Buyers often wonder why buying a new home seems so much more complicated than purchasing a re-sale home. For an existing home, the initial "earnest money deposit" is usually enough to take a property through escrow to the closing date, when you'll need the remainder of your down payment. Why, then, do builders ask for more deposits along the way, and where do they all go?

To begin with, deposits for anything beyond the base price and included features in a new production home will usually be necessary before the builder can proceed with adding upgrades, architectural options, or custom changes. Unlike the construction process of a custom home, production home builders oftentimes put themselves at risk in many ways. When building your home on your own lot, as in a custom home scenario, contractors are able to take "draws" from an already funded loan to make these additions to the house. They can also feel confident that the home buyer will indeed remain the buyer throughout the entire process.

Production builders are vulnerable in the respect that they may have no guarantee the buyers will perform, even though buyers may be fully qualified for a loan. They take the chance that they are individualizing one of, perhaps, several hundred homes they will build that year, and cannot proceed with a "deviation from the norm" without ample "good faith" monies from the buyers making the request. It can cost them not only up-front monies with their sub-contractors, city or county architectural review boards, and added labor costs, but also damages should they have to re-sell the home with your changes to it.

Why do these builders require all this money so soon? Your building superintendent has the responsibility to his builder to schedule each aspect of the home's construction as early as is feasible on each and every home he builds. A third stall on the garage will require a different permit from the city and more concrete from their supplier; a master retreat option will force him to communicate the change to framers, drywallers, electricians, and plumbers. Add to this fray the corporate office personnel who will need to generate detailed paperwork, and get pricing (in a building economy where the prices on new home construction materials can go up daily!) and communicate all this to the field. What seems like a simple request to you and I to make a few custom changes can create a whirlpool of activity behind the scenes. Multiply this times the number of homes in a given community, and then again by the number of communities the builder offers in the area, and you can start to understand why all these safeguards need to be in place.

The deposit monies you are required to pass through to the builder for your upgrades and custom changes are usually a credit to your down payment monies. The clause in most real estate contracts dealing with "liquidated damages" should have been explained to you by the sales consultant as the vehicle by which both seller and buyer are protected should a default of the purchase agreement take place.

Exceptions to deposit monies automatically becoming a part of the down payment may be fees required by the builder for unalterable custom changes made to the house. These fees may not be re-couped by the builder in some cases (architectural fees for special work done, special permit fees charged by city or county offices, etc.) and may be deemed "non-refundable". Each builder has a different way of dealing with these issues, so you'll need to get a clear picture from your sales agent how the deposits will be designated. The addendums to you purchase agreement should state this clearly. If not, as they say, get everything in writing and signed by both you and the builder.

Builders feel confident in building a new home to your specifications when timely deposits are put in place by the buyer. After all, the builder, throughout the entire process until the close, is building the home on their land with you in mind right up to the walk-through, or formal presentation. It is their ultimate goal to see your kids playing in the front yard or your welcome mat gracing the new front porch.

Published: October 30, 1998

Use of this article without permission is a violation of federal copyright laws.

A veteran of the real estate and homebuilding industries since 1986, Dena Kouremetis first joined Realty Times as a new homes writer in 1998. Since then, she has authored four books, written consumer columns on new homes issues for websites and newspapers all across the country, contributed to builder trade magazines, appeared as a guest expert on several radio shows and even created a ten-chapter podcast for LendingTree.com’s homebuilder website, iNest.com, now available on iTunes, entitled Uncharted Waters; Navigating the Purchase of a New Production Home. Kouremetis recently joined her local Folsom, CA Coldwell Banker office as a broker associate while continuing to write for the real estate industry. For the past three years, she has been training real estate agents for both the resale and new homes industries, putting her experience, research expertise and gift of expression to work to help others entering the business.