When you sign a purchase agreement for a new construction home, you will almost certainly be asked to put down a deposit. Builders call this earnest money. It signals your commitment to the transaction and gives the builder confidence to allocate materials, schedule labor, and begin (or continue) construction on your behalf. The amount varies. Some builders ask for one percent of the purchase price. Others ask for three to five percent. In many markets, particularly where builders offer lot premiums, design center upgrades, or option packages, the total deposit can climb higher once you factor in option money and upgrade deposits paid at various stages before closing.
On a $400,000 home, a deposit of three percent means $12,000 out of your pocket months before you receive the keys. On a $600,000 home with upgrades, total pre-closing deposits can exceed $25,000. These are not trivial sums. And the contract language governing what happens to that money if the deal falls apart is one of the most consequential provisions in any new construction purchase agreement.
Most new construction purchase agreements contain a deposit forfeiture clause. The mechanics are straightforward: if you, the buyer, fail to close on the home for any reason, the builder keeps your entire deposit. The contract will typically describe the retained deposit as "liquidated damages" — a legal term meaning pre-agreed compensation for a breach of contract. The builder does not have to prove actual financial harm. The builder does not have to show that your decision not to close cost them a specific dollar amount. The clause simply states that the deposit is the builder's to keep.
The language typically reads something like this: "In the event Buyer fails or refuses to complete the purchase, Seller shall retain all deposits paid by Buyer as liquidated damages, and this shall be Seller's sole and exclusive remedy." Variations exist. Some contracts state that the deposit is retained "as agreed-upon liquidated damages and not as a penalty." Others omit the penalty disclaimer entirely. But the operative effect is the same: you walk, you lose the money.
What makes this clause particularly consequential in new construction — as opposed to a standard resale transaction — is the timeline. A resale purchase typically involves a two-to-four week due diligence window during which you can back out and recover your deposit. A new construction purchase agreement often spans six to twelve months, during which the builder has broad latitude to change plans, substitute materials, extend deadlines, and modify the home without your consent. Your deposit is at risk the entire time.
Here is where deposit forfeiture clauses become genuinely dangerous. In many new construction contracts, the forfeiture applies regardless of the reason you did not close. The builder does not carve out exceptions for construction defects, code violations, or health hazards discovered during the final walkthrough or independent inspection.
The buyer is placed in an impossible position: close on a home with known defects, or forfeit thousands of dollars. Neither outcome protects the consumer.
Imagine hiring an independent inspector who discovers active mold in the attic, hairline cracks in the foundation, or improperly installed electrical wiring that violates local building codes. Under a standard resale contract with a properly drafted inspection contingency, you would have the right to request repairs, negotiate a credit, or terminate the agreement and receive your deposit back. Under many new construction forfeiture clauses, you have no such right. The contract may acknowledge your ability to conduct an inspection. But it does not condition your obligation to close on the results of that inspection. The inspection is informational. It does not give you an exit.
Some builders compound the problem by offering their own limited warranty as a substitute for pre-closing defect remediation. The logic, from the builder's perspective, is that any issues discovered before closing will be addressed under the builder's warranty after closing. But warranties are not guaranteed outcomes. They are promises governed by their own terms, limitations, and exclusions. And once you have closed, your leverage to compel repairs diminishes substantially.
These clauses are not hypothetical risks. They produce real financial harm to real buyers, and the pattern repeats across the largest production builders in the country.
A Hunterbrook investigation documented the case of Nesa Gee, a disabled Air Force veteran in Alabama who contracted to purchase a Lennar home. After Gee's independent inspector identified defects in the property, Gee decided not to close. Lennar retained Gee's $7,500 deposit. A disabled veteran, having done exactly what consumer advocates recommend — hiring an independent inspector — lost thousands of dollars because the contract did not provide a meaningful exit when the inspection revealed problems.
The same investigation documented a D.R. Horton transaction in which a couple's inspector discovered mold in their nearly completed home. When the buyers attempted to cancel, D.R. Horton informed them they would forfeit $25,000 in deposits. The couple ultimately recovered their money, but only by agreeing to purchase a different D.R. Horton home. They were not given a clean exit. They were given a choice between losing $25,000 and remaining contractually bound to the same builder whose construction practices had produced a mold problem in the first place.
When the only path to recovering your deposit is buying another home from the same builder who built the defective one, the forfeiture clause is functioning as a retention tool, not a damages provision.
LGI Homes presents another variation of the problem. Better Business Bureau complaints from LGI buyers document a recurring pattern: sales representatives verbally assuring prospective buyers that their deposits are refundable, only for the company to refuse refunds when buyers attempt to cancel. The written contract language governs, and that language almost invariably favors the builder. Verbal assurances from salespeople carry no legal weight once you have signed a document stating otherwise.
