Monday, October 1, 2007
Buying a luxury condo: the Vertical Living interview
The Robb Report is publishing a new magazine, that has its premiere issue on newsstands, called Vertical Living. It covers super-luxury, high rise, developments in global destinations like London, Mexico, Singapore, Australia, and of course, New York City. Contributing editor Kim Fredricks interviewed me about buying into a new development. That interview follows here in its entirety and has some good advice in it; as does the very nicely crafted piece she wrote for the first issue called Small Promises (tear sheet pdf 320 kb) in which I'm quoted. Buying new construction is a place where even the most savvy buyers will benefit from their brokers' depth and breadth of knowledge. I'm pleased indeed to have been asked to comment on a subject that I've written about before. In fact, I learned a couple of weeks ago that my post about closing costs in new developments, is being excerpted and included in the next edition of New York Real Estate for Salespersons, one of the textbooks for the NY State Real Estate licensing exam; it was also a selection in the Carnival of Real Estate which is a sort of traveling show of the best real estate blog posts that Zillow blog's Drew Meyers started up. These are a few nice and unexpected validations, of the connection with the audience and the growth of my blog, which has been public for just shy of a year now.
the Robb Report Vertical Living interview
Vertical Living: Buyers are lured by the benefits of getting a good deal on pricing when buying pre-construction, but what are some red-flags that the buyer should look for before placing a down payment?
Comitini: I don't think that buyers in our market in Manhattan think they are getting a break on price. They are willing to pay well for a premium product. Sometimes with a year or two lead time to delivery, the market accelerates past the contract price and seems a bit better. New construction is generally higher priced than are re-sales, on a price per square foot basis, with higher out of pocket closing costs. Have your broker identify a couple of previous projects of the developer so you can understand if they have performed as expected.
Vertical Living: What should the buyer look for when signing a reservation agreement? Is the down payment fully refundable? How long does this period last?
Comitini: I think that all buyers should use a good real estate attorney, and have them do the "looking" at the agreement. Familiarity with local custom is important. Every prospectus is different, contingencies are rarely extended, but not unheard of. In general, once you are in contract that commits you to the deal, your down payment may be at risk if you cannot close.
Vertical Living: What should buyers look for when reading a developer’s association rules? Is their any assurance that maintenance fees won’t skyrocket? What about upkeep of the common amenity areas such as pools, spas, and roof decks? How can a buyer be assured that these will be well maintained?
Comitini: Increasing cost of ownership is a fact of life, because of factors like fuel, labor and taxes, so it is prudent thinking to expect them to increase a bit, and budget for that. Again, looking at the developers track record should yield some evidence. Every offering plan will have a schedule of projected operating expenses. You and an attorney with good local knowledge, need to look at that carefully. Every condo building or association is a self-governing community you should be informed and involved. Ultimately, it will be the association, or Board of Managers as we say in NYC, that will determine how efficiently a building will be run. Some are self managed, but professional management will usually insure a better level of services. There are different sizes and qualities to those property management companies. You'll usually get what you pay for. A few questions to ask:
- If the builder has unsold units do they automatically retain majority voting rights and have total control?
- Will the builder continue to operate the property?
- What does that agreement look like?
- When does it expire and under what conditions can it be terminated?
"it is customary to create a "punch list" of items that need to be addressed and signed off on by all parties which becomes part of the closing documents. Monies may be escrowed to cover disputed items while proceeding to close"
Vertical Living: Sales centers show buyers what to expect when it comes to finishes, appliances, and amenities. What happens if the developer doesn’t deliver what’s promised? (For example, the square footage is less, the appliances are not Viking, the flooring is oak instead of maple, or the heated outdoor pool is not heated?) What should the buyer look for in the fine print?
Comitini: It will be in the offering plan and/or purchase agreement if the developer can substitute things like appliances and other finishes. You should have a "walk-through" of the property, prior to closing. If something is critically wrong you can postpone the closing and discuss it with your counsel. Otherwise it is customary to create a "punch list" of items that need to be addressed and signed off on by all parties which becomes part of the closing documents. Monies may be escrowed to cover disputed items while proceeding to close, if both parties accept the terms. We have a pretty professional development culture in New York City today and we really don't see much of that sort of bad behavior going on in our market.
After a buyer receives the condo documents, how long does he usually have to decide whether to proceed to the binding contract?
Comitini: In NYC, sponsors have a statutory 72 hour grace period as I understand it, but most will say a 7 to 10 day period is for "due diligence", or the vetting of any issues in the offering plan. This is the buyer's attorney's job. Sponsors will remove the unit from sale for that period, and may not accept another offer. My experience is that as long as the attorneys are talking, and there seems to be momentum, things get worked out in a reasonable fashion.
