Making Sure Your Deposit Results in a House, Not a Loss
When Baltimore-area home builder Palmer Williams went out of business a few months ago, 16 families that had given him money could have been left holding the bag.
Fortunately, Maryland is one of only a few states that require builders to place buyer deposits in an escrow account.
Williams is nowhere to be found these days. But he left behind a $20,000 escrow account, which the state seized and distributed to his jilted buyers.
Because the troubled builder had started dipping into the account illegally, the buyers recovered about only two-thirds of the cash they had given him. Still, the 16 families can consider themselves lucky. If they were buying in almost any other state, they would have lost everything.
Only Maryland, South Carolina and New York protect new-home buyers by requiring that their deposit money be put aside for safekeeping. As far as can be determined, all the other states allow builders to use their customers’ cash as they see fit.
Buyers of existing properties are far better protected than those purchasing new houses.
Most states require that all funds received by a real estate agent on behalf of a client be deposited in a separate trust or escrow account. Then, when the sale is either completed or terminated, the money must be distributed in accordance with the contract.
But in the new-home market, builders are usually permitted to place earnest money into their own accounts and use it to operate their businesses.
Actually, only about half the states regulate home builders at all. And, ironically, Maryland isn’t one of them. Builders in the Free State need not be licensed or registered, so there is nothing to qualify them as builders. They can just start digging.
But Maryland demands that builders either put deposit money in an escrow account or have a corporate surety bond or letter of credit on file with the state.
The law also requires that home buyers be given a disclosure statement informing them of how the builder will comply with the law and what the buyer should do if the builder mishandles the money.
Most everywhere else, though, builders can mingle your money with theirs. Usually they use your money to build your house and everything goes as planned.
But occasionally, they use your money to finish the last buyer’s house, then use the next buyer’s money to complete your place. Sometimes, though, there is no next buyer, and everything falls apart.
In truth, builders don’t go out of business in that manner very often. “It’s not a frequent occurrence,” said John Nethercut, deputy chief of Maryland’s Consumer Protection Division.
But when it does happen, it’s a major problem for those involved, so you need to protect yourself as much as you can.
How? For starters, find out what the law requires in your state. If deposit money must be placed in escrow, make your check payable to the escrow account name and number, not the builder.
And be sure that it’s a two-signature account, so money can’t be withdrawn without your signature and the builder’s.
If there is no such requirement, ask that an escrow account be established. In some places, builders will balk. But if your demand is the only sticking point, some will acquiesce.
According to Ed Ricketts, Arizona’s deputy commissioner of real estate from 1991 to 1997, when a buyer in Arizona takes exception to what Ricketts calls “legalized commingling,” he is usually told to go elsewhere.
But Tom Early of the Buyers Real Estate Brokerage in Columbus, Ohio, says that when it comes down to it, builders in his market would rather sell a house than have the use of their customer’s money.
“I’ve never had a single builder blow a deal over earnest money, not one,” says Early, who represents buyers, not sellers, and never lets the builder hold the deposit.
Roger Mankedik of Concord Homes, a major Chicago-area builder with a 40-year track record, says that he discourages placing deposits in escrow.
Even though Illinois law requires that deposits on condos be placed in interest-bearing escrow accounts, he says it’s too cumbersome to do the same for the buyers of single-family homes.
Still, Mankedik will consider such requests. “I don’t generally do it, but I have,” he says. “It depends on the circumstances.”
Del Webb, the big Phoenix-based builder, also considers such requests on a case-by-case basis.
“We want to get as many sales as we can,” says Martha Moyer, spokeswoman for the company’s Anthem Country Club project. “But once construction starts, whatever’s held in escrow is moved to our general fund.”
If your builder won’t budge, you have a choice: Look for one who will or check this one out thoroughly.
Mankedik said he often tells his buyers to call his bankers. And you should also call your local consumer agency, Better Business Bureau, home-builders association and licensing authority.
Distributed by United Features.
Know How Much Is Expected
How large a deposit should you give a builder? That depends.
Each builder has his own policy regarding earnest money, but generally they try to get as much as possible when a contract is signed and even more when construction begins.
Chicago-area builder Roger Mankedik normally asks for a 5% deposit, for example. But on more expensive custom homes, he requires 10%.
Del Webb wants a $5,000 check up front at Anthem Country Club in Phoenix. But the firm needs 20% of the base price, major options and the lot premium in hand before it starts construction.
With that kind of money at stake, you can see why it’s wise to ask that your investment be set aside for safekeeping until the house is finished. And why it’s smarter yet to investigate your builder thoroughly before giving him a dime.
