What happens to new home sales contracts in a market downturn?
David Bernstein has a Volokh Conspiracy post remarking on the apparent decision by homebuilder Brookfield Homes to collect expectation damages rather than liquidated damages from prospective buyers who walk away from home purchase contracts.
Translated into English: Instead of just taking the earnest money deposit, Brookfield apparently intends to sue buyers in default for the difference between their contract price and the price for which the home actually sells. Is this true? Well, it looks that way from the quote of a certain Mr. Hughes, in a WSJ article I can't access (I don't subscribe), quoted in a post here at The Housing Bubble Blog. But without seeing the actual contract provisions, I can't tell how much leeway Brookfield has given itself.
It wouldn't surprise me to see some changes in homebuilders' marketing and legal strategies as markets fluctuate. But as David Bernstein and the commenters on his post suggest, the market will probably weigh against decisions like Brookfield's, especially if the market softens further and puts even greater competitive pressure on builders.
I haven't yet heard of builders demanding damages greater than the earnest money deposit here in Colorado. Builders may want to respond to softening markets by increasing their earnest money requirements in an effort to encourage buyers to financially commit themselves more strongly to their contracts, but at the same time fewer prospective buyers will be willing to put up larger deposits and assume greater risks. Requiring a big deposit can scare customers away.
Supplement: Bernstein wonders why the builders don't protect themselves against defectors and market price fluctuation by waiting until the house is almost done before finding a buyer. The answer is that a house is worth more to a buyer who can select customized "upgrade" packages for the house, and it's too late for that once construction has gotten far along. For example, if a buyer wants a nine-foot basement instead of an eight-foot basement, the builder needs to know before excavation is done.
