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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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