While many of New York City’s new residential towers are sheathed in glass, the process of buying a new condo is far less transparent.
Despite the attorney general’s strict disclosure requirements, misrepresentations were rampant during the hectic boom-time market, leaving new condo buyers struggling to uncover some of the most basic information about their new buildings — facts that buyers in even slightly older condo buildings don’t have to fret over. How many apartments had been sold? What percentage of units are owner-occupied? What kind of refrigerator will they have?
But the downturn spawned several high-profile lawsuits over whether developers properly disclosed information about their projects. And now, many new buildings are being forced to be more forthright as they find themselves under scrutiny from anxious buyers and their attorneys, websites that track how many units are sold, the attorney general, and even the courts.
These days, buyers and their lawyers are demanding far more information than they did in the past, often in the form of legally binding clauses in sales contracts.
Neil Garfinkel, a real estate attorney at Abrams Garfinkel Margolis Bergson, said when his firm represents buyers at new buildings, “we push until we get the answers we need.”
“If we don’t get the information, we advise our client not to go forward with the transaction,” he said.
And while they may not volunteer information, brokers must answer questions truthfully if they want to sell new condos.
“On-site sales people have found that they need to provide information that is going to make the buyer feel comfortable,” said Stephen Kliegerman, executive director of development marketing at Halstead Property. “They’re sharing information with buyers that they didn’t share in the past. The bottom line is, the bank is not going to let you close unless you’re 51 percent sold in most situations, so you have to be honest.”
New condo sales have traditionally been less transparent than resale transactions, because new units can’t close until the building obtains its certificate of occupancy when construction is completed. In the last few years, condos were often marketed before the project was built, so sales didn’t show up in city records until long after the contract was signed. As a result, no one but the developer and the sales agent knew exactly how many units had been sold. That has led to a number of lawsuits during the downturn at buildings like Trump Soho and 20 Pine, where buyers claimed they had been misled about how many units had sold.
Now, first and foremost attorneys want to know how many units have been sold and how many are in contract — information that buyers paid little attention to in the past.
“It’s important for the purpose of obtaining a mortgage,” Garfinkel said. “So they’re probably not going to be successful at getting the deal done if they’re lying.”
Steven Sladkus, a real estate attorney at Wolf Haldenstein Adler Freeman & Herz, said his firm now asks developers to disclose in the sales contract how many units have been sold in the building. If that figure later turns out to be false, the contract may be void.
He has also requested that sponsors file amendments to the offering plan informing buyers about lawsuits they’re involved in, and even asked developers to add a clause in the contract guaranteeing brand new appliances (as opposed to those that have been sitting in a warehouse for months or years).
Developers have little choice but to at least attempt to comply with these requests; a refusal may derail the deal.
“People are asking more questions, they’re taking more time to really check things out because they’ve heard horror stories,” said real estate attorney Meg Goble, a partner at Hanley & Goble. “How easy is it going to be for me if I need to resell or I need to refinance? What banks are lending in this building? Those are the kinds of questions that we try to ask.”
In New York, the AG requires developers to submit lengthy offering plans detailing the prices, amenities and other features of their projects. Recently, these disclosures appear to be getting more stringent due to a number of lawsuits centered on a formerly obscure federal law known as Interstate Land Sales Full Disclosure Act, which requires developers to provide buyers with a 30-to-40-page property report. Lawyers disagree about whether ILSA should apply in New York State, and several cases are making their way through the courts. But in the meantime, developers aren’t taking any chances.
“Now that it’s out there, people are definitely complying with [ILSA] more so than they had before,” Sladkus said.
But developers are only legally bound to what is stated in these written plans, not what is stated verbally by brokers or in marketing materials — a fact many buyers don’t realize.
“A lot of misrepresentations come from marketing materials that brokers put together,” Sladkus said. “Sometimes they can be very misleading.”
An offering plan might state that the refrigerators will be “Frigidaire model such-and-such, or better,” explained Goble. But in the marketing materials, “it’s Sub-Zero. They make it sound better than it is. But the sponsor is only obligated to provide what’s in the plan.”
During the boom, exaggerating sales figures and other information may have seemed like an innocuous way of building buzz about a building. But in today’s more tenuous (and litigious) sales environment, brokers are more careful with the information they give buyers.
Some brokers “got away with it, because there was an over-exuberance in the market,” Kliegerman said. Now, “they’re giving people the real story and not coloring it, because you only have one chance in this marketplace to make a credible sale with a buyer.”
It’s also harder to fudge information today, since most buyers are so reluctant to buy from floor plans that virtually all of the buildings being sold are fully completed. Not only can buyers see what they’re buying, but sales show up faster in the city’s ACRIS online database.
“These buildings are complete and offering if not immediate occupancy, then no more than six months out,” said Kelly Kennedy Mack, the president of Corcoran Sunshine, the new development marketing arm of Corcoran. Because of that, “the process has become more transparent. Everyone knows exactly what the pricing is.”
Meanwhile, websites like StreetEasy and PropertyShark, which keep tabs on recorded sales and units in contract, are growing more popular than ever.
Still, despite some of the recent progress in transparency, “the secretiveness element” in new development is still a problem, said Kevin Brown, a senior vice president at Sotheby’s International Realty.
“If you call [the sales office at a new building] every hour they’ll give you a different number of how many units are in contract,” he said. “You can never get a clear answer.”