Contract cancellations roil D-FW new home buyers

North Texas shoppers face unprecedented barriers to finding homes.

With building material costs rising and a shortage of real estate for sale, some buyers are forced to cancel their new home purchase contracts. Or they will be told that they will have to raise more money to close the deal when the house is ready months later.

Such situations were unknown until recently – and will raise the eyebrows of long-time market observers.

“It’s a really frustrating time,” said Ted Wilson, director of Dallas-based housing analyst Residential Strategies. “I’ve never seen anything like it in my career.”

Home builders have sold thousands of homes in the Dallas-Fort Worth area that they haven’t even started. And so many thousands of homes are in arrears that some builders are no longer taking contracts for further sales.

However, when home builders find that the profit on a planned home has evaporated due to construction delays, they can go back to buyers for more money or simply cancel the contract and return the deposit.

That’s what happened to Heather Wilson earlier this year when a builder canceled her contract to buy a new home.

“It seems to be a pretty questionable practice – at least to me – where a builder (or builder) tries to take advantage of the hot housing market and give up valid contracts so they can resell them to higher bidders,” Wilson told an E- Mail.

Wilson, who moved here from Southern California, said she soon heard of other cases of new home buyer contracts being terminated. “We ended up buying an existing house and doing without building a new one,” said Wilson, who has just moved into her home in Frisco.

Most new home purchase contracts contain clauses that protect a builder from losing money when construction costs skyrocket.

Some home builders are giving themselves even more leeway with “termination clauses” that allow them to terminate contracts at will, said real estate agent Todd Luong of ReMax D / FW Associates.

“This year builders have tacitly added that new word to their sales contracts and buyers are being surprised,” said Luong. “In principle, the builders can now terminate their contracts without giving a reason.

“New home buyers need to be very careful and read the fine print before signing anything or paying a deposit.”

Buyers may not have a choice when it comes to a new home. The shortage of real estate for sale in North Teas is so great that home builders cannot keep up with demand for new home rentals, and the existing home market has a record-breaking low inventory.

There are reports that some builders do not price their homes, but rather place bids on the properties when they are completed.

“There have been a few situations where homes have been released on an auction basis in order to maximize the price of a home,” said Ted Wilson. “In normal times when prices are reliable, builders don’t have to do that.

“I hope it’s more of a temporary situation.”

A home builder based in North Texas is bucking the trend.

New construction of a house in the West Crossing district of Bloomfield Homes in Anna. Bloomfield promises to fulfill its home purchase agreements. (Jason Janik / special article)

Bloomfield Homes advertises to guarantee its contract prices even with rising construction costs.

“Even if construction costs rise during the construction process, Bloomfield Homes will keep the contract price because we believe a deal is a deal,” its advertisements read.

Due to long-term agreements with subcontractors and building material suppliers, the builder is able to keep his contracts.

“Many potential buyers and brokers are now aware and asking if there is a price increase clause in our contract,” said Don Dykstra, CEO of Bloomfield. “We are also regularly asked by the 2,000 backlog customers whether we are trying to change the price.”

Phil Crone, executive officer of the Dallas Builders Association, said the home construction market will at some point return to its former ways of doing business. But it will take a while.

“It’s going to be a long drudgery,” said Crone. “I haven’t seen anything like this in the years I’ve been doing this.

“Those clauses in the contacts have been around forever, but I’ve never seen them need to be used,” he said. “They are meant to be used in exceptional circumstances, and that is exactly what we are at right now.”