What's the risk to buy into new condo development under 50% sold?

Since there have been closings, they should have declared the offering plan effective and listed the bona fide buyers in an amendment. Get that and count the number of buyers to confirm the % sold. They often lie about that number.

Also, aside from obviously getting a mortgage contingency and appraisal contingency, get a guarantee on common charges for 3-5 years. Also consider services could be cut if they don't sell the rest of the units in a timely manner and get buyers paying their CCs.

You also need to understand there is huge risk to the value of your purchase in this environment. This should be priced in.

Another risk is your co-owners may not be able to sell and themsleves default. It's also 70%

Thanks streeteasyaddict. Common charge increases would be a major concern since common charges are very high in this building. I thought that if the developer walks away from the project, my common charges could double (based on if they had 50% sold) until the building was able to sell the unsold units.

A dozen out of 100 is certainly nowhere near 40% sold. Remember, just because there are units in contract doesn't mean they will ultimately close - buyers have been abandoning deposits and walking away from deals left and right. So I'd be concerned that only a dozen apartments have actually closed - that is a very small number. The remainder may not sell. Your bank may not want to lend with such an unfavorable ratio.

If the developer turns the unsold units into rentals, this will adversely affect the value of your property.

Riversider, you're saying that if another condo owner needed to sell their property and couldn't and would default, that that the other owners would get hit with higher common charges (at least in the short term)? Also, when you say "it's also 70%" what do you mean? That Fannie/Freddie loans cannot be had unless 70% sold? If so, do you know what the disadvantage is by getting a loan that's not backed by Freddie/Fannie (this is the case with the developer's lender that I would have to work with? Thanks!

good point. You could consider a contract that you don't close until the existing contracted units close up to some % and total contracted units reach a % if you really love the building and the price. Still contingent upon appraisal at full price and mortgage as well.

Most banks will not touch your building, until its 70% sold. You are lucky the builder found a bank to work with the building for now..

Thanks streeteasyaddict and Riversider -- important things to consider as I weigh this deal. Although I plan to live there long term, if the developer just sells 50% and decides to rent the rest for 5 years, but I need to sell for some reason in 3 years, I could be screwed if a potential buyer could not get financing.

If they convert to rentals, it will knock down the price of your apt - simply as a reflection that no one wants to buy in that building at the price you paid for it. Renters also normally are less interested in maintaining the building to the same level of standards that owners have.

In the worst case scenario, the developer walking away, no one is paying 60% of the buildings common charges. Well, that's not totally true - the 40% of the units with occupants will pay that extra money. After months (or years) of legal fights, the developers lender will take over the unsold units and assuming paying the maintenance charges - and having a firesale on all those new apartments they now own.

The 50% (now 70%) sold requirement on mortgages is as much a protection for you as it is your bank.
Look into the developer... see how many projects they currently are selling, how many they have completed in the past - A larger, well-financed developer can probably afford to just hold onto the building and wait; smaller developers are more likely to go under.

There is no disadvantage to the buyer that their mortgage isn't backed by Frannie or Freddie, just the lender.

The vast majority of banks are just going to construct your mortgage and then sell it to Fannie - but Fannie won't buy it if it does not meet their requirements (like 70% sold). If a bank is willing to loan you the money without that requirement, it means that they are actually going to hold on to the mortgage themselves and not sell it. What you owe is unaffected.

It is important to determine how well financed the developers/project are, and if there is real commitment behind the project. Not all unsold condos are in trouble. It's all about due diligence and coming to an informed decision.

I belive that the developer is going to rent unsold units and put them on the market again in a few years (that is, if the market has improrved by that time). The developer seems to be fairly large with half a dozen large condo projects in NYC and a few others outside of NYC. ANy suggestions on how to check how well financed they are or other criteria related to a developer being solid?

Thanks!

Thats a great question. Does anyone have any advice on how to determine how well financed a developer is.

why would you even consider this? are they paying you?

