From time to time we are contacted by Real Estate Professionals, who are working with new home or lot sales, who need a refresher course on the requirements involved with this type of sale. It is important for the Developer/Seller, the Real Estate Licensee, and the Escrow Agent to know and understand that this type of transaction is different – it is handled just a little bit differently.
We are often asked for a refresher on WHEN, exactly, is a subdivision subject to DRE review? The answer is quick, but multi-pronged.
- Located inside a City
- No HOA – single family homes
- All sales are of completed residences – NO vacant lots
It is important that all parties know and understand that no Public Report requirement doesn’t mean there aren’t still a few housekeeping items to address.
All funds MUST be deposited with and held by Escrow until closing. It is a rare home sale that doesn’t involve buyer’s selection of options and upgrades. Any options or upgrades that are selected – in fact, any finish items – are considered part of the purchase money and as a result must remain with escrow until closing. THE ONLY EXCEPTION to the deposit requirement is when the Seller posts a “Purchase Money Bond” with the Department of Real Estate. Commonly referred to as a “600 Bond,” the security posted in an amount sufficient to cover all funds to be released to Seller at any given time.
For example, if you are developing and selling 10 lots, and each lot may have $50,000 in options/upgrades funds, 10 x $50,000 = $500,000 bond value. By posting a bond in this amount, the Seller can withdraw buyer deposited funds PRIOR to close of escrow. The bond is filed directly with the DRE, and protects the buyers against Seller defaults or inability to refund the deposit if escrow fails to close. In that event, the buyer’s recourse is to make a claim against the bond.
If the Buyer defaults, the Seller’s recourse is through utilizing the “Liquidated Damages” provisions in the purchase agreement. It is important to note that any amount claims as liquidated damages that exceeds 3% must be proven; and the seller’s total amount claimed as liquidated damages cannot exceed the amount deposited by buyer.
It is definitely a good practice to ensure that the buyers are depositing adequate funds to protect the Seller in the event of a default!
Advertising Guidelines. To avoid any claim of misrepresentation, care must be taken to avoid statements or pictorial representations that might be false or misleading. The DRE recommends using vicinity maps if you want to reference waterways or other nearby attractions in your advertising.Sales Promotions. Although the current market doesn’t necessitate promotional giveaways (gift, free trip, appliances, etc.), any time that such promotions are used, the value of the giveaways must be bonded for with DRE, even though no Public Report is required.