Buying a new construction home? Beware the fine print in upgrades

A standoff over expensive upgrades cost one homebuyer her contract and nearly a $5,000 deposit.

By JEFF LAZERSON | | | July 24, 2023

Article originally posted in Orange County Register on July 13, 2023.

Armed with an excellent job as a purchasing manager, mother of two Ilene Soto decided it was time-time to find a home to buy.

As a school district employee who works remotely from home, Soto had the advantage of shopping for a more affordable, new home somewhere over the Grapevine, north of Los Angeles.

Last October she signed an 83-page purchase contract for a new $510,500 home in Tehachapi. I issued a mortgage pre-approval letter to the builder. Soto’s house was expected to be completed in April 2023.

Well into spring and with the original tract sales agent long gone, the sales manager engaged Soto about options and upgrades. Through phone calls and text messages, they discussed upgrades for the home for roughly 15% of the base price, totaling $76,995.

Soto is adamant she never agreed to anything in the back-and-forth. Plus, Soto could not afford the increased payment, much less qualify for the payment jump.

A standoff ensued. The builder insisted Soto had agreed to and must pay $76,995 for the upgrades if she wanted the home.

The sales manager told me via email that the original tract agent “missed a signature” on the previously agreed money that was added to the sales contract.

The contract I received indicated a $510,500 sales price plus a $5,000 lot premium but nothing more. That contract was the basis of the pre-approval letter my brokerage issued.

The builder insisted it could keep Soto’s $5,000 earnest money deposit or send the fight to arbitration, which likely would have cost Soto more in legal and arbitration fees.

Regardless of the communication issues between the sales manager and Soto, the options and upgrades construction could have been delayed or avoided entirely had the sales manager asked me to issue an updated pre-approval letter plugging in the increased sales price and new mortgage amount. And never mind factoring in soaring mortgage rates between last fall and this spring. Soto could no longer afford the home or the new mortgage rate.

In my experience closing hundreds of builder loans, if the sales price increases more than, say, a few thousand dollars, the builder seeks an updated pre-approval letter reflecting the increases before home customization begins.

To the homebuilder’s credit, but only after I asked attorney Mike Hensley to review the documents and contact the developer on Soto’s behalf, did they agree to refund the $5,000 earnest money deposit.

The home eventually closed on June 23 for $573,000 to another buyer, according to Lawyers Title.

Just about everyone lost, except for the replacement buyers. Ilene Soto lost the home she wanted. The builder lost $19,495 because their total sales price with Soto would have been $592,495.

The homebuilder declined to respond to several requests for comment.

So, what about the law?

“The statute of fraud exists to make sure key terms like purchase price are contained in a written document,” said attorney Mike Hensley via email. “The developer’s own documents show that an additional written contract had to be done for add-on improvements, which was never done,”

“That means that the original purchase price was the one which governed,” Hensley said.

The whole experience shows us that a broker needs to be involved with developer contracts, especially when it’s 83 pages long. An agent can help a buyer understand deadlines, liquidated damages and arbitration issues.

However, the buyer has no chance in “take it or leave it” provisions, so using a knowledgeable agent to negotiate the contract can work more favorably for the borrower, Hensley said.

Here are some new home facts, according to John Burns Research & Consulting:

—New home builds represent 12% of all residential sales nationwide

—New home inventory in the region: 347 in San Diego County, 1488 in Inland Empire, 170 in Orange County, 359 in Los Angeles County

—4,800 new builds are available for sale statewide (excluding Imperial County and portions of northern/central California due to limited data)

—Median new home prices: San Diego County $850,000, Inland Empire $584,400, Orange County $1,140,000, Los Angeles County $1,111,500

—422,000 new builds are available nationwide (US Census Bureau)

Pros of new builds

—Clean slate, customizable upgrades and options, including the hardscape and landscape.

—Except for 55 and over communities, new builds tend to attract young families, which is important if you friends with whom your children can play.

Cons of new builds

—Prices for options and upgrades can be inflated at builder design centers compared with independently shopping for and engaging with contractors

—Builders do not allow buyers to finance upgrades into the mortgage if using outside contractors

—New builds may come with higher property taxes on top of the 1% established under Proposition 13 such as Mello-Roos taxes, property assessments, parcel taxes and additional taxes to pay for voter-approved debt. (Buyers might occasionally find additional taxes on resale homes, too.)

—Builders often pressure buyers into using their affiliated mortgage lender by offering credits toward rate buydowns and closing costs. But note, their rates and prices are typically inflated compared with what buyers can find on the broader market

Buyer best practices when shopping new homes

Do your new home searching ahead of time with an independent, licensed real estate agent. Ask the agent to arrange the new home tours and thoroughly read and negotiate the contract and manage the process. Always have your agent register with the builder at the get-go so they get paid.

“Almost all builders offer some level of broker compensation,” said Scott Wild, a senior vice president at John Burns. “It could be $10,000 or 1%. The Great Park in Irvine is paying 3-5%.”

If you need further legal assistance for contract review but can’t afford to pay, contact the California State Bar at or the Legal Aid Association of California at, according to Rick Lopes, assistant commissioner of Communications and Publications at the California Department of Real Estate

Check out builders with standing inventory. There might be “deals” similar to the discount the buyers snagged at the back end of Soto’s failed purchase.

Carrying costs are profit killers for builders. “On average, it takes anywhere from 7-12 months from contract signature to delivery, if there are no hiccups,” said Morgan Morales, the political affairs and community manager at the California Building Industry Association.

Compare and contrast design center upgrade and option charges (and credits) against your own contractors.

If you want to finance your upgrades, consider the Fannie Mae Homestyle Renovation mortgage through an outside mortgage lender. It runs roughly one-half percent higher in rate than a standard 30-year fixed from Fannie Mae. With a few limitations, this financing instrument allows borrowers to finance the upgrades post-closing instead of having to pay cash for them. And, you have up to one year from closing to complete the work.

Shop and compare title companies. Every California builder uses a title insurance company to both insure and act as a settlement agent. Sometimes builders add contract language requiring the buyer to pay both halves of the title and settlement fees. The Southern California practice is usually the buyer pays half and the seller pays half.

Pick the lowest-priced title insurance company you can find. Put it in the contract. It is your right, according to the Consumer Financial Protection Bureau.

“The seller cannot require you to buy a title insurance policy from a particular title company,” said Tia Elbaum, spokesperson at the Office of Public Affairs for the CFPB. If the builder refuses your settlement services request, share this article. If the builder still refuses, file a complaint with the CFPB.

Freddie Mac rate news: The 30-year fixed rate averaged 6.96%, 15 basis points higher than last week. The 15-year fixed rate averaged 6.3%, 6 basis points higher than last week.

The Mortgage Bankers Association reported a .9% mortgage application increase compared to last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $684 less than this week’s payment of $4,812.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6%, a 15-year conventional at 5.75%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 6.5% ($726,201 to $1,089,300), a 30-year high balance conventional at 7% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year conventional fixed rate at 5.875% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or His website is

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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Jeff Lazerson - Mortgage Columnist since 2011