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Development's prices fall just before closing

Dear Real Estate Adviser,
I have a contract to buy a new town home for $800,000, but recently I learned that since I signed, the builder has reduced the price of the same type of town home by $100,000. I have a closing coming up and will be sitting there with a house which has already depreciated before I move in. If I put it on the market, will I get $800,000? Should I stay for a while or rent it out? I am confused and frustrated!
-- Rob Ed Blinde

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Dear Rob,
Wow! That's one inordinately steep discount and appears to be a cut-and-run strategy that shows little regard for the housing values of other recent buyers. But in most businesses, including real estate, sellers will seek what the market will bear, then drop prices abruptly to clear out excessive inventory when conditions change. Usually, there's little you can do about it.

You were -- and I shudder to have to tell you this -- likely caught on the wrong end of a change in your market. And unfortunately, you have little recourse, unless you can prove that the builder used fraudulent or otherwise illegal hard-sell tactics to rope you in before new pricing took hold. Even then, you're looking at a long run down a crooked path.

You don't say how much earnest money you plunked down or what contractual consequences you face if you don't "perform" on your deal. These are issues you should immediately discuss with an experienced real estate lawyer if you are entertaining thoughts of backing out. Contact your local bar association for help in finding one.

As a general rule, values of new-construction multifamily housing -- including townhomes, condos and co-ops -- are a little more mercurial than single-family homes and can suffer losses faster than conventional homes when a market softens. But in the last few months, some single-family home builders have cut prices up to 25 percent in a few previously red-hot markets such as Las Vegas. These scenarios usually occur when speculators quit investing. Until recently, investors accounted for as many as one in four transactions in several of the hotter markets.

Depending on where you live, it's not very likely -- though certainly not impossible -- that you'll be able to sell your townhome for $800,000 any time soon. As for renting: If the entire market softens, more rental houses will start appearing, and rents will drop. So you may be better served just nesting in your town house for a while.

History (and inflation) have shown us that hot-gone-cool markets almost always heat up again.

Good luck.

Bankrate.com's corrections policy -- Posted: Jan. 28, 2006
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