Tuesday, April 19, 2005

DHI Cancelation Rate 17-19%

Listening to the DR Horton conference call, the cancellation rate on backorders is at 17-19% and higher in Las Vegas, which they claim is low for the industry. On the housing start decline the firm said the important factor is that the big builders will take market share from the small builders.

The large companies have said this for a while, but it doesn't change the fact that the slowdown is a response to the oversupply that exists. A spokesman said they will close 400 fewer homes than expected in Las Vegas this year. "We're not happy with Denver," one speaker noted.

14 Comments:

At 8:52 AM, Blogger deb said...

How does that cancellation rate compare historically?

I know people who have deposits down on "investments". It is pretty tempting. You put down a small deposit. If the market continues up, you close and flip it. If not, you walk. They will walk if it doesn't look good in a few months when they are nearer completion.

I think when the music stops, we will see a mind boggling number of cancellations. The builders are under reporting the number of investor buyers, I am sure. I bet many buyers do not neccessarily 'fes up to the builder that they are actually investors.

 
At 9:01 AM, Blogger dryfly said...

My question is similar to Debs... when are they 'locked in' and contractually obliged to ‘close’ or make compensation? I know they can walk anytime up until construction starts… how about after construction starts? And what happens if the go past the point of no return and they can’t make the close? What then?

I haven’t heard a lot about these possibilities? Any ideas?

 
At 9:04 AM, Blogger Ben Jones said...

(How does that cancellation rate compare historically?)

I'm not sure, but 17% is high enough to question a "backlog" arguement. Your right, the buyers will bail in large numbers.

25% of their business is "interest only".

 
At 9:05 AM, Blogger Ben Jones said...

(when are they 'locked in' and contractually obliged to ‘close’ or make compensation?)

I think that varies state to state but generally the buyer can pull out prior to completion.

 
At 9:11 AM, Blogger Sunny said...

When the buyer can "pull out" is a contractual issue that needs to be analyzed according to the particular contract. From a practical point of view, if a buyer walks, regardless of the contract, the builder keeps his deposit (even when the K says differently; they make you chase them in court). Builder might then pursue a specific performance remedy if, for example, he begins to have too many cancellations and "force" the buyer to "buy". In all likelihood, the builder would get nothing more than a money judgment against the buyer and buyer would then probably go see BKLawyer.

 
At 9:15 AM, Blogger deb said...

In CA, I believe the buyer can walk up until the house is pretty well complete. The builders do make the buyer pay cash for any options/changes etc. But, if a buyer sticks with the standard finishes, they have a lot of time to back out with VERY little downside.

 
At 9:19 AM, Blogger Ben Jones said...

Sunny,
How could any builder pursue such actions against hundreds of individuals? The downpayments are small enough that any sane person would walk away, as Deb said, with little downside.

The backorders are an illusion.

 
At 9:30 AM, Blogger deb said...

My dad cancelled on a purchase about 6 months ago. Got his deposit back, no problem. Of course, the market was hot and there was another buyer ready to jump in. The builders may not be so friendly when the prospect are not so bright.

 
At 9:43 AM, Anonymous Anonymous said...

About a year ago, I looked at some new homes in the $750k price range around San Diego. They were asking for $20,000 deposits. So it wouldn't be painless to walk away.

 
At 9:49 AM, Blogger deb said...

The buyer is supposed to get that $20k refunded if the house is not complete. Even if the builder puts the screws to the buyer and won't (or can't) refund. The buyers will see that if comparable houses are available for more than $20k less, they are better off walking.

Also, buyers almost always have a loan contigency. If the homes won't appraise, they won't be able to close these deals even if they want to. Of course, this assumes at some point appraisers are forced to take an honest look at valuations.

In the 90's we lost deals all the time because homes wouldn't appraise. We will get there again, eventually.

 
At 10:31 AM, Anonymous hellboy said...

As I understand it most of these “contracts” are fairly similar if not identical. A deposit to buy a standard house with no options is maybe $500 bucks( depending upon where you are). This just gives you the right to buy the house once it’s finished. You can walk away without penalty and get all your money back once the builder finishes and calls you asking for the check. Technically, it is true that some deposits are partially/non-refundable but those only deal with added options over a certain amount in value. The deposit would also not likely be above $2000. In general lenders rarely take your deposit. Two things; first it creates ill will for cents on the dollar to do this. Remember they still have to sell the house! Second, if prices really are softening they would rather skip people in mass and cut prices to try to clear inventory as quickly as possible. They can’t do that if they are haggling with every Tom Dick and Harry over a few hundred dollars here and maybe a thousand dollars there. Just my two cents.

 
At 10:35 AM, Blogger Ben Jones said...

I would contend that even the $20,000 would be small change compared to the hit the speculators would take. Think of the property tax and interest in the first year alone.

 
At 11:32 AM, Anonymous BoyInTheBubble said...

$20K would buy you a decent used car. And remember, you can live in your car, but you can't drive your house.

 
At 7:48 AM, Blogger Sunny said...

You really can't make general statements that you can get your deposit back before a home is built. Unless there is specific statutory law to the contrary, the contract controls how the deposit is handled. Major builders have clever attorneys that draft contracts 99% in the builder's favor. Every contract I've seen (in FL) there are strings attached to the deposit, so beware.

 

Post a Comment

<< Home