Contingency clause

Assuming you want a mortgage, a mortgage contingency is a must have for new developments.

Does anyone know why new developments do not accept contingency clause in the contract?

Would you knowing you could keep the deposit if the buyer cannot secure financing? I suspect a number of sponsors would be willing to accept this now. Not much downside for the developer and less bad p.r. or litigation concerns.

If you need a mortgage, don't go forward without a contingency. I don't know if it's true that new developments do not accept contingency clauses -- I'd question that, given the amount of inventory they're dealing with right now. But even if it's true...hey, new developments are by no means the only type of apartment out there.

A contingency protects you against the whims of the banks, but also against problems with the building. Let's say you sign a contract, and then find out that the developer / building has some minor financial problem. It's something your attorney didn't blink at, because in the old days banks wouldn't have looked twice at it. But now, Fannie Mae's being really tight and won't approve until the condition is cleared -- and the developer refuses to do anything about it. As a result, no bank will lend to you. It's the developer's fault -- so what happens to the deposit? That's right, he gets to keep it. Screw that.

Mortgage contingencies are now common-place and, in this environment, are an absolute requirement. There's always another apartment out there -- if this seller won't do a contingency, walk away. In terms of what should be in the contingency, your attorney should know.

During the feeding-frenzy of the big bubble, developers wouldn't allow contingencies, just because they could get away with not allowing them. Not so now. Make it a deal-breaker, and they'll almost certainly take the risk instead of you. And if they won't, see "make it a deal-breaker".

i am in the middle of signing my contract. I also have no the no mortgage contingency in the offering plan. I asked for a mortgage contingency clause and what they sent to my attorney might as well have said no instead of sending it.

They tried to get a mortgage committment contingency past me, luckily i and my attorney know how to read.

The jist of it is that they tried to say once I went to one of their preferred lenders and received a committment letter, then my contract was valid and i would need to close even if the lender decided not to fund at closing.

So we took out the language that not conditioned on the lender actaully funding and am waiting ot hear back from the sponsor.

If this is what they normally give when asked, I wonder how many people, as there were many more contracts signed prior to mine, just signed without thinking what it stated.

I agree with Mikev. shah, talk to your attorney and make sure there is a full mortgage contingency. If the developer refuses, then walk. There are plenty of other condos in the sea right now.

How about an appraisal contigency?

Well if it don't appraise right and bank won't finance the loan, you should be covered. If that is what you are asking.

It should be written such that if the appraisal comes in too low, then the bank won't finance the loan, and hence the contingency protects you. Somehow these appraisals almost always come in exactly where they need to be...

Mikev. Is the building you are considering in BPC?

Is it fair to summarize the contingency clause should be written the way to protect the buyer:
1-if the bank does not give the committment letter by day XXX for the mortgage equal to XX% of the purchase price at XX% interest rate,......
2-the bank decides not to fund the loan due to any reason including appraisal, after giving the committment letter.

No contingency? Walk ... no, don't walk, RUN! Most developers these days will certainly accept some form of contingency not only until a commitment issues, but extending until closing in case some last minute issue arises outside the buyer's control.

Be very careful. Developers have little leverage these days - and unless it's a property you want or is one of a kind, you should look elsewhere.

no the property is in central harlem on fdb.

and shah your 1 and 2 are correct and what mine was written to now.

mikev, I am looking in that area, can you share with me the name of the development or the address?
Thanks.

Mikev, thanks for the info. I have looked at a lot of the developments in the area as well and have
experience with the Livmor as well, enough experience to urge you to exercise extreme caution with
them. I am not surprised by what you report nor would I be surprised if your attorney came up
with lots more flags. Watch out for them and how they deal and don't believe what they say!!

Actually the only thing i really did not like was how the mortgage contingency was written. I actually have had no real issues in the process itself with regard to negotiating a price i found fair. I am just looking to protect myself in this environment and would not like to lose my deposit just because a bank decides not to fund at the last second.

I like the building because they have actually had a decent amount of sales and closings so far. Construction did not seem bad and i actually saw an apartment that is in the middle of being renovated for the new owner and saw how the floors were put in, the insulation between walls, etc. I did not hear sounds between apartmetns as we had a bunch of people with us one day and tested. I will say when we had 4 people jumping in the apartment upstairs in shoes you could hear, but i would say i do not need to worry someone will be doing that every day.

It also was best location as i need to get my daughter to school on 84th and columbus and i have the subway downstairs and the m7 bus on 116th and fdb that stops in front of her school.

hopefully the process keeps moving along.

btw have you looked at soha118? It was the one we never got to since they only had a few apartments listed.

In the boom days, new devs used to get away with no mortgage contingencies.
That was before credit crisis changed everything. You're pretty much gambling your deposit if you choose to sign without a mortgage contingency these days.

FYI some banks won't even lend to you unless the building is x% sold or y% not-sponsor owned. Better check your facts there.

does anyone know if its common contract language to state that if the buyer is unable to obtain a commitment for any reason not having to do with the seller, then the seller can enforce the sale and / or keep the deposit? so basically the seller gets something if the buyer falls down, but the buyer gets nothing if the seller falls down...does not seem right to me.

It is common language which is why we are discussing mortgage contingency clauses. The basics go that the seller is taking his apartment off the market to sell to you, if you misrepresent that you can get financing and the deal falls apart after many months, why should he get hurt by it. Then he was at least able to keep your deposit due to the breach of the contract.

Now with the market breakdown and the fact that banks have tightened lending standards, more and more people are concerned about the what if. This is why buyers are pushing for the mortgage contingency clause stating that a committment is not good enough that the bank has to actually fund the mortgage at closing, otherwise it is not considered a breach and you get your deposit back.

I would assume that when the market stabalizes in a few years people will stop pushing for this clause.

But right now i would not enter a contract that did not protect me from the chance that the bank will not fund and cause me to lose money.

No way can you say that the opportunity cost in this market is 10%. why shouldnt I as a buyer get a free 10% if it turns out that the building has problems? A seller only needs protection if its a falling market. hmmmmm....

definitely need to the loan funded or everything is off. either that or just no deposit.

Back when pre-construction was first coming to it's own. The sponsor would agree to this clause if and only if you applied to one or two sponsor approved lenders. This was a fair compromise.

We reached a compromise that our lawyer told us was very common to address the possibility that the bank issuing the commitment letter does not fund. We would only be off the hook and have our deposit returned if the reason the bank did not fund was related to the building/seller in any way, but not if it instead related solely to a change in our credit profile. Basically, the risk was on each of us for what we could control. That, together with a decent drop-dead date to ensure that we could walk if the building wasn't finished and ready to close within a short period of time gave us enough comfort to take the plunge.

The concern with your compromise is if the banks raise their borrowing standards.

I dont think thats a fair compromise. the seller has all the advantage becuase they get money if you dont come through, but you get nothing if they dont come through.

I'm not a real estate lawyer, but I do not think a mortgage contingency will cover you in all instances if an appraisal comes in low. For example: The Bank may say that they will lend you up to the appraised value, but if you didn’t include an appraisal contingency in your offer, the buyer is liable to make up the difference between the low appraised value and the sale price. Of course, the seller could lower the sale price to the appraised value if this wish to close.