Q: My wife and I recently signed a contract for a new house. We selected a lot and paid a premium of $15,000 for a plan that included a side-load garage and an additional $15,000 for the construction of a walkout under a screened-in porch. After several months of meetings with the sales agent, we settled on the final price, including all the additional options.
The builder now says that the walkout is not possible due to the slope of the lot. Do we have to pay the $15,000 lot premium and the additional amount for the $15,000 walkout cost because we signed a contract that included these amounts? We signed a contract for the total amount but what happens if the appraisal value of the completed home is less than the contract amount by the time the home is finished and we close?
A: New-home buyers often feel like David facing the builder’s Goliath. While builders are more negotiable on price and terms now than they have ever been, it often seems like builders offer take-it-or-leave-it terms and use their own contracts (rather than the standard forms used in transactions between individual buyers and sellers).
As if that isn’t disorienting enough, many new-home buyers work directly with the builder’s sales agent, rather than with their own agent (often, only because they had no idea the builder would have covered their agent’s commission!) so they end up in a transaction with essentially no professional representative that works for them and is responsible for their best interests (vs. the seller’s).
First things first — let’s try the simplest solution before we overthink this thing. The sales agent could very well be sitting in her office chair right now just waiting for the phone to ring with your call requesting the $30,000 price reduction as a result of the challenges with the lot and the impossibility of the walkout. You don’t say whether you’ve already requested (or whether they’ve already rejected) this reduction, but I’d suggest you to contact them immediately and make your request.
No matter how intimidated or outresourced you may feel, the fact is, even builders are responsible for delivering what they contracted for — and they know this. Generally speaking, my inclination is to give the people and companies across the bargaining table from me what the conductor Ben Zander calls "an A in advance," by expecting them to do the right thing (while always being aware of your rights and obligations, in case they choose not to).
Your first step should be to pull out your contract and all the paperwork that listed your options. If the walkout was specifically listed in the contract or an addendum to it, which it should be, you should have that in front of you or take it with you when you meet with the sales agent to request or propose the price reduction. Chances are better than you might think that you’ll just get at least the $15,000 reduction for the walkout without much trouble.
I can anticipate that you might run into a stickier situation around the premium lot — what, specifically, made the lot "premium" might be arguable. For you, the fact that the lot is what made the walkout impossible might de facto deactivate its premium-ness, so to speak; however, the builder might think that it has a view, size or is situated in a way that still makes it premium, even though the walkout is no longer possible.
If I were in your shoes, I would request a $30,000 reduction, but I’d also probably be willing to negotiate some premium for the lot less than the $15,000 you originally agreed to, but more than zero (this assumes, of course, that there is some advantage to the lot other than just the fact that it was supposed to be able to accommodate the walkout).
You also need to make a decision about how important this issue and this money is to you. I say this because there is a small possibility — I’d say very small, given how motivated most builders are to move inventory these days — that you and the builder could end up at an impasse on this issue. It’s not a bad idea to consult a local real estate attorney fairly early in the game if you feel that you and the builder are not seeing eye to eye on how this matter should be handled. If nothing else, you’ll get an education on what you’re responsible for under the contract, which is worthwhile information to have in any event.
Now, onto the appraisal issue. I wouldn’t say the absence of a walkout should have any sort of significant impact on the home’s appraisal. With that said, when you’re reviewing your purchase agreement to see whether the walkout and the lot premium were specifically called out, you should also look for mentions of an appraisal contingency, if any.
You might have an appraisal contingency, which allows you to back out of the deal or request a price reduction if the property does not appraise for the purchase price. However, many builders these days do the opposite, expressly stating that the property not appraising at the purchase price is not grounds for a contingency, which effectively puts you in the position of having to forfeit your deposit money if you choose to back out of the transaction due to a low appraisal.
There are a variety of ways these appraisal contingencies (or lack thereof) can play out in new-home purchases, all depending on the specific verbiage in the specific contract at issue. And, then, there’s also the issue of seller motivation; some builder/sellers, knowing you may not be able to qualify for mortgage financing if the appraisal is too low, are willing to work with buyers to bring the price down to the appraised price, even if they’re not obligated to do so by law or by the contract. Nevertheless, if you’re concerned about this issue, scrutinize your contract on this point, and if you’re not satisfied, it’s not overkill to pay a few hundred dollars to a local real estate attorney who can brief you on your rights and responsibilities under the contract, in general.
One tip: If you are using an FHA loan to finance the property’s purchase, the builder is prohibited by FHA guidelines from retaining your deposit if you cancel the transaction due to a low appraisal. This is just one reason I encourage new-home buyers to seriously consider FHA financing; the FHA wields more than enough weight to even out that David-vs.-Goliath-type imbalance in bargaining power when it comes to protecting your deposit money.