Right, cc. Splot, if you *have* to buy now, why buy into the increased risk and anxiety of that building when there's so much else out there?

Hi Splot,

The following NYT article, which I think has been discussed on these boards before, summarizes most of the issues:

http://www.nytimes.com/2009/02/08/realestate/08COV.html?pagewanted=1&_r=1&sq=maintenance%20fee%20sponsor%20bankruptcy%20risk&st=cse&scp=11

In addition to the 70% sold requirement, there is also now the more recent requirement that no more than 10% of any units be owned by a single entity, which creates additional mortgage hurdles.

http://downtowny.blogspot.com

streeteasyaddict - how do you get "a guarantee on common charges for 3-5 years"? What exactly do you mean by this?

NYCJR - You can negotiate a clause something along the lines that you will only pay for X% of total maintenance assessments that the building is liable for, and that the seller remains for any overage assessed to you (typically that X% would be a rough correlation to the % of the building you actually own.)

BUT, it's still not that helpful of a clause, if it ever needs to be enacted. If they rent the unsold units, your common charges remain unchanged, but the developer is not paying anything towards the overage fund for emergencies, and your building is underfunded for repairs and emergencies. If the developer defaults, then they will stop paying any overage in common charges and the obligation will revert back to you because the bank is not compelled to honor that clause in your agreement with the developer.

Downtownster, thanks for the link!

Risk is startiing to outweigh benefits. I'm rethinking this move. Thanks everyone for your helpful input.

Splot - Just wait it out... if the building has 100 units, there is probably more than 1 available that you like and can afford. Once the building has sold to 70%, then make an offer on one of them, you will either get it at the same price its listed at today, or more likely, lower because some time has passed. There is a chance that one dream apartment may have sold during that time, but settling for your 2nd favorite is probably worth it if it means avoiding the risk.

I'm in a similar situation, but looking at 3 or 4 different buildings. First one to hit 70% sold is probably going to be the one getting the offer.

Good advice. It has been an emotional roller coaster, but I need to move past it and look at it rationally and 70% is a good benchmark. Thanks.

Splot, tell me it's not Riverwalk on Roosevelt Island.

Stay away from these buildings, there is just too much downside risk, its not worth it, not like they are huge bargains. I was only looking at new construction, wanted shiny and brand new, now somehow old pre-war coops are looking very very attractive

Everythign thats old is new again :)

"(as we've been told)"

I've run across more than a few instances where sales offices were way over quoting the percent sold.Even seen cases where the buyer had a Commitment Letter, but when it came to closing the bank wouldn't do the loan because it turned out the actual percentage sold fell below their lending criteria, leaving the buyer to find new financing at worse terms... fast.

No, not Riverwalk.

so does anyone know how one would go about checking how well financed a developer is or how solid they are?

i find it amazing that given everything that has occurred in in the last 14 months, that you could ask that question with a straight face. While you're checking out the developer, see if you can get a handle on Citi, Bank Of American and Wells Fargo.

Good point. You could probably give it your best guess based on how they've approached past projects, and other current projects, and how many are completely sold out, but it seems like it just would always be a guessing game. One project that cannot sell (the one that I'm looking into) could possibly bring a developer down. To the earlier post, who would have anticipated that these "solid" companies would be in their current situation requesting bailouts, etc.

thanks...appreciate the positive feedback.

p.s. let me get this straight--you're spending your time watching me waste my time?

Mjh1962 I wish I could buy a prewar that I like/can afford!! as the saying goes..."buy prewar they dont make 'em anymore!"

push the button that says "ignore this person." oh, and by the way, i am exactly like this in person.

you both (if you are actually two dieffernt people..either way who cares) need to get over it

Cry me a river buddy. Clearly streeteasy didn't appreciate my cage-fighting post.
I am now OFFICIALLY requesting that STREETEASY pull NYCJR post from 2 hours ago...he is clearly threatening CC, "because you know you cant get punched in your face for what you say."

If you pull my ridiculous post, you should pull his too.