Does Your Builder want to use your deposit as working capital?
As the Real Estate market starts to heat up for the spring home buying season there are many items that you should be aware of when purchasing new construction homes.
Under the “normal” course of business in a purchase money transaction, there is an escrow agent. The escrow agent usually is either the listing broker or an attorney involved in the negotiations pertaining to the purchase and sale agreement. This money is held until mutual instructions are given to release it or return it to the party the places the deposit into escrow.
In some situations, when purchasing new construction, Builders want to use your earnest money deposit as working capital. There are important things that you must understand when this request is made:
1. The money is no longer secure or being held in escrow. It will be almost impossible to have it returned to the party that put the money up for the deposit.
2. If the builder fails to meet the specifications of the contract, your money has been used and there is little recourse when trying to get it back.
3. Often times the Builder tries to negotiate into the contract that the money shall be used during the course of the project to provide working capital. If that term is in the contract, and the bank forecloses, then you become an unsecured creditor against the builder and only have a contract claim in attempt to recover your deposit. More often than not, if the house is foreclosed on, the chances of recovering under a contract claim leaves very little opportunity to successfully recover the hard earned money that you have placed into this new construction property.
A mortgage in the chain of title only helps secure that the money used on that project gets credited towards the purchase price when the project is finished. It doesn’t guarantee that you will ever recover your deposit if you are not the ultimate owner of the property.
In short, if this request is made, you should look at the financial stability of the builder. Often times, the reason that the builder asks to use the money at the outset of the project is that there is a liquidity issue, they do not have sufficient cash to finish the project and it is only a matter of time until the mountain starts to crumble and there are good consumers left trying to recover their deposit and move into what was supposed to be their dream house. This experience ultimately becomes a nightmare for the Buyer of the new construction home, with ultimately very little satisfaction for the consumer.
For more info or legal assistance in this type of matter – please contact Barsh and Cohen, P.C. at info@barsh-cohen.com
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