Q: A couple years ago I signed a contract for the purchase of a new construction condo in Illinois, with a projected closing date of 18 months later. I put down 5 percent earnest money.
When it came time to finally close, I previewed my unit and much to my dismay, the master bedroom was 30 percent smaller than on the floor plan we received. I raised this as a deal breaker and the builder offered me another unit, but there are no comparable units available.
I think I’m entitled to cancel the contract and get my earnest money back. I just spoke with the developer and he indicated that the bank’s attorneys are suing all customers with contracts who have not closed to make good on their agreements. I thought that if the buyer walked away from the deal, the seller would simply keep the earnest money. Do they have a case?
A: The lender can only have as good a case against you as the developer would have had against you. If the lender has foreclosed on the development and now stands in the shoes of the developer or if the developer assigned all of the purchase contracts to the lender, the lender may have rights against the buyers. But the lender can’t expand on the rights that are in the contract.
If your contract provides that the developer’s sole remedy in case a buyer defaults under a contract is to keep the earnest money deposit, unless there is a state law that would change that remedy, that’s all the lender will be able to get from defaulting buyers.
You need to look at your contract and determine what remedies are granted to the developer in case a buyer defaults. You should probably talk to a real estate attorney and make sure you understand your legal options.
Your state laws may give you additional rights and remedies due to the significant change to the size of your master bedroom. If that change is deemed material, you may have a right under your state laws to terminate your contract and get your money back.
In addition, your contract may give you additional rights. Your contract may require the developer to complete the unit in accordance with certain plans and specifications. If the developer failed to complete the plans that way, the developer may be in default under the contract and may give you the right to terminate the contract and get your money back.
One word of caution, when it comes to new construction, it’s not always clear what is a material change. If the master bedroom was 5 percent smaller, would that be material? Perhaps. If the master bedroom was made smaller due to a configuration issue, but the bathroom was made larger, would that be considered a material issue and allow you to bow out of the closing? There may be other and varying factors that would determine whether the reduction in the size of your master bedroom would give you the right to terminate the contract.
Lastly, your builder may be bluffing. The lender may not be in a position to sue buyers of units that have not closed. The developer may be trying to influence your decision to purchase the unit or another unit. You need to do what’s best for you.
If you like the unit, perhaps the developer can do something for you in exchange for the smaller size of the master bedroom. Can he give you an additional parking spot, reduce your costs for any upgrades you ordered or even offer to pay your assessments for a year or two? A financial incentive may be enough to keep you in the deal and close on the unit.
Keeping you happy may be a better choice for the developer than having to work to resell a unit in this market. Some condominium markets in some parts of the country have slowed to a crawl. If your condominium market has slowed down, you may have a better chance of negotiating something for yourself, if you decide to move forward and close on the unit.
March 27, 2008.