Who's Watching Your Deposit Money?

It doesn't happen every day but when a builder goes out of business it usually makes the news. Puzzled home buyers gather forlornly at the excavation site where their homes should be standing. If they're lucky, they got their deposit money back. Unfortunately, many don't.

Overall, the home building industry is very healthy. Very few builders lack the financial wherewithal to follow through on their sales contracts and complete construction. But consumers need to know what happens in case of a fall-through or misuse of their earnest money. In contrast to stiffer laws covering deposits for existing homes, very few safeguards apply to earnest deposits made on new homes. In most states, homebuilders are not even required to put deposits in escrow. They're free to put deposit money into company accounts to pay construction costs or other expenses. If they get into financial trouble, you may never get your money back.

That means that consumers need to pay special attention to what the laws requires in their states, and to carefully research a builder's reputation before signing a contract. Only Maryland, South Carolina and New York require the deposit to be set aside. If you're lucky enough to live where escrow accounts are required, make sure that you make the check payable to the escrow account name, not the builder's name. And if the law doesn't require it, you might get the builder to agree to put the money into escrow voluntarily. Your builder will take some convincing before they'll take the trouble, and some might not agree at all. But many will, rather than lose a sale. Remember that unless the law states otherwise, your builder may want to take the money out of escrow as soon as they begin construction.

But before you even get to sign a check, handle the other check--the background check. Call the Better Business Bureau to see if any complaints exist against your builder. If your state requires licensing which unfortunately many don't, call the licensing agency and ask for background information. Or check with the state attorney general or department of consumer affairs. Unfortunately, new home sales represent one of the larger loopholes in consumer protection. Although some states have recovery funds that compensate consumers for money lost to licensed real estate agents or home improvement contractors, not a single state has such a fund to protect buyers of new-construction homes.

Sources used to create this article include writer Lew Sichelman and The Journal Newspapers.