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Frank, Both Buyer and Seller in New York, NY

What should I consider when looking at a new development with a distressed sponsor?

Asked by Frank, New York, NY Mon Dec 29, 2008

Sorry for the newbie questions. I am aware of several new condo developments in Manhattan, both large and small, whose developers are rumored to be in distress or financially compromised. These buildings are in varying stages of completion, with some having closed on over 50% of their units. I want to better understand the risks I am taking if I purchase a unit in one of these buildings. Is my risk mitigated by the sell-through? Are condo reserves in place and secured before the developer closes on all of the units? What am I liable for if a sponsor declares bankruptcy, and how do those liabilities change at different stages in development?

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I want to emphasize something that Paul said, that when considering a new condo development, you should pay attention to how many contracts have been signed if the development is in pre-sale. A couple of years ago, getting in first meant that you were probably getting the best deal because prices were going up. However, now is not a good time to be one of the first ones in. You run the risk of prices falling on you after you sign the contract, and then, if they don't get to a certain percentage sold, the project might turn into rentals (and in some cases even hotels). The best new development scenario right now is to get into a building where you have at least 70% sold and that closings have already begun, people are living in the building, etc. This means that the developer is probably beyond the breakeven point and his lender is paid off, which makes it a lot easier for your lender, and at this point the developer may be a bit more negotiable because he is not in a panic like that developer who is just putting their product on the market know and is feeling the pressure of having to sell at an amount that was much higher when the project was conceived one or two years ago when prices were shooting up. There are a lot of desperate developers who are really screwed right now, especially the ones who are about to put their building on the market now - and that doesn't mean they are going to be able to give the store away and you will be able to get the deal of a lifetime. You might end up wasting a lot of time. It is best to do your homework or work with a broker who is familiar with which developments are winners and also familiar which ones are destined to be losers, and that is where you will find your best deal. I am currently working on a new development that is about 85% sold and has been a huge success, so I have pretty good insight as to what other developers are doing right and wrong. There is definitely a lot of opportunity for buyers out there.
1 vote Thank Flag Link Mon Dec 29, 2008
Hello Frank,

When buying in a new development project, generally..... you will be required to put a certain percentage down to secure your interest in the property. Usually 10% or more, that money is put in an escrow account and the developer will be released those funds upon closing of the property. I have sold many new development properties and ocassionally a few do fail to be completed. sometimes due to lack of funding or due to lack of interest by the buying public. I have never once had a client lose their deposit . The only thing that the client lost was time and the cost of the lawyer for the prep of the contract. keep in mind the offering plan is closely watched by the Attourny General. If a development does not reach 15% presale... the development does not go into effect. If it reaches over 15%.. the developmet is a go. Now there are still many factors that can stop a development in it's tracks from that point.

Many developers are being pretty aggressive in their pricing. Some are including closing costs, and some are giving away storage units. Let me know what property you are looking at and I could let you know what that building is doing in reference to incentives.

pmacapagal@elliman.com
917 612 2746
Paul Macapagal
1 vote Thank Flag Link Mon Dec 29, 2008
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