Author Topic: closing on new build - to walk away or not  (Read 2113 times)

bradleylsmith

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closing on new build - to walk away or not
« on: April 23, 2020, 07:47:08 AM »
I am contracted for a new build that is scheduled to complete in late July. It's in Westminster, CO. I'm not worried about job security and believe I make enough to afford the house reasonably. It's 1900 sq ft, 3 bed 3 bath for ~$530,000.

I'm wondering if it's better for me to walk away and look at buying other houses in the area (assuming a price drop is coming in the next 24 months). I would lose:

  • $5k earnest deposit
  • $2k lock fee for locking in loan at 3.85%
  • $6k options fee with builder (they haven't collected this yet so I may be able to walk away without paying this?)

vs. losing out on what the house could drop to in this climate. (worst case scenario, houses drop 30% - 40% and I'd lose out on buying one of these cheap houses instead of the one I locked in to build last January. I currently rent a 1300 sq ft apartment about a mile away from the new house for ~ $2200 / mo.

I would be willing to take a loss of say...10 - 15%. More then that would really make me wish I waited another 6 - 12 months.

The other element in this is the interest rate. I have the ability to float it down once in June, so my guess is that 3.85% would become a decent amount lower. I plan to be in this house for 10 years.

Do I stay on target, close on the house and potentially miss out on $100k of cheap house value?

OR

Do I walk away, take the $7k - $13k hit and buy a house in 6 - 24 months instead?
« Last Edit: April 23, 2020, 07:48:45 AM by bradleylsmith »

Indio

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Re: closing on new build - to walk away or not
« Reply #1 on: April 23, 2020, 07:51:51 AM »
Have you tried renegotiating the cost down or stall the build for a few months till it's clear where the market is headed?

Fishindude

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Re: closing on new build - to walk away or not
« Reply #2 on: April 23, 2020, 07:55:21 AM »
You gave your word to these people.
Hold up your end of the deal and follow through.

bradleylsmith

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Re: closing on new build - to walk away or not
« Reply #3 on: April 23, 2020, 08:01:28 AM »
I haven't talked to them about it yet at all. I highly doubt they'd negotiate based on past experience with them, and knowing my income. That said, maybe they are afraid they won't be able to unload it? They just closed on an identical build to mine (the model home) for around the same price. After taking into account it's a model (it went for 10% higher)

I not only gave them my word, I signed a contract. I told them and signed stating exactly the same thing I told you guys only before the virus. I may walk away from the build. If I do I'd be willing to pay the fees.

Nick_Miller

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Re: closing on new build - to walk away or not
« Reply #4 on: April 23, 2020, 08:03:57 AM »
No one knows the future, but in this environment I'd be leery of making huge moves. And that is a very expensive house (to those of us in most of the country, anyway).

You could instead rent for another year or so and maybe snatch up a bargain. Unfortunately, there are going to be people across the country getting foreclosed on later this year and into 2021, or those who are desperate to sell to avoid foreclosure. There will be supply, that's for sure!

scantee

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Re: closing on new build - to walk away or not
« Reply #5 on: April 23, 2020, 08:18:48 AM »
You gave your word to these people.
Hold up your end of the deal and follow through.

This is a business transaction not a blood promise. I guarantee you the builder definitely doesn’t care the slightest about his “word.”

I would walk away but I would never buy a house like this in the first place so my opinion is of limited value. What is the rest of your financial picture like? Do you like your current residence? If your financial house is in order and you are okay with your current house then chalk this up to an expensive mistake and think real hard about whether a new build is really right for you in the future.

J Boogie

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Re: closing on new build - to walk away or not
« Reply #6 on: April 23, 2020, 08:34:05 AM »
Do I walk away, take the $7k - $13k hit and buy a house in 6 - 24 months instead?

Buy the house, move in.

I see zero headwinds facing Colorado especially Denver area real estate. Tech companies have a strong presence there and it seems like a far more livable way to have a mid level tech job than to try and squeeze a family into the bay area.

C19 is at worst a tiny blip on the radar for tech companies. People in CO will still have high paying tech jobs and they'll still pay good money for houses.

