NYC developers implement price protection programs

New York /
Nov.November 12, 2008 06:34 PM

Hoping to head off buyers’ uncertainty about purchasing apartments in the midst of a down market, New York developers have begun offering price protection programs that give buyers a buffer against the falling prices of new construction condominiums.

In Brooklyn, SteelWorks Lofts in Williamsburg and the Clermont Greene in Fort Greene are among the developments offering the programs, which work by guaranteeing buyers a discount at closing if units sell in the building for less for less than they paid.

While price protection is common in Florida and other troubled markets, it has just begun to appear in New York City, said real estate experts, who predict  it will soon be widely utilized in the city as nervous buyers put off buying homes until the economy improves.

“Unless the market rebounds faster than people expect, I think this is the only way to make buyers comfortable purchasing in a new development that’s more than a year out,” said broker Christine Toes,  a vice president at the Corcoran Group, who has begun working with developers willing to offer a price protection program.  “They do not feel any kind of incentive to buy this far out.”

Price protection is risky for developers, since it means they may lose money if prices drop precipitously. But many consider it a worthwhile proposition in the current economy. “It is a risk, but it’s a bigger risk not to sell units,”  said Greg Belew, a principal of Fifth Square Partners and the developer of the SteelWorks Lofts.

During the boom of recent years, many New Yorkers rushed to buy new condos, confident that prices would quickly rise and their investment would grow in value.

“It used to be, you’re guaranteed to make money by the time the building closes,” said Toes, who posted about the subject on the real estate blog UrbanDigs.com.  “People don’t feel that way anymore.”

Moreover, people now prefer to buy in projects that are already completed or close to completion, said Derrick Gross, a business analyst at real estate data provider Streeteasy.com. “People just don’t trust that buildings are going to get done,” he said. “Why put 10 percent down on a unit if the financing could fall through or if the building’s not going to get finished?”

Enter price protection programs. Developers, sensing nervousness on the part of buyers, are hoping to assuage buyers’ concerns by guaranteeing that if prices in the building go down, a buyer won’t lose out.

“We had a flood of interest but we were hearing concerns from potential buyers,” said Greg Belew, principal of Fifth Square Partners, and the developer of SteelWorks Lofts. “People were saying, ‘what happens if I sign a contract now and you guys reduce prices later?’  We heard this more than once.”

Under the terms of SteelWorks’ program, if prices are reduced in the 88-unit building, buyers who have already purchased a comparable unit will receive a discount so they pay only what the new buyer does, he explained.

Belew said he’s confident that the building is priced fairly and doesn’t expect to have to make much use of the provision. “We believe in our product and our pricing,” he said.

Though the program carries some risk, it’s worth the risk to get buyers off the fence, he said. “We were looking to give some comfort to buyers, and  this is one solid way to do it,” he added.

A similar program went into effect at the Clermont Greene in Fort Greene this summer, according to Christine Blackburn, a senior vice president in the Barak/Blackburn Group at Prudential Douglas Elliman, which is handling sales for the building. The developer will guarantee that if a comparable unit in the building goes into contract for a lower price than a buyer paid, the developer will refund the difference.

Blackburn said three buyers have taken advantage of the price protection program so far. “People are very enthusiastic about it,” she said, adding that in the current climate, “people have a fear of the unknown. They have to be comfortable with the purchase.”

The benefits of price protection programs may vary widely depending on the contract wording, especially given the popularity of seller concessions such as free closing costs, Toes said, which makes it hard to assess the true cost of an apartment. What’s more, developers “may not amend prices but might be allowing prices to be more negotiable,” she said.


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