Who's Watching Your Deposit Money?
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
Sources used to create this article include writer Lew Sichelman
and The Journal Newspapers.