Dropping prices, new construction and the inherent risk in a changing market

A client sent me a link to this story in the Washington Post that discusses something that is happening with more frequency. A buyer contracts on a new construction property, and by the time closing comes around, the value has dropped. What do you do?

From my perspective as a Buyer-Broker, looking out solely for my buyer-clients’ best interests, I wonder whether builders would consider:

1) Put a contingency in the offer that the offer is contingent on an appraisal two weeks prior to closing of at least the contract price.
2) A contingency that should the developer drop the price on other homes between contract and closing, the purchaser’s contract price will be reduced the same amount.
3) From the Washington Post story: “The buyer should ensure that the deposit is put into an interest-earning escrow account, perhaps with a settlement company, and is not being used by the developer as working capital, Antonoplos said. To do so, a buyer should ask for written verification when the funds are deposited. That will make it easier to recoup the money if the project hits a snag.”
4) Put down a smaller earnest money deposit.
5) Make sure that you have done your due diligence and that you love your soon-to-be new home.

One aspect of this new environment that I have been wrestling with is how to ensure the soundness of developers. How is a buyer to judge this? How does one effectively represent buyers in the face of an unknown – that unknown being the fiscal ability of the developer/builder?

Calculated Risk covered this story as well as Phil’s excellent analysis of a related story (archived: 2008) (h/t: Dustin (no longer available))

From Inman (behind a subscriber wall) in response to a question of what to do should the price go down on other, competing homes between your contract and closing:

One common thread that runs through real estate law is that real estate values are unpredictable and that no one can guarantee escalation of prices. If property values go up, you cannot be ordered to give all or some of your gain back to the developer. Similarly, if values go down, why should the developer be required to pay you any money?

The builders’ and the buyers’ choices may be reduced to renegotiate or lose the deal – both sides lose if they don’t negotiate.