HOT-SELLING COMMUNITIES ARE USUALLY welcome news for builders. But not when “For Sale” signs crop up shortly after a community opens its doors. As house prices skyrocket, builders are facing a dilemma: how to weed out home buyers that are merely looking to turn a profit. Some communities are seeing 25 percent to 40 percent of the buyers turning out to be investors, says Jeffrey Masters, a housing industry lawyer in Los Angeles. To deter quick-flip investment buyers, builders are beginning to require buyers to sign a contract stating that they intend to live in their new homes for at least one year. Big builders rolling out residency requirements include Standard Pacific Corp., Shea Homes, and Lennar Corp.
How enforceable are these contracts? It's a free country, after all. Masters says the more reasonable the contract, the more enforceable it will be. He says exceptions that should be written into the one-year residency requirement include death of the buyer; death of a spouse; divorce; mandatory job transfer; and medical or financial emergency.
But it's also questionable how effective this residency requirement is: Who wants to take a home buyer to court? “I've been at this for 25 years, and I can't remember a time when this was litigated,” acknowledges Masters. “But the builder should have some contractual protection.” These protections are becoming more sophisticated.
Some builders require a letter from the buyer's lender stating that the loan was approved on the condition that the home would be owner-occupied. Other agreements state that if the buyer puts the home on the market within a year, the builder gets to repurchase the home at the original price.