These are not isolated incidents. They are the predictable consequences of contract structures that place all the financial risk of a failed transaction on the buyer while insulating the builder from accountability for the quality of their own work.
The enforceability of deposit forfeiture clauses varies by state, and the law is more nuanced than most builders acknowledge. Nearly every state applies some version of the same fundamental test: liquidated damages must be a reasonable pre-estimate of the harm the non-breaching party would suffer, and they must not function as a penalty designed to coerce performance.
Courts typically evaluate two factors. First, were the anticipated damages from a breach difficult to estimate at the time the contract was formed? Second, is the amount retained a reasonable approximation of those anticipated damages? If the answer to either question is no, the clause may be unenforceable as a penalty. A builder who retains a $25,000 deposit on a home that is subsequently resold to another buyer at the same or higher price has a weak argument that the forfeited deposit represents actual damages. The builder suffered no loss. The deposit is pure profit.
California provides the most explicit consumer protection in this area. Under California Civil Code Section 1675, liquidated damages in a residential purchase agreement for owner-occupied property of up to four units are presumed unreasonable if they exceed three percent of the purchase price. The statute creates a rebuttable presumption: the builder can attempt to show that higher damages are reasonable, but the burden shifts to the builder to prove it. This is a meaningful protection that most states do not provide.
Other states address the issue through common law rather than statute. Texas courts have generally enforced liquidated damages provisions when the amount bears a reasonable relationship to actual or anticipated harm. Florida courts apply a similar reasonableness test. Georgia has held that liquidated damages clauses are enforceable if damages were difficult to calculate at the time of contracting and the amount is a reasonable estimate. But "reasonable" is a fact-specific inquiry, and challenging a forfeiture clause requires litigation — a process most individual homebuyers cannot afford.
This is the practical reality that makes forfeiture clauses so effective for builders regardless of their legal enforceability. Even when a buyer has a strong legal argument that the forfeiture is an unenforceable penalty, the cost of litigating that argument often exceeds the amount of the deposit. A buyer who lost $10,000 is unlikely to spend $15,000 in legal fees to recover it. Builders know this. The clause functions as a deterrent not because it is always legally sound, but because challenging it is economically irrational for most buyers.
Before signing a new construction purchase agreement, search the document for any clause addressing the disposition of your deposit upon termination. Common phrases to flag include:
Builders will not always accept modifications to their standard contract. Production builders in particular rely on standardized agreements and resist individual negotiation. But asking costs nothing, and in slower markets, builders may be more willing to negotiate. Consider proposing the following modifications through your attorney:
Inspection contingency with a right to terminate. Request language that conditions your obligation to close on the results of an independent inspection. If the inspection reveals defects that the builder declines to repair before closing, you should have the right to terminate and receive a full refund of all deposits. Proposed language: "If Buyer's independent inspection identifies material defects and Seller does not cure such defects prior to closing, Buyer may terminate this Agreement and receive a full refund of all deposits paid."
Graduated forfeiture tied to construction stage. Rather than an all-or-nothing forfeiture, propose a schedule that ties the amount the builder retains to the stage of construction at the time of cancellation. If you cancel before the foundation is poured, the builder has incurred minimal costs and should retain minimal deposits. Proposed language: "In the event of Buyer's default prior to commencement of construction, Seller shall retain $[amount] as liquidated damages. After commencement and prior to completion of framing, Seller shall retain $[amount]."
Cap on liquidated damages. Even if the builder will not accept an inspection contingency, request a cap on the amount that can be retained as liquidated damages. California's three percent cap is a useful benchmark. Proposed language: "Notwithstanding any other provision herein, liquidated damages retained by Seller shall not exceed three percent (3%) of the purchase price."
Mutual remedy parity. If the builder insists on retaining your deposit as its sole remedy for your breach, insist that the return of your deposit is not your sole remedy for the builder's breach. The asymmetry in most standard contracts — where the builder keeps your money if you breach, but you only get your money back if the builder breaches — is one of the most consequential imbalances in new construction contracting.
Read the contract before you sign it. Not the summary, not the highlights your sales agent walks you through, not the FAQ on the builder's website. The actual contract.
Deposit forfeiture clauses are not inherently unlawful. A builder who has invested time and resources into a transaction has a legitimate interest in protecting against a buyer who walks away capriciously. But the clauses as currently drafted by many of the largest production builders go well beyond that legitimate interest. They create an asymmetric risk structure in which the buyer bears all the downside of a failed transaction — including transactions that fail because of the builder's own construction defects — while the builder bears none. Understanding this dynamic before you sign is the first step toward protecting yourself.
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