These days, one or two buyers can make or break an entire project by helping developers reach crucial benchmarks in the selling process. In response, sponsors are doing everything in their power to win over these tipping-point buyers.
To keep their projects on track, sponsors at new development buildings have started wining and dining these golden buyers, offering them generous incentives, huge discounts and even free furniture.
“I see a pattern, where as soon as we reach 50 or 60 percent, just to get to the sprint line, developers are willing to do just about anything,” said Brooke Jacob, CEO of mortgage company Everest Equity.
The urgency comes from Fannie Mae guidelines that went into effect on March 1. That’s when the agency stopped guaranteeing mortgages in condominiums where fewer than 51 percent of units sold and increased the threshold to 70 percent of the units. Thanks to this new rule, it’s now very difficult for buyers to get mortgages unless 70 percent of the project is sold out. As a result, developers are “desperate to reach that 70 percent-sold mark,” Jacob said.
To make sure they do, many developers are offering special incentives to the final few buyers whose purchases push the building over the edge, or even within spitting distance of the threshold. Jacob said she has seen developers offer these final buyers “very deep discounts,” and agree to make thousands of dollars worth of changes to an apartment — such as moving walls — for free just to get them to finalize a deal.
Sponsors “are looking to do whatever it takes,” she said, adding that while discounts often come in creative packages, making them difficult to quantify, motivated sellers are agreeable to 30 to 35 percent discounts for these tipping-point buyers.
By all accounts the buyers who are contemplating a purchase during the crucial crunch time have more negotiating power than the customers who come before and after them, said Seth Brown, the principal of Aspen Equities and the developer of the Sterling Green condominium in Prospect Heights, which is around 50 percent sold.
“It’s a good strategy for buyers,” he said. “If they see that the developer is close to hitting their 50 to 70 percent market, they can get more leverage.”
Brown said he’s not overly worried about Sterling Green hitting the 70 percent mark, since it only has eight units in total. But, he didn’t rule out the possibility of offering some key buyers a special deal.
“We certainly may end up in that situation,” he said. “If everyone is ready to close and we need one more person in contract, they may be able to drive a hard bargain.”
The tradeoff, Jacob said, is that buying before a development has reached Fannie Mae’s presale requirements means the interest rate will likely be higher and a 30-year, fixed-rate mortgage will probably not be available.
“If you want to be one of those buyers who get a deal because the [sponsors] want to sell the unit, [the mortgage interest rate] is not going to be 4.5 percent,” she said.
Still, capitalizing on the leverage of being a crucial buyer largely depends on the broker being savvy enough to realize that their buyer is actually on the tipping point, since sponsors aren’t always eager to divulge that information.
“I don’t think [developers] would tell a buyer,” that they were going to help the building hit a key mark, said Ailene Quinlan, an associate broker at the Developers Group who is the on-site sales associate at the Forté condo in Fort Greene.
In addition to the crunch-time buyers who can help put a building over the Fannie Mae threshold, the very last buyers in a development are also crucial, brokers said.
At that point, the sponsors are anxious to finish up the project and to stop spending money on marketing and advertising, said Sidney Whelan, a sales associate at Halstead Property. “They want to get out of it,” he said. “They want to stop expending resources.”
Whelan is the sales manager at the Langston at 68 Bradhurst Avenue in Harlem, which is 98 percent sold out, with only three units left, he said. As an added incentive, the last few buyers there are being offered a full set of furniture from the model apartments in the building, which will then be placed in their new homes prior to the move-in date. The value of the set, with pieces from West Elm and Design Within Reach, is around $80,000, he said, though buyers also have the option of only taking a few items.
Whelan noted that the developer’s decision to advertise the furniture as an additional incentive, instead of selling it at auction, is a tactic that wouldn’t have been necessary prior to the economic downturn.
“Two years ago, it’s not something they would have advertised,” he said.
Of all the tipping-point buyers, experts noted that the most crucial are those who are willing to close early when the developer is in danger of missing the project’s projected completion date, or “outside date.”
According to the attorney general’s guidelines, the sponsor must close at least one unit in a new development within one year of the original projected completion date, which is spelled out in the offering plan, explained Meg Goble, partner at real estate law firm Hanley & Goble.
If at least one unit has not closed by the deadline, the developer is required to offer all of the buyers in contract the opportunity to rescind their contracts and get their deposits back.
If the “outside date” is amended, she said, the change does not apply to buyers already in contract.
Because of this rule, developers will do everything in their power to close at least one unit in time for the outside date, even if construction is delayed, she said.
“Most sponsors find a way to close one unit because they don’t want to take the chance,” Goble said. Buyers are not obligated to close before the project has received its temporary certificate of occupancy, but in the hot market of recent years, it usually wasn’t difficult to find someone to close early, especially since many buyers had been waiting months or years for their new apartments to be completed.
It’s much more difficult now that the market has soured.
“In a much better market, people were dying to get in [to their new homes],” Goble said. “I don’t know about now.”
With their projects hanging in the balance, developers are likely to offer tremendous incentives to buyers who are willing to close before the outside date, said Shaun Osher, CEO of Core Group Marketing.
“If your whole building is contingent on it and you’re up against a deadline, you might offer someone a huge discount,” Osher said, adding that the buyer would also have to pay all cash because, especially in today’s difficult credit market, “no bank would finance a closing without a T.C.O.”
A recent example is Upper West Side development Linden78, which suffered construction delays and was expected to miss its outside date of April 1. Then, on March 31, a unit in the building closed for $3.05 million — a discount of $545,000, or 15 percent, from the listing price of $3.595 million.
The last-ditch effort apparently came too late and was not counted by the state attorney general’s office, according to published reports. As a result, all of the buyers in the building were given the opportunity to rescind their contracts.
While this phenomenon is still rare, Osher said, it will likely become increasingly common in the next year as more new development projects experience construction delays due to financing shortages.
“This may become an issue in the next nine to 12 months,” he said.