Hefty Deposits Are Risky
With New Construction

Question: I'm considering purchasing a new single-family home in a large development from a well-established builder in the New York metropolitan area. Construction on the home is scheduled to begin in January 2002 and should be completed by the end of August. The builder requires a 10% down payment upon signing the contract and an additional 10% when construction begins in January. Given the state of the economy and the length of time it will take to build the home, I'm concerned about giving the builder such a large down payment in advance. What are some of the potential risks and what, if any, protection do I have under the law?

-- Nick, Rye, N.Y.

Nick: I would certainly be apprehensive about giving a builder a large sum of money to be used toward the purchase of a home that hasn't been built. Remember that you won't earn any interest on that money, and if the builder should go out of business or your home never gets built, you could have trouble getting it back. As a way to get some protection, insist that the money be kept in escrow until the home is built and the purchase is completed.

Each state has different rules regarding how builders can handle the down payment. In California, for example, builders generally may take only refundable deposits. Since I'm not familiar with the rules in your state, I asked New York attorney David Ganz. He says, "In New York, it is common for a builder to ask for a substantial down payment -- 10% being usual, though I've seen higher. [The closing date] would typically determine when the funds are released. I have seen instances where a builder negotiates to receive the right to use the escrowed funds -- to withdraw them from escrow and use them for construction -- but most lawyers don't like to approve that kind of transaction because if the builder goes south, so does the money."

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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