Properties By Manny

Can Home Builders Really Cancel Contracts and Walk Away?

Imagine signing a contract to build your dream home. You have been renting an apartment for years; now you are finally ready to own your own place. Within weeks of receiving the keys to your new house, you receive a letter from your builder. That letter says the builder is canceling the contract and returning your money. Can he really do that?

In a word, yes. Almost all residential building contracts include clauses that allow builders to walk away for any reason. Not only that, canceled contracts have become a growing problem since home building began returning to pre-COVID levels.

A recent MSN News article describes several instances in which home builders either canceled contracts or threatened to do so. In each case, the builders blamed higher prices for building materials. One builder’s attorney contacted by reporters writing the story essentially dismissed questions and said that builders are allowed to cancel contracts if they want to.

Pay a Higher Price or Walk Away

One of the families profiled in the story signed a contract with a builder and assumed everything was taken care of. They got their construction loans as requested. They scheduled a closing date, let the landlord know they would not be renewing, and started making plans to move. Then their builder informed them that the price of the home had jumped by $30,000.

This couple was just days from closing. They were faced with coming up with additional financing or watching the builder cancel the contract and walk away. Fortunately, their bank was willing to offer a higher mortgage to cover the extra amount. The couple went ahead with closing and moved in.

Canceled Contract Leads to a Higher Listing

Another couple profiled by MSN News were not so lucky. They had signed a deal to build a new home for $479,000. Almost a year later, when the home was nearly complete, their builder canceled the contract and walked away. The couple later discovered that the house they had contracted to have built had been listed by the builder for more than $712,000.

In that case, it is hard to believe that the builder’s only issue was the higher cost of building materials. Material prices have gone up by about 20% over the last year or so, but this particular builder jacked up the price by 48%. Escalating housing prices supported a higher listing price, so perhaps that’s what the builder did. Perhaps he canceled the contract so he could sell the home for more.

Understand the Fine Print

Sparano + Mooney is a Park City, Utah architectural firm that specializes in custom builds featuring sustainable design. They say that contracts are everything when building a new home. Contract language spells out the rights and responsibilities of every involved party. If a building contract contains a clause allowing the builder to walk away for any reason, there isn’t much the buyer can do about it.

What are home buyers to do? Sparano + Mooney recommends making a point of understanding the fine print. They encourage buyers to not sign anything immediately. Instead, they should take contracts to an attorney for review. An attorney may not be able to change contract language, but they can at least help buyers fully understand what they are getting into.

Unfortunately, the standard residential building contract usually contains a clause that allows builders to cancel and walk away. It happens more often than you might think. Ethical or not, builders have the legal right to do so as long as their contracts contain the right language.

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