If you REALLY think a downturn is coming and you want to time the market, join the other market timing folks over in investor alley. Put some of your investments in cash, and wait for the downturn so you can buy back into the market at a discount. But don't let your market timing make you change your actual life plans. Live your life!




norajean

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Re: closing on new build - to walk away or not
« Reply #7 on: April 23, 2020, 08:52:28 AM »
It's hard to time the bottom in a real estate dip but you might be waiting more like 4-5 years. If that's ok, then I would bail out as it seems likely real estate will crash everywhere given the current circumstances.

bradleylsmith

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Re: closing on new build - to walk away or not
« Reply #8 on: April 23, 2020, 09:15:55 AM »
thank you Boogie for some local market thoughts. I am a senior engineer at one of those tech companies. I think it's likely to benefit from Covid as it's a data play and Covid is causing a lot of data. I love my field in general and I don't see it going anywhere.

My financial picture (I'm 32):
  • $100k in 401k
  • $20k in HSA
  • $30k cash
  • $30k car loan (yes this is high, it's a tesla model 3 and I think it's paid for itself thus far. Should be paid off next year)
  • $159k base salary
  • $230k salary after bonuses

So, I don't think it's a matter of affordability. It's simply how much money am I likely to lose if I buy today vs. buy the same house 6 - 24 months from now. I'm a single dad and am homeschooling my kids + WFH at the same time through this period of time. It's not easy being in 1200 sq ft. I would be willing to pay a lot more to give us a better space to live especially through COVID if it happens to cause another quarantine. My limit is...$50k ish, or losing 10% of the value. For me, that means an extra year or so of work for the house in July.

Dicey

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Re: closing on new build - to walk away or not
« Reply #9 on: April 23, 2020, 10:25:42 AM »
1. How much are you planning on putting down on the house?

2. What is the $6k in upgrades getting you?

3. Are they still actually working on the house right now? (In my state all such construction is deemed nonessetial.)

4. Do you have full custody of your kids?

5. Is the homeschooling permanent or temporary?

6. How are the new home's schools ranked?

7. How important is the oil industry in your area?

8. Are fencing and landscaping included in the price of the home?

I have experience on this topic. I'm still thinking about your question, but need more data to formulate a solid reponse. If you can think of anything else that might be relevant, add it to the list. I promise i won't tell you to trade the Tesla fr a beater ;-)

bradleylsmith

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Re: closing on new build - to walk away or not
« Reply #10 on: April 23, 2020, 12:44:46 PM »
1) 10% is the plan, or $53k. This is mainly because the interest rate was cheaper if I got a bigger loan. Seems backwards, but that's what it is.
2) the $6k represents 10% of the options I chose on the house. For $60k, that represents:
- air conditioning (not standard which is crazy to me)
- tankless water heater
- dual zone climate control
- extra wiring throughout
- 1 foot taller basement ceilings
- extra window in the basement
- upgraded cabinets, flooring choices
- covered patio
- 2nd sink in 2nd bath

3) they are, I have a walkthrough in two weeks of the mechanical stage being completed
4) half custody
5) homeschooling is only because of COVID. I have no idea if my state will lock down again in the future. I could see it happening in the winter.
6) pretty good, the kids will remain in the same school district they are in currently. We love their schools.
7) that's a really good question. CO used to be big into oil, but it's been dwindling the last 5 years. Still that may be a good factor to look into. Lending is also tightening up. I heard that Chase is now requiring 20% down for new loans.
8) landscaping is not included for the backyard. It's a small backyard. I'm on a premium lot so the front yard is bigger and taken care of with the HOA. (I wouldn't own it, but it's there to use)

Thanks Dicey! I really appreciate any help with this decision. It's encouraging to hear what you guys have to say. The Tesla was purchased with $12,500 in subsidies right when the federal one expired. It's worth $5k less then I paid for it, and it's saved that much in gas. So far it's been a good decision ;)

Michael in ABQ

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Re: closing on new build - to walk away or not
« Reply #11 on: April 26, 2020, 03:32:11 AM »
I think any significant price drop from foreclosures is going to be a year away at least. The second and third order effects are going to take a while to percolate through the economy. Are your future neighbors going to lose their jobs and sell their houses at a loss - thus driving down the price of your new house? Maybe, but probably not. They're probably white collar workers who are also making low 6-figures who are working from home. The cost of labor and materials might drop, but is that going to be offset by the lack of new supply on the market which would tend to keep home prices stable? Interest rates can't go a whole lot lower and are unlikely to go up anytime soon - so that's a non-factor.