Vertical Living: After signing the contract and putting down money, can you still back out of the deal? What is at stake?
Comitini: In general the answer is no, with most sponsor sales. The contracts are usually written without contingencies. The reasons a buyer might want to rescind are unique to each situation, but most often have to do with their ability to afford the property. That decision should be made before signing a purchase agreement. There is a short, but reasonable time frame to decide what to do. It's pretty simple. Once they sign, they are committed. If they decline to sign a purchase agreement in the agreed upon due-diligence period, the property may be increased in price by the sponsor, and/or taken by another buyer.
The amount of negotiating around contingencies also depends on the temperature of the local marketplace. In Manhattan, the market is still quite strong. People are out shopping. One should not sign a purchase agreement thinking that it can be rescinded, it unless a specific contingency has been extended by the seller. It's good will and common sense.
Vertical Living: Buyers are promised specific move-in dates. What happens if the developer delays that date by months or even a year or more? What should the buyer look for in the fine print concerning this problem? What are the buyer’s rights when it comes to move-in dates?
Comitini: Most of the pain in new development purchases seems to revolve around delivery times for closings. New York City's construction resources are actually stretched to the limits right now and some delays are common. Extensive delays are rare, but can cost real money for re-locking mortgage rates, re-setting a rate, renting interim housing, and other related expenses. This is best handled through their lawyer. I've heard that after 18 months past due on delivery, there is a statutory right to rescind a purchase agreement.
Emotions can run high when people are feeling displaced and helpless. A home purchase is not one made lightly. After waiting for months and hearing promises of completion dates that keep passing by, the frustration level can reach a critical mass. Best advice is to let cooler heads prevail, use an attorney to try negotiating with the sponsor for a reimbursement of some of these expenses as a closing adjustment.
Once closed on a unit, a developer may still need to complete work on building amenities like a pool, gym, spa, kids' play space and other common areas. If things are not delivered within a reasonable period, we've seen buyers organize themselves to bring pressure on sponsors to complete the project.
Vertical Living: Do you have any specific examples of clients who have had problems buying pre-construction condos?
Comitini: Good brokers are advocates for those they represent, and give fair advice about complex situations, in light of a customer's goals. I've certainly has a few properties which the developers have delivered late. No party wants to delay a closing, it costs money all around. There are usually reasons for it, but they may be of little comfort to a person needing to move. I do my best to be supportive of my customers caught in those situations. All of my deals have closed, and we've all stayed friends.
I had one situation with a customer where during the walk-through, there were no floors laid and many finishing details missing, on one level of a Chelsea triplex apartment. It was basically still a messy construction site in the morning, when we were supposed to close at noon. We adjourned and got the sponsor to deliver the property a week later, with just a short punch list of items to go, which have all been addressed since.
I've had another customer decide not to go ahead with a purchase at a new development in Manhattan's Financial District. I wrote about what we learned in this story: "I had the perfect storm of these conditions recently influence a deal I was working on with a buyer. I'd been working with him and his partner to find a one bedroom apartment, preferably on the west side of town. We've actually seen things as high as 153rd Street, and down as far as the Battery. So he's flexible on location, but a size of about 650 to 700 square feet and bright, are must haves. He's a serious buyer, with excellent credit, but wanted to put 10% down and leaving modest but basically sufficient liquid assets and cash reserves. After consulting with a mortgage broker, we determined that the mid to high $700K range was going to be his limit. After seeing 25 or so homes, he fell in love with a property at a new development in the financial district priced at $790K. We began to look at the specific monthly costs associated with the purchase, as well as the effect of the closing costs which included paying city and state transfer taxes as well as a number of fees.
If the deal were to close today it would have been tight, but fine. In the end, the deal was scuttled not by the numbers as they might play today, but by a judicious intolerance for risk imposed by the sponsor's terms. Even though we were told by the sponsor's rep that the projected delivery would be in 4-6 months, the purchase agreement actually gave 18 months for the sponsor to deliver the unit and no mortgage contingency provision. This proved too risky for this particular buyers circumstances, as a up tick of less than a percentage point, over a possible year and a half waiting period, might mean that he would not be able to get his financing. His almost $80K deposit would be at risk, and they simply refused to negotiate any of those terms. He still pines for the one that got away, but we are now searching for a resale property where out of pocket expenses and delivery time frame are more reasonable.
Vertical Living: Any other advice for buyers?
Comitini: Be happy. Being able to have good property, is not the same thing as having a good home.
buying in a new development: the risk and the reward
Buying in a new development: the closing costs
download: a summary of real property closing costs (pdf 324 kb)
download: Small Promises (tear sheet pdf 320 kb)