By Elizabeth Razzi
Sunday, May 4, 2008
Today, we take another spin through the e-mail inbox. A recent column about what happens to deposits when buyers back out of a new-home purchase drew the most response.
With cancellation rates running as much as one-third of sales recently, it's a contentious issue for buyers and builders.
A number of readers who work in the building or lending business were sharply critical, although few wanted to see their names in print. Generally, they complained that I was "builder bashing," and they criticized buyers for walking away from their commitments because prices went down after they signed the purchase agreement.
Jeff Epperson of the District wrote: "Espousing loopholes and advocating 'financial prudence' and 'less pain' instead of moral and financial obligations is exactly what's wrong with this economy and America in general. This thinking is why Ivy League executives feel no hesitation to take advantage of any financial situation in front of them. [It is] why borrowers feel it's perfectly okay to walk away from their responsibilities to creditors. Capitalism works a whole lot better for all of us when people live up to their obligations. I, for one, hope The Post exercises financial prudence and decides not to pay you for this trash!"
But such views were outnumbered by mail from people who complained about the significant risks associated with placing a deposit on a yet-to-be-built home.
From Bob Jurgensen, a real estate agent in Manassas: "Your article was spot-on. This is exactly what these builders are doing. They would rather offer incentives (free options, reduced financing, etc.) than lower their prices, due to the precedent they would set and to avoid upsetting buyers who may have paid more and settled recently."
Mary Bayat, who lives in the Alexandria section of Fairfax County, wrote: "I am shocked that the agent from a big [brokerage] company has not seen builders' [demand for promissory] notes. Maybe it is public relations?
"I myself purchased a condo for my son in Alexandria. I paid more than $20,000 when I signed the contract. I lost my job after a year, and I told them I could not get a loan. I even tried their lender, and they wanted me to get a 20 percent down payment from a home-equity line of credit on my house. They could give me the loan with no income verification. They did not care if I could pay the payment for both loans. I spent $5,000 on attorney's fees, and I still have to give them $20,000 for the note. I really wanted to buy, and it was unfortunate that I lost my job before closing."
Rizz Khoshnaw of Annandale wrote: "I feel so sorry for some of these people who have been falling for what I call 'tricks' by real estate agents and new home builders. I worked in this field between 2000-2003, and I can tell you I have seen lots of real estate agents just flat-out lie and steal and get away with it."
In the column, I noted that, under the terms of some builders' contracts, the mortgage contingency may be satisfied once the buyer is approved for a loan -- and remain satisfied even if the borrower loses a job or in some other way becomes unqualified for the debt. The builder will likely try to keep the deposit, including any promissory notes for additional deposit that would have been payable at closing.
Raymond Schneider of Frostburg, Md., wrote: "As you've described the situation for some purchasers, they are looking at losing their deposit even though they can't get a mortgage for the amount they need, let alone that they can't get a mortgage for the rate they might have locked in.
"Isn't this just foolish buyers not demanding that the seller/builder accept a contract that recognizes that, without the buyer being able to finance the purchase at terms the buyer is anticipating and can afford, the buyer has essentially given the seller/builder a deposit that is nonrefundable no matter what? And isn't this because too many buyers simply entered into a contract to make the largest purchase of their life without thinking, or reading the contract?"
Builders should understand that the risk to their deposits is a hot, hot button for would-be buyers. Perhaps if builders found a way to help buyers manage the risk of financial loss during the construction period, they would find it easier to move some of that inventory that is dragging down their balance sheets.
Meanwhile, that inventory of ready-to deliver new houses provides buyers an opportunity to get a home without placing tens of thousands of dollars at risk for months on end. Just make sure you have a lawyer review the contract before you sign.
Last week's interview with the founders of two of the area's homegrown real estate brokerages, P. Wesley Foster Jr., of Long & Foster Real Estate, and John McEnearney, of McEnearney Associates, included their opinions about Washington area traffic as a housing issue. In the interview, Foster said, "So many people don't want you to widen roads; they want you to use Metro, public transportation. There's always a big argument going on."
And thus we have the following installment in that big argument.
Bruce Bennett of Vienna wrote: "I am one of those who supports NOT widening community roads. I, and many, many others, have been active for 30 years or more in the Fairfax County process. We have called for serious consideration of ever-increasing planning and zoning densities that fueled the runaway growth scenarios in the 1970s, '80s and '90s. Today those decisions have changed our way of life.
"Throughout all those years I do not recall seeing anyone with real estate interests calling for a slowdown [in development] or even for more consideration of the potential damage being done by those political actions. On the contrary, what we have seen is obscene levels of campaign contributions, most of which have originated from real estate interests. And we have been assured by our elected officials that those contributions had no effect on their land-use decisions.
"We have seen a studied abdication of political responsibility by our elected officials for those actions that have enriched real estate interests and worked to create the transportation mess in which we find ourselves today."
E-mail Elizabeth Razzi atrazzie@washpost.com.
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