I got some interesting info that I felt was important to share with you regarding buying new construction homes, condos or townhouse – or if you are considering buying a condo in a condo conversion community so that you don’t run into these problems.
Warnings #1a and 1b – if you buy new construction make sure that you are prepared for delays and have in writing that you will not have to close until you are satisfied with the completion of the propery.
With inventory being so low there has been an increase in the last year in new construction. When the market went down 6-7 years ago, new construction almost stopped completely and it wasn’t until last year that it really started up again and then picked up steam this year. With demand being high and inventory for existing homes for sale being low, there is a strong need for new construction and so this area has been growing rapidly.
There are differences in buying a new construction property from buying an existing home or condo and I am updating my knowledge of the area and will be completing the National Association of Realtors course on Successful Buyer Representation in New Home Sales.
Both of my current clients who are buying new construction ran into some of the typical issues with one of the most common ones being delays. I usually tell clients that they should expect it to take about 50% longer than they are promised and in one case the client signed their contract at the end of June and were told it would be done by August and it was actually done the last day of September (sort of) and in the other case they signed their contract the end of January and were told it would be about 6 months but not the estimated completion date is mid-November. Since I had forewarned them they were not surprised by this. So make sure to be prepared for this.
The client who just closed at the end of September had a very unusual experience with one of the larger and well-known builders. Their closing date was set for September 30th and they were informed of this around the beginning of September. They used an inspector who did inspections throughout the construction period (different from when you buy an existing property and a good approach) and informed the builder that they wanted to do the final inspection on September 26th.
Typically you will do a final inspection and come up with a list of final things that need to fixed or touched up – called a ‘punch list’. This gives the builder time to complete these items by closing. In this situation, when we arrived on September 26th for the final inspection, the house was not even close to being done. The A/C system was installed but wasn’t running yet, some of the flooring was not yet completed, the screening for the patio wasn’t done, and there were numerous small issues that still needed to be handled. This was on a Thursday and the closing was set for Monday morning.
We informed the closing coordinator for the building who checked with the construction manager and said it would all be finished by the end of the day Friday, so the buyer’s inspector rearranged his schedule to come back Saturday night to do a final inspection. I also got them to move the closing from the morning to the latest appointment in the afternoon to allow enough time to complete everything. We also had to get the buyer’s loan approval done and we didn’t even have a completed appraisal yet since the home wasn’t finished!
The appraiser came out on Friday but it wasn’t done then and so she rescheduled for Monday morning. As of Saturday evening, there were still issues not completed including the fact that the A/C was not working correctly in half of the house. My client informed the construction manager on Sunday and I emailed the closing coordinator that we may have to move the closing to a later date due to the incomplete construction and the fact that we didn’t have an appraisal yet. My client said they would be willing to close on the 30th but only if the builder paid them for their rental home until they could move into the new home.
We spent most of that Monday, September 30th, trying to get this all sorted out for the 4pm closing. The appraisal did get completed in the morning but the A/C was still not working right in half of the house. By 3pm my client still did not have the final figure for closing or wire instructions and no confirmation that the A/C had been fixed. By 3:30pm they did get the final figure and wire instructions but did not want to close until they knew the A/C was fixed and at 3:40pm they received a call from the President of the building company for the Tampa Bay area who assured them the A/C would be working correctly by the end of the day. My client had been promised many things before which were not kept and told him she was not going to close that day and at that point he told her the closing is at 4pm and hung up on her.
Within an hour the closing documents from the lender were sent and then the President sent an email stating that if my clients did not close they would be in default on their contract (which means they would lose their deposit and the house). They spoke with me about this and I told them that even though the documentation doesn’t really support their doing this it doesn’t mean they couldn’t try to, but that it could mean that they would have to get an attorney to fight them about this. They discussed it and decided they didn’t want to fight and they would close and we arranged to get that done even though it was later than scheduled – and it did close.
My client had said at one point there were some bonuses involved with the building company getting properties closed by the 30th and I found out after all of this, from my client’s lender, that September 30th was the end of the fiscal year for the builder. This explained why they wouldn’t just postpone the closing for a few days to make sure the home was really finished and the buyer was happy with its condition. Shameful!! I was able to get the construction manager to get more things done more quickly than would have otherwise probably occurred but this was just awful service on their part and I cannot recommend this company to anyone at this point in time. I won’t tell you who it is but if you ask me about any projects being built by this company I will at that time tell you I don’t recommend buying from them.
Condo Conversion Complexes
Someone who had contacted me in 2009 about buying a condo in a Palm Harbor condo conversion complex (and then went ahead and bought on her own without me) contacted me in August about now selling that condo.
I met with her and found out that she was unrealistic about the price she could get (recent sales averaging about $50,000 with the highest being $72,000 for comparable units and she wanted to get $120,000). About a week later I got some additional information that she had not provided me about the complex.
In 2011, a large institutional investor bought over 70% of the condos in that complex and now owned nearly 75% of the condos. Only about 5% were owner-occupied and the association had failed to put aside any reserves the last several years. These last 2 issues create a situation where no lender will make a loan to a buyer wanting to purchase in that complex which will then make it even harder to get a higher price when selling.
There is also a potential situation if that investor were able to acquire more units, they could possibly at some point in the future convert back from a condo complex to an apartment complex and then the remaining owners would be in a situation where they could either sell for the low market price or turn the condo over to the investor and get a small portion of the rentals for the complex.
This potential client felt this wasn’t fair and that despite all this her condo was worth what she wanted because the community was so nice and she had done so many upgrades. At that point I told her that I couldn’t help her sell the condo.
Not all condo conversion communities are in this type of situation and there are many around her that will never run into this issue and are on strong ground financially. There are a few, however, that are risky to buy in. The troubled ones are normally those that began their sales not too much before the market tanked and either didn’t sell many or had too many buyers that went into foreclosure or both. Those complexes that had sold out by 2003-2005 are not running into this problem.
So if you are thinking of buying in a condo conversion complex you will need to get enough info to determine the stability of the complex financially. There are now even some developers trying to do new condo conversions and to be honest with you I don’t think are going to be a good thing to get involved in.
I don’t want you to be so concerned about these warnings that you think you should avoid buying anything since these are more the exception than the rule. However, it is smart for you to be aware of these possibilities so that you take the appropriate actions to make sure they don’t happen to you.