories increase, resale prices soften and new home prices stay high. If a buyer can’t sell his old home, and the equity gain in the new home isn’t all that much, it’s much easier for the buyer to simply walk away.
It’s easy to do because nearly every contract is contigent upon financing. Since most people can’t afford to carry two homes, if they can’t sell the old one, the bank won’t approve the loan on the new one, so they’ll be off the hook on the financing contingency. Deposits are usually refundable (though this may change as times get tougher) and the only thing a buyer would potentially lose are monies paid toward upgrades. Builders almost never give these back.
So essentially, developers give people the chance to option a purchase on unbuilt housing. Because they’re building so many units at once, economies of scale kick in, making profit easier to realize at competitive price points. This model works best in a booming housing market. Not so sure it’s going to work as well going forward into a slowing market.
