Buying pre-construction « Real Estate Miami - Pre-construction- Condominium - Condo-Hotels: "When You Buy Before It’s Built
When Seth Ferman looked into buying a $3 million three-bedroom condominium on West Caicos, a Caribbean island that is part of the Turks and Caicos, the development was little more than a pristine stretch of beach. Instead of walking through model units that duplicated the apartment’s 3,300-square-foot floor plan and opening closet doors, he drove around the property in a Range Rover for a tour of where the building would eventually sit.
It was one of many times that Mr. Ferman visited the site — which will eventually include a Ritz-Carlton resort and condo units managed by the hotel chain. He asked about interest from other potential buyers. And he met the developers running the project. It was only then that he gave a 25 percent deposit.
“I really made an effort to get to know the development team,” said Mr. Ferman, 42, a real estate developer who llives in Bedford, N.Y. “That was a big part of the decision.” He now frequently checks up on the construction process, which is scheduled for completion at the end of 2008. He monitors the project’s Web site, and makes phone calls to the developers every few weeks.
Buying into a development before construction has begun is not a new phenomenon, but with the slowdown in the real estate market — and in condo sales in many areas — the rules are changing. A few years ago, the incentive to condo buyers was clear: You would buy early, sit back and, by the time the building was in place, be pretty certain that the unit’s value had increased substantially. But the days of buyers lining up for a condo in a building that might be years from completion are long gone — and developers are facing a new reality.
“The world has changed quite a bit,” said Edward Baquero, a managing partner with Coalco New York, a developer with projects in New York, New Jersey and Florida, including Villa Magna, 787 condominiums in two waterfront towers in Miami that are now in preconstruction sales.
“It took about a year to sell 200 units,” Mr. Baquero said, adding that in the heyday of the South Florida condo frenzy, “the whole building would have sold out in five months.”
But even with the falloff, preconstruction sales are continuing, however sluggishly, in places as varied as Telluride, Colo.; Donnelly, Idaho; the Hawaiian island of Kauai; and Las Vegas, which has seen a huge growth in condominium development in recent years but is now in the midst of a slowdown.
What has truly changed is the developers’ mindset.
“I don’t know many developers that say, ‘If I build it, they will come,’ ” said Peter Forsch, the president of the Club at Spanish Peaks, a second-home community in Big Sky, Mont., that includes the Lodge at Spanish Peaks, a 49-unit condominium project that started sales earlier this year before construction began. “Rather it is, ‘If I sell it, I will build it.’ ”
More than ever, developers are relying on pre-construction sales to give them the green light to break ground. Which means that in the markets with the largest drop in activity, like Las Vegas, it is questionable whether some planned projects will actually be built.
“From a supply standpoint there are a significant number of potential projects out there,” said Brian Gordon, a principal at Applied Analysis, a Las Vegas economic and real estate research firm. “There are only a dozen that are actively preselling that haven’t commenced construction. Those projects are facing some challenges in the ability to generate sufficient sales and allow them to go forward. There has been some cancellation of projects that don’t make financial sense at this point.”
People thinking of buying early at a new project that might be years from completion should take certain steps to make sure that they protect their investment and end up with what they expect.
Mr. Baquero, the developer of the Miami project, recommends that buyers looking at preconstruction sales negotiate an exit strategy in their contract, especially as lead times in some markets grow longer. “If the developer doesn’t build by a certain day,” he said, “it triggers your right to get out of the contract.”
While deposit money is kept in escrow, minimizing financial risk if the project doesn’t go forward, the deposit usually does not earn interest. If that is the case, Mr. Baquero suggests that buyers negotiate to get interest — a request he says more developers are accepting. “Those things are available,” he said, “and developers are giving them for long-term projects.”
It is also prudent to question the developer on changes that can be made to the project once the sales contract is signed. In some projects in the very early stages, for example, finishes and details like appliances might not be set in stone.
“We really can’t change the layout or the floor plan,” said Bill Krokowski, the executive vice president of Monument Realty, which is at the preconstruction sales stage on Silverline, a condominium in Mountain Village, Colo., with ski in/ski out access to the Telluride Resort. But Mr. Krokowski said that options like alternative finishes could come into the mix during the 30-month construction process. He said that since Silverline has just 90 units, it is small enough for the developers to update buyers regularly by telephone.
There are also other potential pitfalls. Because buyers usually see only floor plans, and perhaps artist’s renderings or model bathrooms or kitchens, they do not know how much light an apartment will get or whether a large bed will fit in the bedroom. When the building is completed, the reality can be very different from what the buyer expected.
Another expectation that may not be met is the overall size of the apartment. Yes, the square footage is provided in the offering plan. But the small print may include a disclaimer noting that the actual square footage may be different. For these and other reasons, real estate specialists suggest that before placing a deposit, a buyer should consult a real estate lawyer.
Anyone buying early should also ascertain the current state of the local market and gauge whether the developer is offering incentives to lure new buyers — which, though attractive to buyers in the short term, can put a downward pressure on prices, developers say.
But even with all these caveats, many people feel the need to buy early. When John Robbins, 56, bought a four-bedroom condo at the Lodge at Spanish Peaks, he was well aware that it will not be completed until 2010 — a fact he said was just fine with him.
“I’m a believer that in the right development, if you are willing to take a little risk upfront and don’t mind having your money tied up for a while, you can make good money,” said Mr. Robbins, a developer who lives in Concord, N.C.
Besides, he predicted, “we will be out of the slump before my condo is even a reality.”