Maria Hoffman knew what she was getting into when she signed the contract on her condo at the Leah, a new development on East 117th Street in Manhattan, last October.
The 30-year-old New School graduate student had heard horror stories about long construction delays, and had even let a friend crash on her couch after the new apartment the friend bought was still unfinished when her lease was up.
Along with Hoffman’s attorney, her broker, Michael Eisenbrown of Pari Passu Realty, advised Hoffman to make sure her lease allowed her to stay put several months past the expected close late last month.
“I have a clause that says if it’s not finished within four months of the projected date, I have the option to exit my contract and get my money back,” she said.
Hoffman’s cautious approach echoes a larger trend: Buyers who once clamored and clawed for apartments in new developments are now treading softly. They’re asking more questions and leaning more heavily on the expertise of brokers and attorneys to shepherd them through the suddenly unsteady luxury condo market.
Numbers compiled by StreetEasy show that sales of new development condo units in Manhattan have fallen 10 percent between the first quarter of 2006 and the last quarter of 2008.
What’s more, according to Shaul Betesh, managing director of Manhattan Mortgage, “a number of buildings” in the works are in danger of not being completed.
“The majority of new developments are in a position now where there’s a lot of uncertainty,” adds Shaun Osher, the CEO of Core Group Marketing. “Many are languishing due to a lack of liquidity and the fact that we’re in a soft market that’s trending down.”
Case in point: In late October, and then again in December, the real estate Web site Curbed.com speculated that Five Franklin Place in Tribeca was having financial problems. The site printed a statement from Leo Tsimmer, a representative of developer Sleepy Hudson, confirming that various aspects of the project, including advertising and staffing the sales office, were being “downshifted.”
As The Real Deal has reported, financial troubles have also plagued the planned conversion of 25 Broad, partly due to the collapse of one of the project’s major investors, the now bankrupt Lehman Brothers.
Given the uncertain climate, customers are reassured by buildings that are closer to being finished and occupied.
“Now, when I tell a client that a building they’re looking at buying in is 50 percent sold, they look relieved,” says Jessica Armstead, a vice president at Corcoran. “A year ago, they wouldn’t even have asked.”
But these days, they have to. At the beginning of March, Fannie Mae will raise pre-sale requirements of new condo and co-op buildings to 70 percent — a significant increase from the previous 51 percent. And Fannie Mae isn’t the only mortgage company tightening the rules: Several brokers said in interviews that their clients are telling them banks won’t approve a mortgage if a building is less than 60 percent sold.
“It used to be that anybody with a body temperature and a business card could get a mortgage — those days are gone,” says Max Dobens, vice president of the Jacky Teplitzky group at Prudential Douglas Elliman.
As a result, he says, “buying from a floor plan is riskier than ever.”
All these complications mean that buyers are relying increasingly on the advice and expertise of not just brokers, but also attorneys as they navigate the suddenly choppy waters of luxury living.
So how are these professionals performing their due diligence on behalf of clients?
Both Armstead and Dobens say they’re scrutinizing offering plans more closely, looking for potential contingencies that could protect their clients if the building finishes late, loses financing or converts to rental.
“The world has changed,” says Dobens. “The days when you sign a no-contingency contract with a seller, and then do whatever they tell you to, are done.”
Armstead says she’s telling her clients that when buying in a new building, specifically buildings where construction isn’t complete, they should add at least three or four months to the closing date estimated on the contract. Clients need to be prepared to wait, she says, noting that she advises them to make sure their current lease is flexible enough that they won’t be out in the street waiting for their new apartment to be completed.
Still, both brokers freely admit that even they aren’t experts at the fine print of complicated contracts. For that, they steer clients to real estate attorneys.
“I always tell my clients, don’t skimp on an attorney,” says Dobens, who estimates a good attorney will run somewhere between $3,000 and $5,000. “The average purchase price of a Manhattan condo is $1 million, so why would you call Uncle Ernie the lawyer who thinks a co-op is where chickens live?”
Lauren Baker, an associate broker at Halstead Property who is also an attorney, says the first thing she does when a client brings in a contract is an extensive public records search to uncover information on the developer and its financing.
“Two years ago, I would definitely not have done that, even though I did a lot of new construction,” Baker says. “Back then there was no negotiating. If you didn’t like the terms, too bad, they’d find someone else.”
Baker also says she advises clients to research the escrow agent or suggest that their attorney hold the funds in escrow: “I haven’t actually seen that done yet, but it would certainly be another way to protect your money.”
Attorney Lisa Breier Urban says she reviews the development’s official plan for protections.
“I’m interested in what kind of guarantees they’re giving in terms of timing,” she says. Most developers are not yet offering many financial contingencies, but “we’re asking for them more now,” she notes.
Betesh of Manhattan Mortgage explains how such a contingency might work: “Say the mortgage contingency period is 30 to 45 days. If you don’t close for six months, and the bank changes their guidelines, you’re in an unfortunate situation.”
Betesh said buyers should try to get language in the contract stating that if the building’s pre-sale requirements don’t fit the bank’s regulation at the time of the issuance of the closing letter, the buyer can get out of the contract. He also advises clients to be prepared to put an extra 5 percent down.
“If you sign a contract but don’t close until six months later, the bank may reset the terms of the mortgage,” says Betesh. “I have one client who was initially buying in new construction and had gotten 90 percent mortgage insurance. But by the time the building closed, she could only get 85 percent financing, so she’s going to get out of her contract, which fortunately states that if she isn’t able to get a mortgage up to the full price she can get out.”
Baker and Urban also say the reputation of a developer is more important than ever. “I advise people against going with an unknown developer, someone who hasn’t been in the business more than five years,” says Baker.
Betesh says he sees buyers being far more cautious about purchasing new construction apartments.
“They really take our advice and listen to what we have to say about getting certain language into the contracts,” he says.
Still, with all the potential headaches, some real estate experts say it might be wise to simply avoid buying new.
“I wouldn’t advise buying in new construction right now,” says Baker. “Roof pools and all the amenities are great, but a co-op will be cheaper and easier to finance since it’s probably already at least 80 percent occupied.”
The bottom line, says Baker: “Buying new is a lot more complicated and it costs a lot more.”