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Home builders keeping EMD after house doesn't FHA appraise?

Real Estate Agent with Windermere Prestige Properties S.74766

I need some clarification because unless I'm completely nuts, I don't get why this new home builder is doing this!  I have some newly aquired buyers that are trying to get out of a contract with a local Vegas builder and get their $5k EMD back.  The house they are buying FHA appraised $28k under contract price.  The buyers asked them if they would reduce and the builder basically said:  1.  The appraiser did not do his job. 2.  They want to wait until other homes in escrow close to see what they close at. 3.  Would not give them a timeframe/new close date.

After a couple of weeks, these buyers sought me out to start searching resale homes instead and want to cancel the contract based on FHA appraisal clause/amendatory clause that the builder signed, the fact that they are technically out of escrow- the contract stated close in 30 days (which has past plus a couple weeks) and the sales agents did not have them sign any sort of extension stating when they would close.

The buyers have on more than one occasion mentioned cancelling to the builder and they were told EMD would be kept for them cancelling because "they were still in negotiations".  Obviously my clients didn't see it that way, there is no negotiation!  You either work with the new appraisal price or cancel the contract. 

I contacted title on their behalf to inform them of these circumstances and for the file to go straight to title's legal dept upon cancelation.

Am I missing anything here on why the builder seems to think they are entitled to keep EMD AND keep these people in limbo for who knows how long after escrow has expired?  Please, i would love anyones input so I can give them good info to go back to the builder with.  Thanks!

Roy Kelley
Retired - Gaithersburg, MD

Somebody should read their contract and advise the buyers of their obligations. If the builder's action violates the contract, report the situation to the attorney general of the state.

Aug 03, 2009 11:42 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Was the EMD payable to the builder? I know some large builders do this, but it's always risky for the reasons you're in dispute with the builder. I always recommend against letting the seller/builder hold ernest money. With builders going broke every week, I'd do something quickly. Have you spoken with your broker? The purchaser can always sue in magistrates/small claims court unless the amount is over the limit for such cases, and they can do it themselves.

Aug 03, 2009 11:43 AM
Donna Harris
Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com - Austin, TX
Realtor,Mediator,Ombudsman,Property Tax Arbitrator

If the builder specifically signed something that states the earnest money needs to be returned, have your clients highlight that part, walk their butts into the sales office and demand it.  And then make a lot of noise around the office if other buyers walk in about how "unfair" they've been treated.  They much rather get your buyer out the door than have the other buyers walk away too.

Aug 03, 2009 11:50 AM
Cynthia Luna
Windermere Prestige Properties - Las Vegas, NV

Please remember, I am not the agent of record for these buyers with the builder- they did not use their own agent and just walked in off the street and used the builder's sales agents.  They came looking for me AFTER all of this.  I have been unable to actually see the builder's contract, but I highly doubt they can override the amendatory clause and the COE date that they themselves put in the contract.


Hi John,

The EMD was payable to the escrow company and is sitting there.  I have talked with the escrow officer and she agrees that if the builder tries to claim the EMD she will need to send it to legal because there are too many issues here that should be clear cut as to EMD being returned to buyers.


Hi Donna,

I don't know how things are going in TX, but here in Las Vegas most builders are going bankrupt and buyers walking through the door of a sales office are far and few in between.  They might be there 24/7 for the next week trying to catch a buyer coming in!

Aug 03, 2009 12:21 PM
Dallas Jensen
Adamsville, NT

What does the contract say? Whatever the buyer signed is what will happen. I work for a builder and have never heard of this...

Aug 03, 2009 12:35 PM
Rick Cordisco
Pocono Mountain Lakes Realty - Lake Harmony, PA
Pocono Real Estate Professional

Cyntia, I would advise them to highlight the portion of the contract about appraisals  and go in and ask one last time for their deposit money. If they refuse then advise to seek an attorney and go after them for even more and fast. Like John said these guys are falling over every week and if this outfits homes aren't appraising then they are a good bet to go under too.

