Locked In, No Exit in Sight
Many Rueful Buyers Try to Escape Builders' Ironclad Contracts

By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, December 9, 2006

Lisa and Reggie Starr thought they were getting a good deal when they signed a contract to buy a new six-bedroom house in Woodbridgealmost a year ago. But after they had trouble selling their own house and wanted to get out of the deal, the fine print in their contract became a very big obstacle.

"There's no contingency for the sale of your home. There's no contingency for financing. 'No refund will be due to you' -- it's clearly written in the contract," said Lisa Starr, who admits that she did not fully understand the document when she signed it. "You get all excited. You're about to build your dream house. I wasn't looking for anything to go wrong."

Now, after rereading the contracts and consulting lawyers, the Starrs and many other would-be new-home buyers are finding that the sales agreements they so enthusiastically signed just a year or two ago have left them little wiggle room as settlement day approaches. Indeed, some consumer advocates and real estate lawyers who have been fielding calls from remorseful buyers in recent months say few contracts are as rigid and one-sided as those for new home sales.

Prepared by builders' attorneys, the contracts are "written in a way to give every possible edge to the home builder," said Allen J. Fishbein, director of credit and housing policy at the Consumer Federation of America. Some developers have added certain provisions that further strengthen the contracts, bit by bit, over the past decade, some attorneys said. As a result, contracts became more prevalent during the frenzied real estate boom that block consumers from getting any "remedy" beyond reimbursement of their earnest money, or that prevent them from taking the dispute to court but instead force them into arbitration, when differences of opinion arise.

Builders, on the other hand, say the contract provisions protect them against buyers frivolously trying to extricate themselves from completing purchases. They say that buyers weren't complaining about the contracts during the boom, when values jumped by tens of thousands of dollars, with buyers earning a profit even before they went to settlement.

Of course, every home sales contract is different. Some are more consumer-friendly, and an increasing number of builders are willing to work with buyers to keep the deal alive, especially since new buyers aren't exactly knocking down their doors these days.

But some buyers are trying to get back their deposits just the same, and at times are finding that persistence can prevail. After initial protests from the builder, one would-be buyer was released from her contract after arguing that a job transfer from Rockville to Baltimore met, albeit barely, a "change of circumstance" clause in her contract that gave her an out if her new job was more than 50 miles away, said Harvey S. Jacobs, a real estate attorney in Rockville who represented her.

And some buyers have been striking back at what they perceive as an imbalance in power between builders and buyers. In a recent round of lawsuits filed in several local jurisdictions, attorneys have challenged the validity of certain builder contracts because they lack "mutuality of obligation" on the part of the builder and fail to give the buyer any "remedy" -- other than return of the deposit -- even if the builder breaches the agreement. Put in plain language, the attorneys contend that the builder doesn't have to build or sell the house to the buyer and that the buyer can't do anything about it, even if the buyer lost money on the sale of a house or got stuck renting an apartment.

There have not yet been judgments or verdicts in these cases, but some would-be buyers are getting settlements instead. In one case settled recently in Fairfax County Circuit Court, 16 home buyers in a McLean subdivision sued to get back deposits on homes contracted for a collective $20 million.

Alexandria-based real estate attorney Beau Brincefield Jr., who filed the lawsuit on behalf of the buyers, argued in court filings that the contracts allowed Reston-based NVR to walk away without recourse because the terms of the contract didn't set a date by which NVR had to go to settlement; freed NVR from liability for any damages; provided no remedy to the buyer if the builder didn't hold up his end of the bargain; and required the buyer to waive any right to "specific performance" of the contract, which meant that the buyers couldn't compel NVR to build and sell them the house.

"Unless both parties are bound, neither party is bound," Brincefield said in an interview, quoting from a decision in a contract dispute case rendered by the Virginia Supreme Court in the early 1900s.

NVR disagreed with Brincefield's assessment, saying that limitations on remedies do not undermine a contract's validity. NVR's attorneys argued that the contract did not lack mutuality, and that even if it did, mutuality was established after the company built the homes with upgrades and features as specified by buyers in their contracts.

