The real estate market moves quickly, and property changes hands from builder to buyer and sometimes back again. This potential scenario is known as a “buyback transaction,” and it can help builders raise capital while also giving buyers the confidence to invest in a property with an uncertain future.
What are Arizona builder buyback transactions and how do they work? Here is a short guide to help you better understand.
What Are Buyback Transactions?
A buyback transaction is a general term for any transaction in which the seller agrees to purchase an item of value back from the initial buyer. Though this term can apply to any big-ticket item, like equipment or insurance, it is commonly used in real estate transactions.
Buyback offers are often made to assuage the worries of the buyer, such as a concern that the property in question may not increase in value. Sometimes a builder wants to include a buyback right in a real estate contract to address the risk that a buyer will not be happy with the final product from the builder. In simple terms, sellers hedge their bets and agree to take the property off the buyer’s hands if things don’t work out. The other buyback scenario protects the seller and allows them to repurchase property, such as a unit in a condominium, that is not well-maintained or otherwise doesn’t meet predetermined standards.
Repurchase agreements and buyback agreements are alike in this way, but repurchase agreements are written documents that hold more legal weight. Buybacks are not always documented. This is why it is wise to include a buyback provision in the contract of your real estate transaction.
How Arizona Builder Buyback Transactions Work
One type of Arizona builder buyback transaction helps builders retain property value during the building phase of a development. In these situations, the builder includes a provision in the purchase contract stating the property can be repurchased in the event the buyer does not meet the requirements listed in the contract. This prevents buyers from reselling their properties while the rest of the development is being built.
The other type of builder buyback transaction protects the buyer. The builder offers to repurchase the property for the amount the buyer paid or at the inflation adjusted value. Therefore, if the subdivision or condominium complex is unsuccessful from an investment standpoint, the buyer can offload the property to the builder.
The Risks of Buybacks
Buyback schemes have trapped plenty of unsuspecting investors, so it is best to be aware of the risks before signing on the dotted line. For starters, there is not always a real estate regulator, meaning it would be difficult to take action against the builder for any wrongdoing. The builder may not create an escrow account for the development because there is no law requiring that they do so. This makes it hard to track how investors’ money is being spent. Because builders running buyback schemes ask for 80-90% of the money upfront, this is a high-risk scenario, especially if the builder defaults.
This is not to say that Arizona builder buyback transactions are inherently risky. There are plenty of reputable Arizona builders that have spotless records of buyback transactions. It is simply a warning to be wary of any investment opportunity that seems too good to be true.
What Buyers Should Do
For prospective property owners interested in buying property from a builder, it is recommended to conduct due diligence before initiating the purchase transaction. Look at the property’s intrinsic value with a real estate expert and determine if there are planned infrastructure developments that will raise the area’s value. For example, Valley Metro transit stations like light rail or large bus stops can quickly increase the property value of nearby homes.
Additionally, research the builder’s track record, financial health and reputation. If the builder is trustworthy but has defaulted multiple times in the past, it is likely to be an issue during your project.
Find an Experienced Arizona Real Estate Attorney
MacQueen & Gottlieb has significant experience with real estate laws in Arizona. Our firm can help you navigate a builder buyback transaction if you believe you have been caught in a buyback scheme. Contact us today at 602-562-7218 to schedule an initial consultation or make an appointment online.