July 06, 2018
By: Beckie Strum
Buyers who purchase apartments in unfinished developments have more information at their fingertips than ever before, with third-party listing sites offering instant access to online regulatory filings and other public records.
“Buyers are equipped as never before knowing practically every aspect of a property before having to commit,” said [broker] with [firm]. “Everything—from airplane tickets to cars, to art, to disposable household goods—is purchased with fair-market value readily ascertainable, with a few swipes on their phone.”
But some developers, feeling more vulnerable to legal action if their projects don’t meet expectations, have responded to greater consumer scrutiny with obfuscation, withholding information where legally possible or padding it with disclaimers and wordiness. Nevertheless, buyers and their advocates can leverage abundant public info—and even the lack thereof—to identify the best home that both suits their lifestyle and is a safe investment.
The depth and kinds of information developers disclose to the public vary greatly among states and countries, depending on the local laws and standard industry practices.
No matter where you’re house hunting, however, become familiar with what most developers choose to disclose about their unfinished projects and let that standard be a guide. A developer that obscures significantly more information about a building than its peers—such as availabilities, the number of units already in contract and at least some prices—should throw up a red flag.
“Holding back now more often than not creates potential concerns for buyers, who get the sense that something material is being hidden from them,” [broker] said. “Absent full and reasonable transparency, buyers assume that if the numbers were strong, the sponsor would flaunt it, and if they’re not disclosing them, there could be a reason to beware.”
New York City
New York state law requires developers to file a novel-sized document called an offering plan detailing the building, its common spaces, each unit and its specifications, which can be accessed by anyone through the New York State Attorney General’s office.
Over time, offering plans have gotten larger and larger to accommodate numerous disclaimers to protect the developer, said [president of firm] and author of a weekly report on Manhattan’s luxury market.
Buyers should read the offering plan carefully for disclaimers on square footage, ceiling heights and other physical attributes, which could be subject to a 5% variance or more. Developers can also severely underestimate property taxes for each unit by thousands if not tens of thousands of dollars by qualifying their data as subject to change, [president of firm] said.
Law firms “write plans that are more onerous for the buyer to understand” and that benefit the developer, [president of firm] said.
In most cases, developers are not required to disclose a schedule of which units are in contract and negotiated prices, but some developers do through the multiple listing service and their eagerness to report such activity early on is often a good sign.
“There were some new developments that sold in a matter of months—10 Madison Square Park, 56 Leonard,” [president of firm] said. “They were very happy to report their sales, they wanted people to know.”
Several cases by Adam Leitman Bailey, a real estate attorney who has successfully sued condo developers on behalf of dissatisfied buyers, show how important is it to fact check a grandiose sales pitch against the official offering plan.
In 2010, Mr. Leitman Bailey successfully won deposits back for 10 luxury condo buyers at Trump SoHo, when he used public filings with the state attorney general to show the sales team had fraudulently exaggerated the percentage of the building already sold to make the project seem in better financial health.
“Your best friends when buying an apartment are your lawyer and your engineer,” Mr. Leitman Bailey said, referring to the expert one hires for the unit inspection.
He recommended checking the offering plan for when the sponsor intends to close on the unit, which in many cases could be well before the building is complete and when the unit is practically still uninhabitable.
A buyer or their lawyer should also check the plan for basic lifestyle issues: whether pets are allowed, what amenities there are, and how many stories are in the building, he said.
An attorney is best able to make sense of the legal jargon in an offering plan, but you should also read it and ask your lawyer about things that make you uneasy. New York offering plans are accessible from the attorney general’s office anytime and are prudent to review before putting down a deposit, usually 10% of the the purchase price and which will be lost in full if a buyer decides to back out before closing.
Off-plan buyers in the U.K. start by signing a reservation agreement for a particular unit, when they pay a nominal fee of somewhere between £1,000 to £2,500 (US$1,307 to US$3,269). They typically have a month from that agreement to carry out due diligence and put down a deposit of 10% or more.
Given the quick time frame between placing a reservation and committing to purchase, a buyer should do his or her research before stepping a foot into a developer’s sales office, said [assocate] at [London-based law office].
“It makes sense to study the developer’s literature carefully, visit the site and ask to see a draft contract,” [associate] said. “The developer would be more amenable to agreeing variations before they have got the purchaser’s money.”
Due diligence should include getting a copy of the developer’s title from the official Land Registry and copies of the development’s specifications from the local authority’s planning portal.
Official planning documents will show how many contracts the developer has already entered for that building, as well as rules set forth by the planning committee, which could include putting aside a section of affordable housing units in the building, limits on parking in the area and required building materials.
A buyer might also consider scanning the local authority’s page and the news about whether there are any impending transportation projects in the area that could lift the future value of the home and therefore raise the local council tax, [associate] said.
A little snooping on the developer through the Companies House, the country’s official registrar of companies, will reveal how well it is publicly trading and whether it is embroiled in any lawsuits.
Florida law gives condo buyers a 15-day window after signing a contract to back out of the deal with no money lost, said [president of real estate firm].
During that window, [president of real estate firm] said: “You can walk from the contract at any point.”
It’s typically during this 15-day rescission period that the developer hands over a textbook-sized stack of official information known as the “condo documents” akin to the offering plans in New York. The documents filed with the state’s Department of Business and Professional Regulation outline the physical characteristics of the building and individual units, the rights of the developer during construction, amenity spaces, estimates for common expenses and much else.
But buyers and their attorneys don’t have to wait until they’re under the gun to examine these condo documents rich with crucial information. The paperwork is a matter of public record, and can be reviewed at a buyer’s leisure long before signing a contract.
Prospective buyers in Miami need only download a “declaration of condo” and any amendments the developer made to it from the Miami-Dade county online records search, or call the records office directly for assistance.
Meanwhile, [president of real estate firm] suggests doing a deep dive into the background of the developer, reading about their other projects, seeing which companies have partnered with them on real estate projects in the past and scouring any information available through the Securities and Exchange Commission.
“The developer’s reputation is really important,” [president of real estate firm] said. “My general advice is to really research the developer and his wherewithal to complete the development.”
It’s prudent to research a developer before buying off-plan in Los Angeles, but the city has relatively strong consumer protection compared to other places.
Once a buyer puts down a deposit, the funds sit in an escrow account until closing, and the buyer is allowed to walk away from the contract at anytime with most of that money, under the current law. The city also limits speculative activity by banning people in contract from reselling their units before the building is complete, said [director] at the [firm].
Under California law, off-plan buyers must receive what’s referred to as a White Report, or a final public report, and have time to review it before a deposit is taken or a sale is finalized in a new development. Up until then their deposit is almost entirely refundable.
Buyers and their attorney should read that final report carefully as it offers an opportunity to renegotiate with the developer if the condos or amenities have materially changed, [director] said.
“The square footage can change a lot, maybe the city will say you need a plumbing line here. It’s important do a proper read in case you need to renegotiate,” [director] said. “You have people who just bail out.”
Wherever the project, transparency will does more good not only for the buyer, but for the market, [director] said.
“Absent full data, it not only hurts the open market, it creates inertia amongst buyers and handicaps brokers from being able to do their best job,” [director] said.