The case was settled on the heels of NVR's announcement in October that it had seen four out of 10 home buyers cancel contracts during the third quarter and that it was revising its profit expectations for the rest of the year. Terms of the settlement were not disclosed.

An NVR spokesman declined to comment on the case. In court papers, however, the builder said: "While plaintiffs argue that NVR foisted a contract on them that somehow gave discretion to NVR as to its performance, the evidence will show that the plaintiffs entered into contracts in order to invest in a 'hot' real estate market, let NVR undertake performance, and then waited to see whether they would perform based on market conditions at the time of closing."

These legal arguments could have broad implications for how future sales contracts are drafted as well.

Robert M. Diamond, a real estate lawyer in Falls Church, said that one of his clients, a local builder, recently eliminated the clause in the contract that took away the buyer's right to "specific performance." The firm did it, at least in part, because Fairfax County Circuit Court Judge Arthur B. Vieregg Jr. ruled in June that a home sales agreement -- this one between the seller of a foreclosed condominium and the highest bidder -- was unenforceable because it lacked mutuality of obligation.

Many builders are having to fend off an array of legal attacks from consumers who have changed their minds. Notifications of the slightest changes to a home or a community have triggered attempts to back out of deals, said Diamond, who added that since July, he has handled about three dozen letters from attorneys representing reluctant buyers.

Diamond said some buyers are grabbing at straws, even protesting changes favorable to them, such as when the developer added extra parking in a condominium complex. Buyers and their attorneys have alleged that these adjustments are "material adverse changes," even though the contracts clearly permit developers to make certain changes as needed to their projects.

"It didn't matter what the change was . . . these are excuses," said Diamond, adding that many of the buyers who want out are speculators who decided their investments had turned sour or buyers worried that they had overpaid.

But many contracts allow builders to make far bigger changes, such as flip-flopping the layout of the home or moving its footprint within a lot. David Jaffe, a lawyer with the National Association of Home Builders, said contracts must account for a multitude of unforeseen roadblocks that builders may face in developing a subdivision -- for example, underground rock formations where a community pool or someone's basement was planned. The trade group, Jaffe said, has long advocated that a contract should be a "communication tool" fair to both parties. And a contract is fair, he said, as long as the terms were known to the buyers, who had the option of walking away.

The Starrs said they are hardly trying to slither out of the deal just because they were having second thoughts. They say their backs are against the wall: They couldn't get good enough financing terms, and the builder had lowered the price of nearby homes. The Starrs finally got a contract on the home they were selling, but at a price that is $150,000 less than they expected when they bought the new house.

Reggie Starr marveled at just how quickly the real estate market had turned. "It was not even like a slight decline," he said. "It was like a big curve."

They are still in talks with their builder but say they have already learned from the experience. "You need to have legal representation, and you need a real estate agent," Lisa Starr said.

Fishbein, of the Consumer Federation, wholeheartedly agrees.

No matter how reputable the builder may be, buyers should seek out a lawyer before signing the deal because new-home sales agreements can be "loaded with all sorts of hidden land mines," Fishbein said. "We tell them to request a copy of their sales contracts to review . . . which unfortunately some buyers do not do, even though the stakes could be so great for them."

During the boom, however, many builders refused to pay sales commissions to real estate agents representing buyers because builders could sell the houses without any help. And buyers risked losing out on a coveted contract if they took it to a lawyer rather than signing right then and there.

Now, with the frenzied market behind them, those on the prowl for new homes have the luxury of time to consider the terms of the contracts they sign -- before they sign them. Some are even inserting their own language or striking out certain passages.

Jeffrey Silverstein, a real estate lawyer based in Burke, said he recently had two buyers bring him their contracts before signing.

He successfully inserted contingencies in both contracts that outlined when construction would begin on the new home, what price the sellers would ask for their homes and how low they could be forced to go on the sales price, and what would have to happen for the buyers to get their deposits back.

"When the real estate market was hot, everybody thought they had to sign right now or they'd lose the place. And that was probably true. Lawyers just weren't in the loop anymore," Silverstein said. "Now, it's coming back a little. They [builders] listen now. If you have reasonable changes to make the contracts more equal-handed, they're willing to listen."