The Wall Street Journal

By Dan S. Barnabic, April 20, 2015

Buying a condo unit during the preconstruction phase might seem to be a straightforward proposition. Future unit is bought from the architectural drawings at the developer’s sales site. However, in real life, buying a unit before it’s constructed may work out to be anything but straightforward.

Buying a preconstruction condo unit is a dicey move

By Dan S. Barnabic

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Developers often redesign the layout of units as they go, as a result of changes made necessary during construction. Moreover, they draft the purchase contracts to their advantage. For example, if they are late in completing the complex, the purchaser is forced to agree to delays, or to occupy the unit while the complex is still awaiting occupancy permits of units that may still be under construction.

Unwary buyers could also become victims of developers who sell them units in the early stages where they are still in possession of more than 51% of the condo project. Over time, developers may become unable to sell the rest of the units.

A condominium unable to attract new buyers may experience a rapid decline in the value of its units. Upon realizing that there was no longer demand for their units, developers may use their powers as majority stakeholders in a complex, to force a buyback of the already sold units, often at heavily reduced prices.

The Wall Street Journal ran a story last year about hapless unit owners muscled by developers to buy back their condo units for the purposes of converting them to rentals. One of them was a lady who bought her unit in Boynton Beach, Fla., for $309,900 in 2006. Using a statutory loophole, the developer tried to force the owners to sell their units back at discounted prices. By 2013, it acquired back some 90% of the units and offered the aforementioned woman less than half of the original price for the unit. She refused. To make matters worse, that unit’s appraised value went down to $74,000 by 2014. The unit owner sued the developer by employing a reputable law firm, PeytonBolin PL of Fort Lauderdale. The principal attorney of the law firm, Mauri Peyton, advised me recently that litigation is still ongoing.

Whether this and similar cases will turn out to be successful remains to be seen. Nevertheless, picture yourself in that position: Would you like to be stuck in it?

Buyers are well advised to consult a knowledgeable attorney and insert their own contingencies into purchase contracts. By specifying a fixed date of completion, buyers can position themselves to get their deposits back should the developer miscalculate the timing of completion. Timing of completion should be determined by the buyer. I strongly suggest yet another contingency where the proceeds from the unit’s sale, along with deeds, be kept in escrow by the developer’s attorneys, until such time that developer sells at least 51% of the units to the other individual unit buyers.

Until such time, the unit buyer should be paying occupancy fees to developers, equivalent to the monthly maintenance fees plus the anticipating monthly mortgage payment. Such arrangement would provide that after expiration of specific time, buyers would be entitled to a refund on their deposits and/or sale proceeds, in cases when complexes weren’t finished on time, or respectfully, where 51% of the complex isn’t sold to the other unit holders. Shy away from any purchase in which the developer isn’t willing to accept your conditions as, otherwise, you may be putting yourself at the developer’s mercy.

Condominium fees are guaranteed only for the first year of operation from the time unit owners take control of the complex. Developers often calculate their initial budget on the low end to make condo units more appealing to buyers.

Almost as a rule, in the second and third years after an association assumes the complex from the developer, unit owners get hit with considerably higher monthly maintenance fees to cover the developer’s cost overruns. Buyers should assume and expect that there will be an increase in maintenance fees from the first year onward, following the completion of a new condominium.

  • Watch out for contracts that force you to buy the condo unit even if completion of the whole complex’s construction is delayed.
  • When buying during preconstruction, count on higher maintenance fees than originally calculated by the developer.
  • Check the reputation and track record of the developer and builder before you buy.

This column is the seventh in a series of articles on condominium golden rules for buyers.