Special pricing addendums explained

Kathy:

My friends are purchasing a new home from a builder and they were asked to sign a “Special Pricing Addendum.” I had never heard of this, but because they are not closing on time, the builder wants to enforce this addendum which is now costing them about $25,000. How does that work?

—Laurel M.

Hi Laurel:

That’s a great question as I recently learned of this myself. I think it’s important to note that most contracts and addendums in place with builders are typically written in favor of, or to protect, the builder. I believe this specific addendum is referring to an incentive that the builder may have offered your friends. Let’s say it was an extra $25,000 to spend at their design center, or monies towards closing costs. If the buyer fails to close the home on time with no fault to the builder, then the builder can go ahead and enforce this agreement, thereby taking away your incentives, and still force you to close on the home, or else put your earnest money at risk.

Many times, a builder will do this to encourage you to use their preferred lender. It gives the builder more control over the lending process and if something were to go south with your loan, they are the first to know. They can help you themselves, or at least know firsthand that the home is in jeopardy of closing. As with any company, numbers and goals need to be met to remain profitable. If it is a rather large builder, they may have to answer to investors and upper management and therefore must make their numbers.

There are many cases where this could apply. For instance, you decide to go with your own credit union, which you are entitled to do, but that lending institution drops the ball on your loan. Maybe the credit union does not order the appraisal on time, or maybe they didn’t verify your income, something that was not the fault of the builder. Now, you have had that builder take your home off the market for X amount of days, only not to be able to perform. Your credit union acknowledges the mistake and says, “We will fix this for you but we need an additional five days to get your loan closed.” So instead of you closing on Oct. 30, your lender does not have enough time to process your loan documents and needs another five days, thereby delaying the closing process. You have now cost the builder money since you did not close on time. This special pricing addendum could kick in. This would give the builder a reason to take away the $25,000 promised and still force you to close on the home, and thereby putting your earnest money at risk.

That’s just one example and I have not personally run across a builder using this. Hopefully your friends have a good rapport with the sales agents that sold them their home and recognize that they have tried to perform as expected and in a timely manner. Often, the builder will choose not to enforce an addendum like this and work with the buyers; to help them achieve the goal of closing on time and moving into their dream home that they have so anticipated.

This may also depend on the time that this addendum was put in place. For example, at the end of the year, builders are trying to meet their year-end numbers. Typically, this is when they give more incentives to close a deal. I have seen builders throw in appliances, pre-pay taxes, or pay HOA dues in advance. All can be considered “closing costs.” In recent weeks, we have seen more inventory on the market and a “pause” if you will. The talk is that it may turn into a buyer’s market. If that is the case, it would be wise for a new home builder to do whatever it is they can to help the buyer close the deal rather than play hardball and risk losing a year-end number to upper management.

It’s always best to read every document closely before signing, and if you are not sure at all, consult a real estate legal professional. I hope your friends can work this out and get into their dream home as planned. Great question and best of luck to them.