Beware of seller financing with homebuilders who preapprove buyers prematurely


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Dear Real Estate Adviser,
New-home builders are canceling our purchase contract because they couldn’t get us a loan, even though they preapproved us. Now they say they’re keeping my down payment, too! In the meantime, I sold my previous home and have been living in an apartment based on their decision. Can I ask for reimbursement of my temporary housing, storage expenses, etc., in addition to getting my deposit back? The home is complete.
— Dan T.

Dear Dan,
This sort of treatment is dreadful and too common. Sadly, there have been a slew of cases similar to yours in recent years, mostly involving prominent publicly traded firms using duplicitous tactics.

I urge you to file a complaint immediately with the state attorney general’s office and Better Business Bureau, and also search the web for any class-action suits involving the builder.

How the buyer gets cheated

It’s hard to say exactly what happened with you, but here’s what we’ve seen elsewhere. Builders offer buyers incentives such as low interest and several thousand dollars toward closing costs if they take out their loan through the builder’s banking unit. The buyers bite at the deal and are quickly “preapproved” for the loan even before any underwriting is done.

Under the builder’s contract terms, the buyers are then given, say, 45 days to cancel their purchase and to meet a closing date. The financing decision then gets “delayed,” often for dubious reasons, and the loan is ultimately denied by the builder’s lender, sometimes after weeks of no communication with the buyer.

The builder then tells the buyer, “Sorry, you have defaulted on the purchase agreement by failing to close in the time indicated in your purchase contract,” then pockets the down payment. Other times, the builder’s “easy” financing terms turn out to be far more costly than first promised and the buyer angrily cancels as a result — and loses the earnest money that way, or pays a lot more than expected.

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Preapproval not enough

Even if the builder said you were preapproved before its bank did a thorough financial and credit check, a deal is not done until the underwriters approve it. It doesn’t matter to them that you rearranged your life based on their initial preapproval.

Such are the pitfalls of seller financing with homebuilders. Shop around for independent financing next time, please. And get legal representation to pore over the contract, especially if it’s a new build.

As for the apartment and storage expenses, those will prove tough to recover. You’d need a seasoned real estate attorney to represent you because big builders also have big legal budgets and contract language adverse to the buyer. If your earnest money loss was less than $5,000, it may not be worth your while, unfortunately. You can certainly try to recover your losses in a small-claims court, where loss caps range from $2,500 to $25,000, depending on the state.

Before you take any action, do a search for the builder name with the words “rip-off” and “lawsuit” and “preapproval scam” and you might get an eyeful and a few other ideas on how to recover your losses.

Unless there is something you’re withholding, you’ve no doubt been mistreated, if not cheated. Good luck moving forward.

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