Let’s be frank – navigating the world of DRE can be confusing and convoluted. There are so many subdivision sale requirements and almost no resources available to the general public that promote understanding of the topic.
Our company is often asked what requirements are involved with subdivision-type sales. Here’s hoping this article can help by shedding light on a few guidelines surrounding these requirements.
1) Check To See if You Need a Public Report
Subdivisions of five or more lots will need a Public Report. However, one exception to the rule applies based on the following three combined circumstances:
- Your subdivision is located within city limits
- There is no Home Owner’s Association attached to your single-family homes
- All of your sales are completed residences (no vacant lots)
It is important that all parties (Developer/Seller, Real Estate Licensee & Escrow Agent) understand that even though your subdivision may not require a Public Report, there are still rules that apply. Check out our website for more information on Public Reports and call us today for advice on your specific project.
2) All Funds Must be Deposited With and Held by Escrow Until Closing, Even if Exempt from a Public Report
It’s rare for a home sale not to involve a 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 this deposit requirement is when the Seller posts a “Purchase Money Bond” with the Department of Real Estate, commonly referred to as a “600 Bond.” This is done so that the Seller can use or pull out money in advance to pay for construction, materials, etc. and protects the Buyer against Seller defaults or the inability to refund the deposit if escrow fails to close.
If escrow fails, the Buyer’s recourse is to make a claim against the bond. However, 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 claimed as liquidated damages that exceed 3% of the purchase price must be proven; and the Seller’s total amount claimed as liquidated damages cannot exceed the amount deposited by the Buyer.
Sellers- ensure your Buyers are depositing adequate funds to protect you in the event of a default!
3) Calculating a Bond Value
When calculating a bond value, take the number of lots you are developing and selling and multiply by the dollar amount of your options/upgrades. Here is an example of a 10 lot subdivision with enhancements valued at fifty thousand dollars:
10 Lots X $50,000 value of enhancements = $500,000 bond value
By posting a bond for the above amount, the Seller can withdraw up to $500,000 deposited funds before the close of escrow. This type of bond is filed directly with the Department of Real Estate. Contact our Company today to assist you with filing your purchase money bond.
4) Avoid False Advertising
To avoid any claim of misrepresentation, care must be taken to avoid statements or pictorial representations that might be false or misleading. The Department of Real Estate recommends using vicinity maps if you want to reference waterways or other nearby attractions in your advertising.
5) Make Sure to Bond for Sale Promotions
Although the current market may not warrant promotional giveaways such as gifts, a free trip to the Bahamas, free appliances, and so on, these types of incentives may attract buyers in a down-market.
Who wouldn’t want to score a trip or washer/dryer that fits perfectly in your new home?!
However, it is important to note that any time that such promotions are used, the value of the give-aways must be bonded for with the Department of Real Estate, whether or not a Public Report is required for the development.
