Use and occupancy addendum

I am purchasing a pre-construction home and the builder wants me to sign this addendum. It basically states that I must use the home as my primary residence for one year. I would like to flip this property and I have heard that these contracts will not stand up in court. Could someone please tell me if they have had any experience with similar addendums?

That is starting to be common in new home builds! They do not want other houses for sale in the area they are selling home’s at!

Also Buyer beware I have had at least 15 emails from people that have bought new home builds at a SPECIAL INVESTOR PRICE and that price is also the same as THE FIRST TIME HOME BUYERS PRICE and it is also the same as the SPEC HOME PRICE and that is the same price as the YES I AM READY TO BUY TODAY PRICE!

So look at what price you are getting!

look at this way, if he sues you, you will have to spend money to defend yourself in court. Even IF it is illegal, you must go thru the legal process to do so (i.e. you will have spend $$$). Are you prepared to accept that challenge???

<< Even IF it is illegal, you must go thru the legal process to do so (i.e. you will have spend $$$). Are you prepared to accept that challenge???>>

A better question: Is he???

I am not a lawyer but I’m not at all convinced that clauses like this will hold up in court. Once you close, it is your property and I think you can make a case that, in a free-market economy, you can do with it as you please. I would line the clause out on the contract and see what he says.

Just my opinion.


There is nothing illegal in stating that you must occupy the property for at least one year before selling it. Take a look at the addendum. What is the penalty if you don’t? Are you obligated to provide the builder with a portion of your profit? Does the property revert to the builder if you don’t occupy it as a primary residence?

In general, rules that govern how you can alienate a property are legal and valid as long as they are not “unreasonably restrictive”. The judge is who decides what that means.

Is the property going to cash flow if you purchase it and rent it out? Can you carry the property for a year if needed before selling it? My opinion is, that if you are not planning on using it as a primary residence then you should not sign a form that says you will. It is deceitful and could open you to legal issues.

Either tell them you don’t want to sign it because you don’t plan on living there for a full year. Or, sign it and be prepared to live by the promises you make when you sign it.

I am not a lawyer either but have a lot of experience with fairly complex business contracts. Having clauses in a contract of the sale of goods which restrict the use of those goods, field of use and way they can be re-sold is fairly common in some fields of business and to my knowledge not illegal.

While the courts generally favor unrestricted commence, the seller does have a right to protect his business (in this case, building and selling houses) from potential competition that comes about from the breach of contract related to the initial sale of the product that was conducted on a fraudulent basis (i.e. you said you were buying as principle residence; now trying to sell quickly for a profit).

So unless someone can show a particular state statue, I would say you will be sued for breach of contract and fraud and the damages will be the differential between what you sell the property for and what the building is selling for at the time of the transaction in question. Also, if the builder prevails, he will ask for atty fees as well which may or may not be awarded.

Again, I am not an atty but have be involved in setting-up commerical contracts and dealing with (non-real estate) contract disputes.

The real question is are you willing to take the risk and call his bluff on this contract condition. If its a medium to larger builder, I would say there is a fair chance they will try to enforce the contarct thru legal means.

I understand this situation is happening in alot of hot market.

But what about claiming primary residence (Owners occupance) if you are not going to live there. I know that alot of people are doing this to rent their properties. Is this a lesser of a crime? Will this hold in court? Is the builder to inforce this or the lender?

When I first looked into buying into the community I intended on using it as my primary residence and I still do. My concern is the possibly unstable market that the bay area, ca offers. I would hate to be locked into not selling for a year if the market makes a drastic change for the worse.

I was able to get into the second sales release and homes have since been increasing at a rate of $15k per release. If this continues the property will be up $100k by the time I move in.

I faxed a copy of the contract to a well know real estate layer and he doesn’t think it would stand up in court. It is my intention on the date I sign the contract to live in the home for one year. If, by the time the home is built in 9 months my life (or the market) changes, I can’t be legally obligated to this contract. (according to him)
I would assume that someday there will be a court case on this and I have a feeling that the builder will be shot down.

you have changed your tune here

the fact is if you have bona fida intent to use it as a primary residence, then you should be fine (however you might have to spent money to prove it in a court of law).

if you got a for sale sign in the yard in the first month after you close escrow, you have got a real up hill battle to prove your true intent.

I am sure your atty will be happy to prove the builder “wrong” for a healthy fee (which you may or may not recover for the plantiff even if you prevail)

BTW, if the market tanks (as you fear), I think this will become a moot point.

I have signed contracts for 2 pre-constructions with this occupancy addendum included. I had a lawyer review the contract and her response was:

It will not hold up in court for the following reasons, although she has no experience with this type of case yet::

I signed the original contract for the asking price
I then was given this addendum and forced to sign it if I wanted the house, but was given No consideration for signing, such as a lower price or refund
In order for a contract to be binding, there needs to be consideration. I was given No consideration ($$) for limiting my rights to sell the property

Based on that, I am moving ahead with the properties. My intent the day I bought them was to live in them. I can always change my mind 10 months later when they are completed.

This is a very good point and my laywer said the same thing. The only problem with this is if you do actually go to court they will look at your history of investing in Precon’s. If you have a few homes under contract this may negatively affect you.

What builders are you dealing with?

What if I don’t sell it but I rent it out for the year? Is renting out (rather than occupying it myself) violating the agreement? Aren’t they just trying to prevent you from selling it? Or do they actually want you to live there too?

According to their terms you must actually occupy the home for one year.

What the builders are doing is trying to protect themselves. What has happened is a builder will price the Phase 1 homes at $100,000 (for instance). They then want to price the Phase 2 homes at $200,000. Investors buy the Phase 1 homes, and put them right back on the market for $150,000. New buyers purchase from the investor rather than the builder. I believe this is what it’s about.

<<What the builders are doing is trying to protect themselves.>>

If this is the case, then they’re not trying to protect themselves, they’re just greedy money grubbers.

I live in one of the very nicest developments in the area and there are no idiotic rules like this.


Sounds logical, although a bit greedy and completing against the basic idea of a free and open market. So why would renting out (rather than owner occupying) for the year be any problem? I’m not selling, just renting. Why do they want me to actually occupy? Would they even know if I was renting?

It is a restriction against investors. In the developers opinion a community full of owner occupants is better than renters for a varitiety of reasons.

I don’t see how they would know if you were renting it out, I may choose that path.

considering it takes 2 years in CA to develop raw land, the builders have high holding costs. the increase in pricing helps mitigate this cost [and add significantly to their bottom line]

i asked 2 lawyers about this. both of them said it would definitely hold up in court[atleast the contract i had] however the sales agent said the builder wasn’t going to pursue this, just wanted investors to be discreet about selling[like no banners or for sale signs]

regardless, i now work only with builders who are investor-friendly. there’s a ton of them where i’m investing.