Good business is good for both parties
Another week, another confusing property story; it can be difficult to keep on top of them all!
The most recent article doing the rounds on social media this week has the alarming headline ‘Deposits at risk as developers drop protective clause’. This article refers to the subject to loan approval clause, which is standard in most new homes contracts (unlike the vast majority of second-hand purchases). The main point of the piece is that apparently “An increasing number of new-build developers are refusing to include the protective clause that was once commonplace”. What is interesting about this story is how it conflicts with our experience on the ground. As experienced buyers and investors will know, making a contract subject to finance was next to impossible in the early days of the crash and subsequent recovery, and for good reason; purchasing off-plan was almost unheard of once the market imploded, also, home builders simply could not get finance to build without unconditional, signed contracts in place.
In practice, this protective clause for buyers is actually more common today than it was just a few years ago. If anything, I would suggest that fewer developers, and home builders in particular, are dropping this clause from their contracts today.
And this is positive for new-home buyers. Clearly, if a purchaser who intends to rely upon mortgage finance signs a contract without that clause, they risk losing their contract deposit (as distinct from the booking/holding deposit) if their finance does not come through.
The consequences for those contractually bound not being able to secure finance when the time comes is that they will be unable to fulfil their obligations under the contract, resulting in a forfeited deposit (typically 10% of the purchase price) and a potential legal action for breach of contract. From my perspective, one of the more sinister assertions in the article is that developers are using incentives like free white goods to entice potential buyers into signing unconditional contracts in a hurry.
As many new builds are purchased off-plan, even loan-approved buyers will find their Approval in Principle (AIP) or property-specific approval will have run out well before the properties are completed and ready for draw-down of funds. Of course, there is an assumption that once a buyer secures loan approval then it should be relatively straightforward to have that approval renewed; this is true most of the time but it is quite a dangerous assumption as there are certainly exceptions to this where personal and financial circumstances change over the build period.
For the sake of clarity, let me first point out that I can only speak for Victoria Homes; having said that, I was genuinely surprised to read this about our contemporaries. In reality, it is not in any home builders’ interests to entice buyers into contracts that they are unlikely to be in a position to successfully close. This is a waste of time and resources, and merely serves to frustrate both parties.
In my experience dealing directly with home buyers in Dublin over the past few years, purchasers’ solicitors insist on this being a standard clause (as per the established Law Society guidelines) and I am not aware of any reputable developer looking to have that removed – unless they are selling to cash buyers exclusively. Here at Victoria Homes, we work with our individual purchasers and negotiate with them depending upon their individual circumstances. For example, in the past we have taken booking deposits from potential purchasers who had a house on the market, on the basis that the house they were purchasing was still at construction phase. Unlike many builders, we sell our homes to buyers directly, with no third-party or external estate agency involvement, and one of the great advantages of this is that we have the opportunity to build relationships with our intended purchasers. This is a much more efficient and transparent way to deal with such an important purchase for people.
Finally, I should point out that white goods are standard in all our developments and certainly never used as an incentive to sign an unconditional contract!