Given the historic lack of inventory in the real estate market, many buyers are flocking to purchase newly built homes.  The advantages of buying new home construction can include more affordable prices, structural warranties, and the ability to pick out custom fixtures.  On the downside, home builders often insist on using their purchase contracts that lack many buyer safeguards like consumer-friendly contingencies or a reasonable liquidated damage clause if the buyer fails to purchase the home.  In Oklahoma, a home builder took it one step further by suing a buyer for almost $160,000.00 even after the home builder resold the home for more money and retained the buyer’s $20,000.00 earnest money deposit.

The facts are as follows:  In 2022, the buyers entered into a purchase contract with the home builder to buy the property for $517,400.00 and put down a $20,000.00 earnest money deposit.  When the home was completed several months later, the potential buyer failed to close and soon thereafter filed for bankruptcy.  The home builder retained the buyer’s earnest money deposit and sold the home eight (8) months later for $524,900.00.

Despite selling the home for more money and retaining the $20,000.00 deposit, the home builder still claimed it was owed an additional $159,741.00 from the buyer for lost profits.  According to the home builder, it was a “volume builder” meaning it had the unlimited ability to construct homes and an equally unlimited supply of buyers for each home it built.  Therefore, it was entitled to its net profit from the failed transaction even though it sold the home for a profit.

Judge Terrence L. Michael disagreed.  Judge Michael felt the novel legal theory of the home builder was the “wrong tool for the job”, not “strong enough to bear the weight of its foundationally shaky arguments”, “does not pass inspection”, and had “been constructed out of whole cloth, with no more substance than the proverbial house made of straw (or sticks if you prefer).”  Instead, the court followed Oklahoma law that measured damages for a breach of purchase contract to be the contract price less the market value of the property.  Since the market value exceeded the contract price the home builder suffered no damage, let alone almost $160,000.  Arizona measures damages similarly but also allows for the possibility of consequential damages if applicable (expenses related to the 2^nd sale).  Revised Arizona Jury Instructions, Contract Instruction #20.

While the Oklahoma home builder’s attempt to double dip was thwarted, it illustrates the lengths some home builders will go to pursue contract buyers if they fail to close.  The danger is real.  Best practice for agents representing buyers of new construction homes is to recommend to their buyers that they consult legal counsel to review the builder’s purchase contract and advise them of their legal obligations and potential liabilities. Agents should not try and interpret contracts with which they are not familiar and should not under any circumstances put themselves in a position where they can be accused of offering legal advice.

In re Potts

2023 WL 4882437

Aaron M. Green, Esq., a licensed Arizona attorney, is the General Counsel for the Arizona Association of REALTORS®.  This article is of a general nature and reflects only the opinion of the author at the time it was drafted.  It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.