Bought, then built

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.

On April 15, Hicks said, the couple received a letter dated March 17 informing them that escrow would close on April 9. Because of the time discrepancies and verbal instructions to expect an occupancy notice, they waited.

At last, during the first week of May, the couple received and signed the final escrow documents; the escrow company apparently did not know of any problem that would scuttle the deal. The lender funded the purchase, but the day Hicks expected to pick up the keys to the house, she was informed that the builder had canceled the purchase contract because of the allegedly late funding. The buyers said they had not received a notice of cancellation or a call asking where the funding was, which is the usual protocol for closing escrow, said Michael Hixson, a Newport Beach consultant to new-home builders.

Haven principal Patrick F. Finnerty responded to calls for comment by e-mail, stating that the company goes to great lengths with buyers to explain the terms of its purchase agreements and the potential pitfalls of using outside lenders. He added that Hicks’ deal fell through because “she and her lender failed to deliver loan documents in a timely manner.” The letter informing Hicks of the closing date made no reference to a certificate of occupancy holding back the sale, he wrote. In addition, Haven’s dates for the sequence of events conflict with Hicks’.

The builder resold the house in June. Right after Labor Day, Hicks, her husband and the builder will argue their cases before a mediator, who will try to settle the dispute. The couple’s funds still are in escrow.

Hicks is still contemplating how things went so wrong.

“Everything was going to be wonderful,” Hicks said. “I didn’t know it was going to turn into the nightmare of my life.”

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Guarding against disappointment

Buying a new home can fray the nerves and, in some cases, result in major disappointment when contracts aren’t read thoroughly or prices go up during the purchase transaction. Here are some tips to smooth the process:

* After selecting a proposed house plan and site, the buyer makes a deposit, which reserves the home. The deposit should go to a title or escrow company; those companies do not have to be chosen or operated by the builder. The deposit does not necessarily guarantee a price, nor a specific home or site. The builder or buyer may cancel the transaction with a full deposit refund at this point.

* Next, a legally binding purchase agreement is signed by both parties. Typically, the signed contract guarantees the sale price, excluding added amenities. Builders may include, in writing, price bumps due to construction-cost increases. Mortgage interest rates usually are set close to the completion of the home.

* Deposits typically remain in escrow for the duration of the building process. Final funding goes to the escrow account three to seven days before the actual close.

* Real estate experts recommend that buyers

read the fine print of their contracts before signing. Ask questions before signing any documents.

* If the time between making the deposit and signing the purchase contract is longer than a week, buyers should view this as a warning that the builder may try to increase the price.

* Many builders offer incentives to buyers who use the builders’ lenders. Buyers do not have to use these lenders; if they feel coerced, they should back out of the deal.

* Builders are required by law to disclose ownership of a mortgage company to which they’re steering buyers. The same applies to builder-owned escrow and title companies.

-- Diane Wedner

Sources: Michael Hixson, executive vice president of Ryness Co., Newport Beach; California Deputy Atty. Gen. Benjamin Diehl; Tom Pool, spokesman for the California Department of Real Estate.