real estate

Home Buyers Facing Higher Prices, Unexpected Cancelled Contracts in New Home Builds

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The hot housing market is shining a spotlight on the fine print in many agreements between home builders and home buyers. Months after signing contracts to build new homes, some buyers said their builders threatened to walk away from their deal unless they could come up with thousands more to buy the house.

Read on to learn more about what’s driving the changes and what to know if you’re building a new home.

“We were incredibly frantic”

A few days before the scheduled closing date on their new home, Britney Chan said their builder bumped up the price.

“Either we pay an extra $30,000 or they would just cancel our contract,” Chan told NBC 5 Responds.

Chan said the builder cited the increasing cost of materials as the reason for the price change. The couple said they originally signed a contract with their builder in August of 2020 and spent months picking out the finishes, ordering furniture and preparing for the move.

“We were incredibly frantic. We contacted our realtor and, unfortunately, that's when she told us that's something that they're allowed to do,” Chan said.

Chan said the family scrambled to line up additional financing to cover the price increase.

“We were able to cover the cost,” said Chan. “To this day, I'm still, believe it or not, still in shock.”

Pandemic’s impact on new home construction

During the pandemic, the cost of lumber soared. The prices dipped this summer, but overall building costs are still significantly higher than pre-pandemic levels explained Dr. Luis Torres, a research economist with the Texas Real Estate Research Center.

“When we shut down the economy and then we reopened the economy, the supply bottlenecks became an issue,” said Torres.

He pointed to data from the Bureau of Labor Statistics that showed overall building material prices increased 19.4% in the last 12 months. The cost of steel mill products, alone, climbed 108.6%.

Torres said some builders may have agreements with suppliers that may cushion some of the increases, but prices remain volatile.

“That's what we're currently living in right now, is that they [the builders] can't plan ahead because they don't know how much those inputs going to cost them one, two or three weeks ahead, right? Or a month or two months,” said Torres.

Buyers taking a closer look at the fine print

Real estate attorney Tonya Johannsen said builders are evoking clauses in contracts that allow builders to cancel for any reason.

“The home builders are scouring their own contracts to find ways to get out of the contracts,” explained Johannsen.

She said most of the termination clauses aren’t new to many standard builder contracts, but they’re in the spotlight because of the current market. The clauses allow the builders to walk away from the deal and find another buyer.

“You figure, oh, this is what everyone else signs and so you sign,” said Johannsen. “Until recently, that was fine.”

She tells home buyers to understand the fine print before signing.

“Tell them you want to take the contract home with you. They don't like you to do that because they’re salesmen and they want you to sign it right then, but there's nothing that says you have to,” said Johannsen.

“Call a lawyer and sit down and go over it with them and say, worst thing that can happen to me – what is it? And, where is it in this contract so I will know?” Johannsen said.

“They caught us completely by surprise”

Zach and Brooke Green said they signed on to build a house in Farmers Branch at a price of $479,000 in July of 2020.

They said the home was nearly complete when they received a letter from their builder dated July 30, 2021 canceling their contract and returning their money.

The couple shared the letter with NBC 5 Responds – which points to a clause in the couple’s contract that allows the builder to terminate the deal.

“They caught us completely by surprise,” said Zach Green.

The couple said they later saw the house they planned to buy listed for sale with an asking price of $712,825.

The Greens said they’re moving on and working to buy another house, but the experience left them in a bind. Their rental home sold to a new owner who couldn’t extend their lease much longer. With large dogs, they struggled to find a temporary place to live.

“Since we had to be out of our rental home, we've basically been couch surfing,” said Brooke Green.

What builders are saying

“That's one of the larger numbers, if not the largest number that I've heard of as we've gone through this,” said Phil Crone with the Dallas Builders Association of the Green’s story.

Crone said the association has advised members to be clear with home buyers about potential cost increases or delays. He said builders should keep buyers in the loop during the build to avoid surprises.

A recent article published by the National Association of Home Builders points to the price changes that continued in 2021.

“We're almost playing whack-a-mole with different price increases from time to time. But, if you plan ahead and you empathize with your homeowners, you can have a really proactive and positive conversation and get through this together,” said Crone.

The Greens and the Chans were Megatel Homes customers.

NBC 5 Responds asked Megatel Homes about the experiences each consumer-described.

In an email, an attorney for Megatel writes, in part, “These are extraordinary circumstances that both homebuilders and potential homeowners are in right now in the new home sale market. The purchase agreement that all buyers sign has similar terms and conditions that are used by builders nationally as well as throughout Texas – this is not a unique circumstance.”

The company said it doesn’t discuss individual buyers and said a limited number have been impacted.

NBC 5 Responds asked about the situation the Green’s described. In a follow-up response, Megatel wrote, in part, “…there are provisions in the contract that are outside of price escalation that result in termination by either party and return of all monies owed plus damages per the contract, if applicable.”

The Greens told NBC 5 Responds they didn’t want to cancel the contract and wanted to keep the home they signed on to build.

You can read both Megatel responses in full below.

These are extraordinary circumstances that both homebuilders and potential homeowners are in right now in the new home sale market. The purchase agreement that all buyers sign has similar terms and conditions that are used by builders nationally as well as throughout Texas – this is not a unique circumstance.  While the company does not discuss individual circumstances of its customers, the very limited number of buyers we have had to make this difficult decision to contact have been provided an option of either paying the escalation material and labor costs or terminating their agreement and receiving a full refund of all monies paid. Those customers elect to move forward or not at the customer’s option, close the sale voluntarily based on clear, industry-standard contractual terms. The purchase price of most properties sold are below market value as of today, and buyers now have instant equity in their new homes. - Megatel Homes

The purchase agreement that all buyers sign has similar terms and conditions that are used by builders nationally as well as throughout Texas – this is not a unique circumstance.  While Megatel does not discuss individual circumstances of its customers at 12701 Mercer Parkway, there are provisions in the contract that are outside of price escalation that result in termination by either party and return of all monies owed plus damages per the contract, if applicable. - Megatel Homes

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