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Bought, then built

Some buyers have seen a brand-new home slip through their fingers when prices are hiked or terms changed.

August 29, 2004|Diane Wedner | Times Staff Writer

Christine HICKS was looking forward to moving in April into a newly built, $439,000, four-bedroom house in Azusa. Last winter, she and her husband put down a $5,000 deposit and signed a purchase contract to buy the house, which was then under construction.

Now, instead of unpacking, the couple and their attorney are preparing for a showdown next month with the builder of the tract home, who canceled escrow, claiming the teacher and her engineer husband were late funding their purchase.

"I was horrified; I was beside myself," Hicks said. "We hadn't heard that anything was wrong."

Some buyers find themselves losing the opportunity to buy a new house because of changed terms, higher prices or a financing technicality. Others don't even get as far as a signed contract. Even when they've made a deposit to reserve a house at a certain price, the builder later asks for a bigger deposit and hikes the price.

Discontent with new-home sales practices is difficult to measure. Disappointed buyers typically don't file complaints with state agencies or make legal challenges on their own because proving malfeasance is difficult, lawyers say. And though some tactics may be questionable, they usually are not illegal. Many of the disputes are quietly settled in mediation or arbitration.

A signed purchase contract is key to whether buyers become victims of altered terms or aborted deals. And even with one, there still is wiggle room in the fine print for the builder to change prices or terms.

The majority of builders, particularly the large, publicly owned ones, closely follow federal lending and real estate regulations in their sales practices, according to the California Department of Real Estate and the California attorney general's office. But buyers sometimes have a difficult time with smaller independent builders who are seeking maximum profits, said San Francisco real estate litigation attorney Therese Cannata.

"Buyers get completely awed by the best house, which they feel they must have," Cannata said. "They're willing to sign anything, and they get ripped off."

Luring buyers to a new development with one price, then changing the price when they get there -- bait and switch -- is illegal, and so is coercing buyers to use the builder's lender (other than for pre-approval), title company or escrow agent, said Benjamin Diehl, a California deputy attorney general.

Buyers can be subject to price hikes, however, if they do not have a signed purchase contract.

"From the sellers' position, if they don't have a signed contract and the market dictates that they can get $15,000 more for a house, they might be inclined to get it," said Tom Pool, a spokesman for the California Department of Real Estate. "With no specifics outlined and no purchase contract in hand, the builders can raise a deposit and home price." Buyers can then get a refund of their deposit and cancel their reservation, assuming they know their rights.

If there is a signed contract, "you've got two willing parties that come to terms," Pool said. "In this sellers' market, buyers had better read their contracts and know [those contracts are] skewed toward the developers."

Builders may raise prices after a contract is signed if there has been a spike in the price of building materials during the construction period, for example, but those conditions must be spelled out in the contract.

Hicks signed a contract with Thousand Oaks-based builder Haven after being approved by Haven's lender, a typical first-step process.

She was encouraged to fund the home through a mortgage company chosen by Haven, not an unusual request. Many builders either have their own lending companies or are partners with lenders. They prefer that buyers use these lenders to streamline the funding and completion of the project, and some builders earn additional revenue.

Many builders offer incentives, such as a $3,000 discount on closing costs or $5,000 toward upgrades, to get buyers to use the in-house lenders. Some buyers feel penalized if they refuse the offer, but experts say the incentives are legal, as long as the builders don't require that the buyers use the builders' mortgage company.

Hicks and her husband chose their own lender, a move real estate experts recommend. The couple were required to sign a document saying that if they used their own lender instead of the builder's, Haven would not provide an extension of escrow if the lending process dragged on. Haven's request was legal, but some experts say this extra caveat might have clued Hicks in to the potential for problems down the road.

The buyers, longtime homeowners, say they lined up their funding and waited for a closing date from the builder. Haven chose the escrow company. The first week of April, Hicks said she was told by Haven to hold off on final funding pending the issuance of a certificate of occupancy. Notice of that issuance never arrived.

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