Uncovering the Truth: Builder Tie-in Arrangements

 Cori Lamont  |    January 01, 0001

Did you ever wonder how a builder can require a buyer to build with the builder if the buyer bought the land from the builder? Try saying that sentence fast 20 times.

Developers who also have a real estate license have the legal ability under Wisconsin law to draft subdivision restrictions and covenants as well as condition the sale of a property by tying the builder to the land in some shape or manner. This concept is better known as a builder tie-in arrangement. For instance, a builder who also has a real estate license can create a tie-in arrangement that ties together the builder and the building of the home: the buyer must use the builder to build the home if the buyer purchases the lot.

Wisconsin Administrative Code specifically allows a real estate licensee who is also the builder to condition the sale of vacant land or to improve certain real estate as long as the builder meets certain requirements. The relevant portion of Wis. Admin. Code § REEB 24.075 is provided for reference. 

Myth #1

Developer/builder tie-in arrangements are illegal. 

The truth: If the developer/builder has a Wisconsin real estate license, then Wis. Admin. Code § REEB 24.075(3) provides the builder may create certain tie-in arrangements. 

Myth #2

A developer/builder cannot legally force residents in a subdivision to use the builder to build the home on a lot purchased by the buyer. 

The truth: Wis. Admin. Code § REEB 24.075(3) permits the builder/developer with a real estate license to create certain tie-in arrangements that could condition the sale of the lot owned by the builder/developer on the fact the buyer is required to use the builder to build the home. 

Myth #3

A builder tie-in arrangement is only permitted if the builder is also the developer. 

The truth: A builder who has purchased one or more lots in a subdivision may create a legal tie-in arrangement regarding the properties that builder owns. The builder is not required to also be the developer. Therefore, the builder may choose to require any buyer interested in purchasing the lot that the buyer be obligated to build with the respective builder. Alternately, a builder may only have interest in selling the lot and has no interest in building the home for the buyer. 

Myth #4

A builder can have anything in the tie-in arrangement. 

For instance, a builder may legally force residents in a development to list solely with the builder’s real estate firm or demand a commission percentage if a seller decides to list with another firm by stating these terms in the subdivision restrictions and covenants. If this is permissible, can it be made retroactive to other developments sold prior to this requirement being added to restrictions and covenants?

The truth: Because the developer is a licensee who owns the properties in an array of different entities, there would appear to be a question about whether the restrictions and covenants might violate license law, specifically Wis. Admin. Code § REEB 24.075(1) and (2) regarding tie-in arrangements. Furthermore, restrictions and covenant requirements that property owners looking to sell their property either list with the developer/licensee or pay a fee to the builder would not be binding on properties sold before the imposition of this requirement.

This article is one of a series exposing the truths of real estate practice and dispelling any perpetuated myths. Since 2011, these articles have discussed protected buyers, “as-is” transactions, buyer agency, procuring cause, use of non-approved forms, and three articles specifically on the inspection contingency and the inspection report when the deal falls apart as well as the Inspection and Testing provision.

REEB 24.075 Tie-in Arrangements 

Licensees shall not:
(1) Condition the sale of real estate owned by the licensee or whose sale is effectively controlled by the licensee to a buyer upon the buyer's agreement to purchase another parcel or real estate.
(2) Condition the sale of real estate owned by the licensee or whose sale is effectively controlled by the licensee upon the buyer's agreement to list the real estate or other real estate owned by the buyer with the licensee.
Note: The following are 2 common examples of activities which would violate this subsection: (1) requiring a builder to list a speculation home with the licensee; and (2) requiring a buyer to list a present home with the licensee.
(3) Condition the sale of vacant real estate owned by the licensee or whose sale is effectively controlled by the licensee upon the buyer's agreement to employ one or more specific builders to make improvements on the real estate unless:
(a) The builder owns a bona fide interest in the real estate; and there is full disclosure as specified in s. REEB 24.05 (1) (b).
(b) The builder and the licensee or the builder and the owner of the real estate are the same person or are commonly controlled corporations and whose business is selling improved property and not vacant land; and there is full disclosure as in s. REEB 24.05 (1) (b).
(c) The agreement is a bona fide effort to maintain development quality or architectural uniformity and no consideration passes from contractor to licensee for soliciting this agreement.

Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA. 

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