20% Builder Price Increase 10 Mo Into Contract

Salt Lake City, Utah

Tax, SDIRAs & Cost Segregation

20% Builder Price Increase 10 Mo Into Contract

Member since 2021 · 10 posts · 2 votes

We need some advice. My husband and I have been looking forward to moving to Draper, UT for the past year. We locked in a house at $559k in Nov 2020, and were told it would be finished late spring to early summer. We sold our house in Texas Dec. 2020, anticipating we would rent from our in-laws for a couple of months (considerably cheaper than our mortgage) before moving into our new house. Well, with Covid there has been delays, and they started excavating our lot last week. This morning we received an email saying they are planning on increasing the cost of the home by $109,182 (about 20%). We have a call scheduled to "discuss" this, but they basically said if we aren't able to come up with the money they will cancel our contract, refund us our earnest money, and give us $2k for the trouble. Our realtor said builders all over SLC have been doing this. In fact she explicitly went through our contract with the sales rep to discuss this possibility and was assured it wouldn't happen. The builder said if they were to relist our house they would list it at ~$720k, so we would still have equity in it if we paid the premium. The issue is the down payment would wipe out all the money we set aside to invest with.

Has anyone experienced this? Is there any recourse to this?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
5y
We have no idea what your contract says. For this much money, I’d certainly get an opinion from an attorney.
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
5y
I'm retired now from Contracting but I've heard this is going on from new neighbors. One of their contractors requested an extra $100k. Given the events of the past year or so it's certainly understandable. Look at it from the Contrs point of view......he signed that contract expecting to make, let's say, $150k in profit and overhead. Now with the increase in materials and subs, he redoes the math and sees that he is only going to walk away with $30k. I wouldn't do a new home build for $30k, half of which is overhead. $15k in your pocket for a years work? Plus the go-backs and warranty work? No way. It's essentially a loss for him at this point.
Now you're thinking, well we signed a contract. Sure you did, and I doubt the contract allows for an increase due to inflation (unless he had that clause in there). But if he is smart, he will walk away anyway and let you sue him rather than take a loss like that. Even if you want to spend $40k ish and go through with it, and even if you prevail (which you may not given today's climate) is it really worth it? I'd say no since you're asking our opinion.
Your practical options are:
1) Sit down in a friendly setting with the Owner, ask him to open his books a little so you can see the hardship he is facing...negotiate a slightly lower profit margin for him, if he will and I'd think he might...no one wants to walk on a contract like this.
2) Walk away from this deal and find another Contr. As a matter of fact, you may want to approach another company before you meet with the original guy. Get a price, test the waters, Etc.
3) Don't build at all right now. Sit on that land and wait for prices to come down. They probably will, but they might not....?
Wish there were better options......
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Cara Lonsdale
Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
5y
Read your purchase agreement with the Builder. See what they have the ability to do in terms of changing pricing. Most likely, they do have a clause that covers them for an increase in materials and/or labor (like lumber earlier in the year). However, they shouldn't be able to just arbitrarily increase your purchase price without your agreement (unless you are at the point prior to having the public report. They may have the ability to rescind offerings before that is published).
I would start with your purchase agreement and all the forms you signed at the beginning. GO over them with a fine tooth comb. Ask your agent where the sales rep told them that it couldn't be changed. By the way, this will seem absolutely ridiculous, but did you know that most builder contracts have a clause that states that their sales rep and/or any hosts do not speak on their behalf..?! So, anything the sales rep tells you is not something that the Builder needs to stand behind unless it is in writing. So, make sure EVERYTHING the sales rep tells you, or agrees to, is in writing signed by you and the builder's designated broker (not the sales rep).
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- Jessica Jordan
  OP
  Member since 2021 · 10 posts · 2 votes
  5y
  Originally posted by @Cara Lonsdale:
  Read your purchase agreement with the Builder. See what they have the ability to do in terms of changing pricing. Most likely, they do have a clause that covers them for an increase in materials and/or labor (like lumber earlier in the year). However, they shouldn't be able to just arbitrarily increase your purchase price without your agreement (unless you are at the point prior to having the public report. They may have the ability to rescind offerings before that is published).
  I would start with your purchase agreement and all the forms you signed at the beginning. GO over them with a fine tooth comb. Ask your agent where the sales rep told them that it couldn't be changed. By the way, this will seem absolutely ridiculous, but did you know that most builder contracts have a clause that states that their sales rep and/or any hosts do not speak on their behalf..?! So, anything the sales rep tells you is not something that the Builder needs to stand behind unless it is in writing. So, make sure EVERYTHING the sales rep tells you, or agrees to, is in writing signed by you and the builder's designated broker (not the sales rep).
  
  Bruce, I totally understand why a builder would want to cover their costs. It makes sense. In this particular situation, we don’t own the land, the developer does. Unfortunately, comparable properties in the neighborhood have appreciated over 150k in the last year. Which prices us out of the market. It’s just a bummer because we definitely would have purchased a built home at a reasonable price last fall if we had known what was in store.
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- Jessica Jordan
  OP
  Member since 2021 · 10 posts · 2 votes
  5y
  Originally posted by @Cara Lonsdale:
  Read your purchase agreement with the Builder. See what they have the ability to do in terms of changing pricing. Most likely, they do have a clause that covers them for an increase in materials and/or labor (like lumber earlier in the year). However, they shouldn't be able to just arbitrarily increase your purchase price without your agreement (unless you are at the point prior to having the public report. They may have the ability to rescind offerings before that is published).
  I would start with your purchase agreement and all the forms you signed at the beginning. GO over them with a fine tooth comb. Ask your agent where the sales rep told them that it couldn't be changed. By the way, this will seem absolutely ridiculous, but did you know that most builder contracts have a clause that states that their sales rep and/or any hosts do not speak on their behalf..?! So, anything the sales rep tells you is not something that the Builder needs to stand behind unless it is in writing. So, make sure EVERYTHING the sales rep tells you, or agrees to, is in writing signed by you and the builder's designated broker (not the sales rep).
  Hey Cara, thanks for the insight. What do you mean “prior to the public report”? Do developers have to publicly disclose their building costs?
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