Aug 03, 2009 12:36 PM
John Rakoci
Eagle Realty - North Myrtle Beach, SC
North Myrtle Beach Coastal Carolinas

Every state has different laws and the contracts are written accordingly. I'm licensed in two states, one just changed their laws. Add the fact builders contracts are loaded toward the builder and it is a headache. I always have buyers start with $1000 EMD and if needed negotiate as low as possible. SC has different means of clearing a dispute depending on the value. When working with a builder I try to get the EM into my agency trust fund if at all possible but it really makes little difference when there is a dispute.

Let the builder know the buyer is going to their lawyer to handle the situation and every lawful means of making the situation public will be used. Not one wants lawyer fees and even less bad publicity.

Aug 03, 2009 01:26 PM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

I have sold KB, Richmond, DR and Rhodes here.  Every single one of their contracts is geared towards keeping the earnest money no matter what (contingencies are few and far between.) 

As long as your buyer has a fully executed FHA Amendatory Clause (signed by builder's officers) they should be able to file a complaint via SNHA or GLVAR and mediate. 

Pretty much all contracts (builder and GLVAR) state that mediation must be completed prior to legal action.  If they hire a real estate lawyer to send them a notice on law firm letterhead (and your clients backed out on a contingency) odds are that will get them their EMD back VERY quick.  Sometimes you have to give a couple hundred to get a few thousand back.

Good luck :)

Aug 03, 2009 01:46 PM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Coldwell Banker Realty

Earnest Money is defined as the $1,000 that the Buyer loses when in contract on one of our listings and they try to pull some "funny stuff"!

Aug 11, 2010 02:40 AM
Cynthia Luna

Hi Tony and Suzanne,

I'm not exactly following your comment- I know what EMD is and what it stands for.  I too am a seller and buyer's agent, but I believe in being fair to both parties especially over a "true contingency" issue- not "funny stuff" as you put it.  In NV, buyers just don't lose $1k when in contract, there are duties on each side and usually some contingencies.  The builder had every right not to sell for $28k less if they did not want to, but that does not entitle them to keep $5k emd when they knowingly accepted an offer from FHA buyers with an amendatory clause.

I posted this story appx a year ago and I have a final outcome to share:  My clients gave me permission to speak with the escrow company on their behalf that was holding the EMD.  Well, I had worked with this escrow company before and knew the rep so I started there.  Title agreed that yes, an amendatory clause was signed by all, and yes, the builder never thought to extend close of escrow date due to all of this, so the seller/builder was found to be at fault for being out of contract.  Therefore the buyers received all funds back from title.  I printed up a cancellation for buyers to sign and sent it to escrow for them.  These clients ended up buying resale with me in the same builder community ! )  Plus, they were so happy about the work I had done and going above and beyond that they have since referred me to several people.  It pays to treat others how you would want to be treated!  Good Karma helping people get $5k back!

Aug 11, 2010 04:08 AM

This thread is quite interesting. As a custom home builder, who is fiscally responsible enough to be one of only two companies out of almost a hundred that used to build in the county we primarily build, I am astonished to see some of these comments. Myself and my company are not and have not ever been near bankruptcy, despite what many of you believe in your comments. Guess another case of throw the baby out....

What many of you are expecting is that a builder take all of the financial risk to build and construct a home to your buyer's liking and be able to walk without any financial penalty if the house doesn't appraise properly. Any real estate professional these days should know that occasionally appraisers miss totally appropriate comps and don't do their job perfectly as they are human. However, buyers add options that we all know might not add to the value of the home as much as they might want....so should we tell our customers "No, we will not build your home the way you like it Mr and Mrs Johnson?"

If the builder signed the amendatory clause up front, then by all means both parties intentions were clear from the start. I ran across this when a lender asked us to sign the amendatory clause before they locked their loan. I don't think so. I'll be happy to sign it and release any and all of our rights when a fair appraisal comes in. However, the amendatoy clause is a very slick move to try to slip in at the last moment. Again, if agreed upon from the start....there should be no issue and EMD should be returned. However we frankly would never accept a contract with that contingency. With how low profit margins are in this business now a days, it would be irresponsible to my company and it's employees to sign such clauses. Just my two cents from the other side of the table. 

Oct 14, 2012 02:04 PM