Dilemma: Opting out of contract?
We are in a dilemma.
We booked our first home with one of the reputed builders (National - Wall Street) in July 2007. The location is on Redmond Way(NE 85th St) & 136th in Redmond, WA. At that time, we signed purchase & sales agreement with earnest money deposit for $15,000. Per the original plan, the house was supposed to be ready to move-in in May/June 2008. The builder has just informed us that he is running behind schedule 4-5 months. So he gave an option, for us to opt-out whereby he will refund our earnest money back.
With real-estate being in soft-mode, do you suggest getting out of the contract at this time? The dilemma is coming from its hard to get 3 bedroom (1300 sq. ft.) house in that area for less than $500,000.
We would appreciate your thoughts, comments, suggestions.
We booked our first home with one of the reputed builders (National - Wall Street) in July 2007. The location is on Redmond Way(NE 85th St) & 136th in Redmond, WA. At that time, we signed purchase & sales agreement with earnest money deposit for $15,000. Per the original plan, the house was supposed to be ready to move-in in May/June 2008. The builder has just informed us that he is running behind schedule 4-5 months. So he gave an option, for us to opt-out whereby he will refund our earnest money back.
With real-estate being in soft-mode, do you suggest getting out of the contract at this time? The dilemma is coming from its hard to get 3 bedroom (1300 sq. ft.) house in that area for less than $500,000.
We would appreciate your thoughts, comments, suggestions.
Comments
If I was a first time buyer now, I'd strongly consider continuing to rent to avoid the likelihood of going underwater (owing more than your house is worth). A 3 br. 1500 sq. ft. split-level at the end of NE 87th St. in Redmond rented for $1650/month last week. That's way better financially than buying it for $450K, for the first 10 years at least, assuming that house prices will fall back so that their gains will have not exceeded inflation, as has happened historically. (To verify that, run the numbers with the CEPR Housing Price Calculator.) During those 10 years you could keep an eye on the market and buy in when you think it has hit bottom; it might take only a couple years for most of the bubble to deflate.
The housing market, including in Seattle, is so likely to fall between now and the time you would take possession on your house, I would opt out of the contract if it were me. Even in average times it's risky to obligate oneself to so many $$$ so far in the future.
If you choose to stay contracted, at least demand a discount from the builder; after all, you're waiting 4-5 months longer and that's worth something.
How many homes are still for sale in the community? Is it nearly sold out or the does the builder have a ways to go before they're all sold? If not very many have sold then I would really think hard about getting out. Once the builder has a lot of finished inventory that is unsold you can expect prices to start coming down.
That said, a lot of it also depends on your financial situation. If you know it's the home for you and you're not committing financial suicide in the process and you plan on living in it more than 5 years then I would say go for it. Other than that, I would think long and hard about maybe renting for a bit.
1) the cost of construction has gone up so much (including materials, labor, and carrying cost of the land) that they're afraid it will no longer be profitable
2) they're in a precarious financial position and need to retrench (or want to get out of the business)
3) they think they can sell it to someone else for more
If the builder feels like he is not making enough money then I expect corners will be cut.
Maybe you could ask him for a cancellation fee. Say you are willing to let him out of the deal if he refunds you $17500. See if he comes back with an offer. If he doesn't seem eager to get out then you are probably safe. After he rejects the offer explain that you were mostly just testing to see how eager he was to get out of the contract as you do not want you house built by a team that is trying to cut losses.
As for speculating on the price going up or down, I think it's safe to say it won't be going up by very much. If you are comfortable where you are and the rent is lower than the mortgage, then just sit tight because you never know what else might come on the market as people's mortgages get reset.
Interesting idea, jon. I like that.
I still think asking the builder if he would pay you a cancellation fee might reveal information on if this is the case.
Like those typical New Home buyers, We were looking for new houses & since Redmond/Kirkland border has proximity to Microsoft/Google & more, we thought we made a good choice. But with possibility of slow-down in real estate market, guess this is the time to get out of dream "Home" for the time being. We are very inclined to get out of the contract, with articles/blogs/economy/dollar devaluation, kind of pointing to the south for Real Estate, in the near term.
MrRational,
The community about 25% sold & we were told that they have given option to others who booked the home in this community, for opting out as well. It is a small community though, 24 single-family homes. We have asked our real-estate agent to check if she can find more on that.
femto,
Good point. According to the contract, they are free to build the house by June 2009 without penalties. However, during the appraisal of the home, closer to "Closing", if its value is lower than contract value, they have a choice of re-appriasal & possible reduction in price of home. But should we count on that is another thing, right? Their stock also, on downhill from $24 to about $12 in 6 months, like many other construction stocks. This may be due to slack in Construction industry, I guess.
Confusion is..... When they had a until June 2009 to build, they are being nice (really??) to provide us an option to opt out, by giving our earnest money back. The obvious thought was, they want to sell it higher price to someone else, as our's was in "pre-sale".
Alan,
To your point, we fear the same... if he is not making enough he may cut corners. Will ask him, for refund with interest, classic idea.
Scotsman,
It may very well be. Time will tell but we are about ready to quit.
Thanks everyone! Was eager to see the replies, but was not in a position as was out in the field most part of the day (yesterday) without access to internet. In the night, the website was down & could not post reply yesterday.
Good Day!
Let us know how the negotiations work out. I always have room to learn in that space.