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In tough markets, a reported home 'sale' is not always a done deal

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In a cooling housing market, like San Diego County, perceived sales activity of new homes is widely held to create a buzz about the project, thereby producing more sales activity.

And because sales figures are not regulated by generally accepted accounting principals, they are often subject to premature announcement as builders' marketing departments struggle to get their projects noticed.

A developer's definition of "sold" can vary from that of the California Department of Real Estate (DRE), which can make market studies and unit availability figures misleading.

According to Barbara Wagar, who works at Barratt American's downtown condominium Metrome sales office, a unit is considered sold once a buyer puts down an initial deposit.

Bosa Development's sales office for downtown projects Legend and Electra confirmed this definition of a sale.

But for the DRE, a unit is not considered sold until after a contract has been signed and the unit has closed escrow, according to Tom Pool, spokesman for DRE.

"What people need to understand is there are reservations (a.k.a. deposits) and there are sales," said Glen Arsenault, residential sales associate for ICON, a development of Levin Menzies & Associates. "A reservation is a nonbinding agreement. ... It holds the unit for that person" who is interested in buying.

Since a reservation is a nonbinding agreement, a potential buyer could decide not to sign a contract to purchase a unit, which means the buyer would receive the deposit back and no sale would occur.

This situation is fairly uncommon, however, according to Wagar, because most buyers are committed to their future purchase once they've put down a deposit. For a unit at Metrome, the current deposit is $15,000 and the amount of time between when a deposit is made and when a contract is signed is typically 30 days. Of the other sales offices contacted, the time between paying a deposit and signing a contract varied from a week (Bosa) to a month, assuming the developer has an approved final public report -- also known as a white paper -- from DRE.

Before developers can legally enter into a binding contract, they must obtain a white paper from the DRE.

According to Arsenault, a situation in which a developer doesn't have the white paper could mean a large loss of assumed sales, as buyers may become impatient with the extended contract signing process and demand their deposit back.

The final public report contains information regarding parking, surrounding infrastructure and the condo plan. Consumers receive the report prior to signing a contract.

"It's possible they (developers) get those (white papers) prior to any unit being constructed. You see that more and more in high-rise projects in larger cities where they may want to pre-sell these things to help with financing," Pool said, adding the more developers pre-sell, the more interest they can show a potential lender.

This was the case for Barratt, which was selling Metrome units in 2004 off a scale model. In an effort to ensure those who put down deposits on a unit would eventually buy that unit, the company required a $20,000 nonrefundable deposit at the time.

Builders of single-family homes often "sell" units off blueprints, well in advance of any construction on a house.

Pool said in situations like this, potential buyers can receive their deposit back if the unit isn't built within a certain period of time, regardless of a company's claim that a deposit is nonrefundable.

The amount of potential buyers who get their deposit back and thus don't make a purchase is small, according to Barratt American's Wagar.

Even a small amount could affect a month's sales figures, which could mislead those who don't understand the selling process in a period when sales have slowed.

A developers definition of sold doesn't signify a done deal, Arsenault said.

Send your comments, thoughts or suggestions to erik.pisor@sddt.com

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