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Recent Articles : Know Your
Rights Concerning Real Estate Deposits
On New Homes
Typically when you buy a new home in Florida, the builder
will require that you make a deposit equal to 10% of
the purchase price of the home. Sometimes for homes less
than $150,000.00 the builder may accept a deposit of
a lesser amount. On occasion when a buyer is purchasing
a new home in excess of $500,000.00, the builder will
attempt to obtain a deposit for as much as 20% or 30%
of the purchase price. Naturally, as most things in real
estate, the amount of the deposit is negotiable including
the timing of the payment of the deposits.
If one is buying a new home, the question that always
arises is whether or not to place your deposit in escrow
or release the funds to the builder. Under Florida law,
the Buyer has a choice and must decide in writing which
option to choose. While at first glance the decision
would appear simple: Put the money in escrow. Indeed,
the decision requires carefully weighing factors such
as whether or not the builder is likely to complete the
project and the general risk tolerance of the Buyer.
If the Buyer elects to place the earnest money deposit
in escrow, the builder has the right under Florida law
to charge the purchaser the builder's cost of borrowing
that amount of money, less any interest that the builder
is able to obtain on the escrow's while the deposits
are being held in the bank. What does that exactly mean?
For example, if it costs the builder 12% in annual interest
to obtain an unsecured loan and the Buyer's deposit is
$20,000.00 and during the course of construction, which
we shall assume for purposes here is one year, the builder
obtains interest at the rate of 3% for the Buyer's Deposit,
at closing the builder will charge the Buyer 9% (12%
- 3%) or $1,800.00 for the "privilege" of having
the funds held in escrow.
So as you can see, that for the privilege of being able
to sleep well at night knowing that your funds are safe
and secure, you have effectively purchased an insurance
policy for $1,800.00. Naturally, if your deposit is for
less, or the interest rate that the builder obtains for
you is more, and if the builder can complete the home
in less than twelve months the cost to you for having
your funds secure and safe will be less.
Having said all this, sometimes builders during the
course of construction will provide an incentive to the
Buyer to release their escrow to the builder. Such an
incentive usually includes an abatement of costs associated
with the escrow. Some buyers who had previously escrowed
their funds and now see that construction is progressing
and their builder appears not to be having financial
problems, will then consider releasing their escrow to
their builder.
Remember, the decision of whether to release your escrow
is yours. Never allow a builder to talk you into releasing
your escrow if you do not want to do so. In fact, if
a builder appears too eager to have you release the escrow
to them, maybe, just maybe, that is a warning signal.
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