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Developers Go After Earnest Money

In a heated market developers are only too happy to let buyers out of their contract so that they can raise the price. Now a couple of developers (John Ross and Civic) have decided that they are going to enforce the contracts that buyers entered into. It’s an interesting situation for a couple of reasons. First it is a case contract enforcement versus goodwill. Second there is probably an agency question to be addressed. ***Note that we backed out of a new construction condo/hotel project in Seaside in the spring and got our earnest money back***

In the heat of the moment, buyers lined up (literally) to get a condo reservation. Those contracts became binding and then, in some cases, more earnest money was due and it was reiterated customization additions became nonrefundable (on paper). I heard more than once, “earnest money is nonrefundable but I have never seen this builder go after it” from sales offices. Neither had we. If Buyer wanted out, buyer got out based on Developer’s goodwill. That is no longer the case.

The other issue becomes my long standing debate over dual agency. We firmly believe that dual agency on resale property should be against the law even though we are in the minority of Realtors on the matter. I’ve made the exception for new construction but this and another recent event make me wonder (We had a builder offer the buyer a $10,000 price reduction if they chose not to be represented by us. We have to assume they took it since we never heard from them again).

Builders and developers, more often than not, use their own paperwork for the contract. It is written by their attorneys for their projects. Realtors, including us, are trained on OREF contracts; the standard contract used in real estate. When we come across nonstandard forms, we have to disclose, in writing, that these are not the forms we are familiar with and therefore advise legal advice before entering into a binding contract. We read the contracts but cannot offer legal advice on them.

There is no way of knowing what percentage of the sales in question were buyer agent represented versus sales office represented but I am willing to bet that most did not involve a second agent. Would it have made a difference? Would the buyer’s agent have been any more aware of the potential reality of contract enforcement? More questions to a changing market.

5 Comments on “Developers Go After Earnest Money

  1. This is going to have an enormous impact on speculators/developers investing in condos.

    OHSU bulletin boards are absolutely packed with ads for rentals in SOWA. The range in prices for identical units is truly funny. I’ve seen ranges from 1300-3500 for similar 1 BR units in the John Ross.

    Even more ominous…when I rode the tram down at 8 pm yesterday only ~25% of the units had lights on. I think SOWA is turning out to be a monumental blunder.

  2. Seems fair enough to me – both sides entered into and agreement in good faith – the builder SHOULD keep the deposits. I suspect a lot of those entering litigation are absentee landlords from outside the PDX area…

    They speculated and lost – deal with it.

    I’m sure they would not be clamoring to share the profits with the builder had the RE market continued to appreciate.

  3. “Seems fair enough to me – both sides entered into and agreement in good faith – the builder SHOULD keep the deposits.

    Well, it may not be that straightforward. I haven’t looked at any deposit agreements from these particular developments, but some of these agreements use pretty loose language. When I was shopping for a condo a few years ago, most preconstruction agreements had a provision that buyers could get their deposits back if they “could not” “qualify” for a mortgage at “market rates.” The words I put in quotes leave quite a bit of wiggle room.

  4. Which is why I use a real estate attorney. You are right, dual-agency should be illegal…it’s just a crazy conflict of interest…A lot of changes are needed in RE agent compensation and rules, the current system is flawed in a lot of ways. Look at the UK for an indication of where we are headed (1% comm, fixed).

  5. Which is why I use a real estate attorney. You are right, dual-agency should be illegal…it’s just a crazy conflict of interest…A lot of changes are needed in RE agent compensation and rules, the current system is flawed in a lot of ways. Look at the UK for an indication of where we are headed (1% comm, fixed).

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