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New Construction Deposit In Jeopardy

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM #LAW 645

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A reader has put a deposit down on a home in a new subdivision. After two years, they learn that the developer has not gotten final approval for the development. Sam and Ilyce give advice on how to get the deposit money back and suggest hiring a good attorney.

Q: Two years ago, we put in a reservation for a lot in a new subdivision. My deposit was placed in an escrow account and we were to close in ninety days.
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We sold our house and rented an apartment in anticipation of building a new home.

One year after we signed the reservation, we still hadn't closed due to developer delays but work on the property progressed. Last year after the work was complete, we entered into a contract with the developer to buy the land and gave them a ten percent deposit. We were told we would close in two months.

We later found the deposit was not put into an escrow account, the developer had not gotten final plat approval for the development, and we were not going to close.

An attorney has told us we really don't want to sue the seller as it will be extremely expensive and time consuming. Is there a statute regulating what is a reasonable time frame to close on a contract? Can the developer use our deposit instead of placing it in escrow account?

A: If the seller has offered to return your deposit to you, you may be better off taking the money and buying somewhere else. When a developer has been unable to obtain the required approvals for the subdivision after two years but has started work on it, it’s a huge red flag.

Either the developer is in a dispute with the local municipality or the developer may be in financial trouble and is using the lack of permits as an excuse not to proceed with the development.

In either case, unless you have information that confirms that the developer has placed your money in an account that is separate from the developer’s and safe from creditors, your money may be at risk and you should get it back.

In just about all cases, earnest money for the purchase of real estate should be placed in an escrow: an account that can’t be used by the developer and can’t be used to pay the developer’s creditors in case the developer is in financial trouble.

Preferably, you’ll make out the check directly to the entity that will hold the money. The escrow holder should be an independent third party with no ties to either side of the deal.

Whether right or wrong, in many places, the earnest money (or good faith deposit) is held by the seller. If the seller holds the money, the money can be at risk if the seller has financial problems and goes into bankruptcy or if the developer decides to use the money for another development or even for his or her own use.

If the seller continues to refuse to return the money, I suggest you take action to protect yourself now. You may have to file suit against the seller to force him to return the money. If there are many buyers that are owed money, those buyers that are most aggressive and push the developer harder in the early stages of legal action are most likely to get whatever money is there.

Those that wait the longest to take action might just have to kiss their hard-earned deposit good-bye.

Talk to your attorney about what the seller is offering to do. If the seller believes that the company will get the approvals shortly -- and you can confirm that information with the local governmental officials -- you may want to wait it out. If not, get your money and run.

There are state laws and federal laws relating to the sale of land. Some states have specific requirements relating to earnest money and the party that may hold it, particularly when it comes to condominium developments.

One federal law, the Interstate Land Sales Act, governs the sale of certain types of land. You may fall within requirements of this law. Once again you need to talk to your attorney about these issues. If the attorney you have seems to minimize the risks involved in your situation and does not have concrete information to support his position that your money is safe, you may want to find another attorney.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com