Sold -- or Not: When Home Buyers Walk

Toll Brothers townhomes under construction in Ashburn. The builder says its higher deposit requirement has kept down cancellations.
Toll Brothers townhomes under construction in Ashburn. The builder says its higher deposit requirement has kept down cancellations. (By Carol T. Powers -- Bloomberg News)

By Sandra Fleishman
Washington Post Staff Writer
Saturday, May 6, 2006

As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits.

Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship -- more than double last year's rate, according to one research firm, and perhaps as high as one in three new-home buyers in some places. And nationally, some big builders are beginning to report cancellation rates upward of 25 percent.

When a housing market is hot and prices increase, as they did dramatically over the past five years here, cancellations are rare and builders generally aren't concerned because they can typically sell the units at even higher prices. But if the market is slowing, as it has been this year, builders may need to add incentives such as upgrades and price cuts to move their product. That reduces profit but provides opportunities for people who couldn't afford to buy before.

Hanley Wood Market Intelligence, a home-building research firm, this week said that its latest survey of builders showed that the cancellation rate for the Washington area in March more than doubled from a year earlier, jumping to 12.7 percent from 5.1 percent.

"But 10 to 15 percent of people deciding to cancel is not going to be unusual most of the time," said Jonathan Dienhart, Hanley Wood's director of research. "It's just that in the last couple years when we had unusually high demand, where people could just buy a property and flip it, there were fewer cancellations. It's not a cakewalk anymore."

The survey shows the cancellation rate locally highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled, compared with no cancellations a year ago. When the statistics are looked at by a single county or type of housing for one month, however, the number of transactions is small.

People who are buying for investments rather than residences are the most likely to bail out, experts said. They reason that it would be better to lose a deposit than to go ahead with an investment that could lose value, particularly if builders are cutting prices in the same or nearby projects.

Typically, buyers of new homes pay upfront deposits calculated either as flat amounts as low as $1,000 or as a percentage of the price, generally about 5 percent of the home price. In recent years, some builders increased deposits to discourage speculators and get more upfront cash from desperate buyers. Some require deposits of 7.5 to 10 percent.

Despite the pain of giving up that much money, some buyers are canceling to cut their losses because builders are pricing the same houses for so much less, Alexandria lawyer James C. "Beau" Brincefield Jr. said.

"I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less," said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.

And builders are trying to make it harder for people to split, lawyers and real estate agents said. While contracts "always favor the builder" and are always hard to contest, now that it is harder to resell, "builders are fighting attempts to get the deposit back tooth and nail," Washington lawyer John Gerardo said.

"It's getting really kind of scary right now because builders are waving their sabers," said Christine Cormack, owner of brokerage Keller Williams Realty in Ashburn and a real estate investor. "They're holding people to contracts." That can include going to court to force closings.

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