Contract Addendum: A Tool to Discourage Investors
Speculative buying has been cause for concern among builders, particularly in “hot” markets, and builders have begun pre-screening by sales staff and included addenda to sales contracts as ways to discourage real estate investors in their communities.
An NAHB nationwide survey of 500 home builders conducted earlier this year looked at the depth of the problem. Respondents indicated that only 4% of single-family homes were sold to investors during the first half of the year, rather than for primary residences or vacation homes. However, investors accounted for 11% of purchases in "hot" markets.
One of the concerns NAHB economic forecasters have warned builders about is that speculative buying can generate a substantial “hidden supply” if house price appreciation begins to falter. Sales of new units would then be disrupted severely.
Another concern, “For Rent” signs or completed homes in communities sitting dark and empty, is more than cosmetic. If houses are not owner occupied, there is a much greater risk of property prices heading downward.
A contract addendum, coupled with a deed restriction, can be an effective deterrent to speculative buying.
However, David Crump, NAHB’s director of legal research, warns that a deed restriction of ownership should specifically state a justifiable public purpose, for example, "a stabilized community of affordable housing." Such a goal is in the public — as well as the builder’s — interest.
A sample provision follows:
The parties specifically agree that in order to maintain a stabilized community of affordable housing it is in the public interest to discourage unbridled real estate speculation, and to discourage the "flipping" of recently purchased residential properties. In furtherance of this goal, it is agreed that the purchaser (grantee) shall hold title to and shall not re-convey the above-described property for a period of at least (one year† ) from the date of this contract (deed). Any contract for sale, or grant by deed, of this property within this stated period shall be void, and the seller (grantor) shall have the right, at its option, to reacquire possession and title from the purchaser (grantee) at the original contract price between the parties hereto.
In order to avoid hardships that might result from restrictions on an early re-conveyance unrelated to real estate speculation purposes, the following transactions and occurrences shall not be subject to the above-stated resale restrictions:
- Conveyance by will or intestacy, or by the executor or administrator of the purchaser's (grantee's) estate
- Conveyance to a family member (the specific relationships can be described to avoid a "remote" transfer)
- Conveyance necessitated by job transfer (the specific distance can be added)
- Conveyance necessitated by a division of property in a marital dissolution
- Conveyance necessitated by a military service obligation
- Conveyance necessitated by medical condition upon a doctor's written recommendation
- Conveyance to the seller (grantor)
- Conveyance to the purchaser's mortgage lender because of financial necessity
Note to Builders: It is suggested that the restricted period be limited to a reasonable length of time to avoid a negative assessment in any balancing test.
This information is provided as a service to you as a member of the National Association of Home Builders. It represents legal research only and in no way constitutes an opinion of law. The materials provided herein are intended to familiarize you with the law in this area, and should not be regarded as an exhaustive presentation of information on this particular subject. An attorney must review this information to determine how it applies to a particular situation.
This suggested Anti-Speculation Provision can be adapted to your particular sales contract the assistance of a qualified attorney.
For more information, e-mail Natalie Holmes at NAHB, or call her at 800-368-5242 x8461.