You're paying a premium for new build just as you did for a new car. With that premium price you're getting what you want versus having to settle for what's available in the used market. It looks like you're in a financial position to do so.

I'd say stay the course.


former player

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Re: closing on new build - to walk away or not
« Reply #12 on: April 26, 2020, 05:04:38 AM »
As I see it every reason for you deciding to buy this house in the first place is still there, all that has changed are some of the outside circumstances and whether you can make a windfall gain out of them.  How important to you is that potential windfall gain and how likely is it that you will make that gain and that it will be bigger than your loss?

Others will have opinions on the local conditions and chances of profit/loss.  But I am looking at your salary and thinking that any profit or loss you would make on your real estate speculation would be insignificant in comparison and take up far too much of your emotional energy which would be better put into your job and your kids.


Duke03

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Re: closing on new build - to walk away or not
« Reply #13 on: April 26, 2020, 06:46:38 PM »
The way I see it you have 3 options:


1.  Walk away and try to get your earnest money back.  A lot of home builders won't put up much of a fight to keep your earnest money as it's not worth the hassle or bad publicity.

2.  Hope the appraisal comes in lite when it's time to close and they are forced to lower the price.  This is like a 1 out of 100 chance of happening fyi.  I've seen this happen, but can count on one hand how many times it's happened on a new build....

3.  I'd start dropping hints with the builder that you might have to renegotiate the agreed contract price.....or will be walking away and want your earnest money back.  They won't like it, but will be open to it if they think it will sit on their books and will cost them a lot in carrying cost....If they go for this don't expect them to lower the price by a crazy amount 15k-25k at the upper most.

SndcxxJ

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Re: closing on new build - to walk away or not
« Reply #14 on: April 26, 2020, 11:09:30 PM »
I don't see why there would be a housing crash.  Any foreclosures that might happen due to covid could easily be swamped by the lack of new home starts and lack of long term investing happening in housing right now.  I'm not sure bout your area but in my area trends are pointing to 3-4% rise in values in the next 12 months (source: Zillow)

dragoncar

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Re: closing on new build - to walk away or not
« Reply #15 on: April 27, 2020, 01:54:31 AM »
The way I see it you have 3 options:


1.  Walk away and try to get your earnest money back.  A lot of home builders won't put up much of a fight to keep your earnest money as it's not worth the hassle or bad publicity.

2.  Hope the appraisal comes in lite when it's time to close and they are forced to lower the price.  This is like a 1 out of 100 chance of happening fyi.  I've seen this happen, but can count on one hand how many times it's happened on a new build....

3.  I'd start dropping hints with the builder that you might have to renegotiate the agreed contract price.....or will be walking away and want your earnest money back.  They won't like it, but will be open to it if they think it will sit on their books and will cost them a lot in carrying cost....If they go for this don't expect them to lower the price by a crazy amount 15k-25k at the upper most.

Am I the only one leery about hardball negotiation with some people who haven't finished your house?  Who knows what kind of corners they might decide to cut?  I'm sure it's about as likely as a waiter spitting in your food but the possibility exists.

As FP mentioned, at your salary don't worry about the sunk costs.  Nobody should anyway, but it should be super easy for you.  Just decide if you would take the deal again if it were presented to you right now.  Only you can decide that (and I don't have any crystal ball about the CO housing or tech markets).

As to any ethical issues... there are none.  Presumably your contract lists the earnest money as "liquidated damages".  Everyone agreed that's the price they are willing to pay/accept to walk away.  Unless there is more to the contract due to it being a custom build...

But on the flip side, consider how these guys are doing.  Are they going to be able to keep up their side of the contract?  If they run into financial problems you again look at them skimping on materials, etc.  Maybe they are a large builder with a reputation to keep up or maybe they will disappear at the first sign of trouble.  Do they have an obligation to support the HOA while other units are sold?  Lets say they deliver your home but disappear.  If you have one out of five sold lots and there are 50 empty lots not paying common upkeep you can run into a blighted situation. 


bradleylsmith

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Re: closing on new build - to walk away or not
« Reply #16 on: May 02, 2020, 09:47:37 AM »
thanks everyone, I've decided should I have the cash for the downpayment I will get the house. It will be a pretty big factor in quality of life for the next 10 years. I'm getting 10% off the price in the form of a lower interest rate, and that helps ease some of the concern I'm paying too much.

It's true in my situation my effort is much better spent on crushing it at work and taking care of my kids. So I will put my efforts there. There may be a promotion right around the corner, who knows.

Car Jack

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Re: closing on new build - to walk away or not
« Reply #17 on: May 05, 2020, 09:33:25 AM »
I think it's the right decision to go ahead with the purchase.  If there's a dip in prices, who cares?  In 30 years when you decide to move, you'll laugh at how cheap houses were in 2020.  Overall, I expect you made the choice in order to get exactly what you want.  I don't know CO, but where I am, an existing house costs 80% of what a new build costs.  But then, an existing build would cost a lot to upgrade flooring, add lighting, and change up the floor plan to your liking.

Dicey

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Re: closing on new build - to walk away or not
« Reply #18 on: May 05, 2020, 08:17:04 PM »
1) 10% is the plan, or $53k. This is mainly because the interest rate was cheaper if I got a bigger loan. Seems backwards, but that's what it is.
2) the $6k represents 10% of the options I chose on the house. For $60k, that represents:
- air conditioning (not standard which is crazy to me)
- tankless water heater
- dual zone climate control
- extra wiring throughout
- 1 foot taller basement ceilings
- extra window in the basement
- upgraded cabinets, flooring choices
- covered patio
- 2nd sink in 2nd bath

3) they are, I have a walkthrough in two weeks of the mechanical stage being completed
4) half custody
5) homeschooling is only because of COVID. I have no idea if my state will lock down again in the future. I could see it happening in the winter.
6) pretty good, the kids will remain in the same school district they are in currently. We love their schools.
7) that's a really good question. CO used to be big into oil, but it's been dwindling the last 5 years. Still that may be a good factor to look into. Lending is also tightening up. I heard that Chase is now requiring 20% down for new loans.
8) landscaping is not included for the backyard. It's a small backyard. I'm on a premium lot so the front yard is bigger and taken care of with the HOA. (I wouldn't own it, but it's there to use)

Thanks Dicey! I really appreciate any help with this decision. It's encouraging to hear what you guys have to say. The Tesla was purchased with $12,500 in subsidies right when the federal one expired. It's worth $5k less then I paid for it, and it's saved that much in gas. So far it's been a good decision ;)
Hey, @bradleylsmith, sorry to be so slow in responding. Thanks for the detailed answers to my questions. Funny, the last time I bought a house from scratch, I had to put down 50% of the cost of all the upgrades. I agonized over every decision. Recently, I was going through paperwork and found all the original work orders. I am mostly pleased and pleasantly surprised at what a good job of prioritizing I did. If I only had to put down 10%, I'm sure I could easily have gotten myself in big trouble. (Ha! I sprung for a premium lot too and am so, so glad I did.)

If you are sure your job is secure, you love the house, and know that you'll want to stay in the area for at 5-10 years or more, I'd strongly consider it. My approach would be quite different than others have suggested. I'd look for something you could have the builder throw in to allay your fears of closing. Backyard landscaping? Something that would be relatively easy for them to do. When the builder of the house mentioned above screwed up the flooring installation (not knowing I was in the flooring industry and that hell, yes, I was going to notice), I asked for additional concrete to be poured. I had them widen the driveway, add a walkway, and increase the size of the back patio. It was easy for them to do and I didn't have to be there.  I also asked for a couple of trees. Got it all. It cost them virtually nothing. I still own that house and I'm glad for that extra wide driveway every time I get out of the car.

Now, how would I approach that negotiation? I'd tell the truth. That I'm worried about going through with it, given the current pandemic and future uncertainty. Then I would shut the hell up and see what they offer to entice you to close the deal. You have nothing to lose.

Dicey

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Re: closing on new build - to walk away or not
« Reply #19 on: July 11, 2020, 02:31:04 PM »
Hey, @bradleylsmith, what did you decide?

bradleylsmith

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Re: closing on new build - to walk away or not
« Reply #20 on: August 11, 2020, 12:32:23 AM »
well, I bought the house. While I didn't get a discount on the cost of the house, I did get a stunning 2.75% 30 year fixed interest rate with no points. They also chipped in $7000 towards the closing costs. More importantly, it's full of luxury for both me and my kids. It's going to be a good house.

Thanks for all the help, and calming me down enough to pull the trigger.

former player

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Re: closing on new build - to walk away or not
« Reply #21 on: August 11, 2020, 01:31:08 AM »
Thanks for letting us know, and here's to a life of luxury!