Unique Risks in Buying New Construction Condos

There are risks in any real estate transaction, but buying new construction has several unique ones:

1) Contract Risk - builders use their own contract and rarely (if ever) allow changes. Obviously the contract is written in the builder's favor, but how will you know which terms are commonplace in the local market and which are uniquely theirs?

2) Financing Risk - If the building isn't ready to be delivered yet, the buyer assumes any financing risk between contract date and delivery. If interest rates double between now and then, for example, it's the buyer's problem. Similarly, any change in the buyer's status (e.g., job loss) is rarely accepted as a reason to get out of the contract. Best case is that you lose your deposit and walk away.

3) Delivery Risk - Again, with buildings that aren't complete, builders write in a clause that give them a specific time frame-often 2 years in this area-in which they can deliver late with NO consequences. If a buyer's lease is up or they have no place to go, that's the buyer's issue. It also adds to the Financing Risk (see #2)

4) Sales Risk Part A - If the builder doesn't sell out, then it's nearly impossible for a resale owner to price competitively. Consider the math--a buyer purchases, and has to mark it up to cover their own sales costs. How will a resale ever compete with a builder that doesn't have that markup?

5) Sales Risk Part B - If a builder doesn't sell out, and money is getting short, they may decide to "repartment" the building - that is, convert partially to apartments. That's a bad situation for owners (who now have tenants in their building) as well as for re-sellers (who would buy in a building when they can rent for much less in the very same building?)

6) Fees - Not really a risk so much as an FYI. Don't get too excited about that huge closing cost credit with use of "preferred lender and settlement attorney." They're "preferred" because the fees are higher in the first place. Know what a reasonable fee is so you can make an informed decision.

Parkside Alexandria

Here's an interesting new twist for builders trying to liquidate inventory: the live auction. Parkside Alexandria, a condo community on Van Dorn St, is selling 30 condos with a minimum bid of $225K for a 2BR/1.5BA unit. There certainly aren't too many 2BR units inside the beltway for that price. There are some catches, of course - you must register by 10/23, sign the contract on the spot if you win, bring $5000 with you, and close before Nov 27, among other things. More details are here. Of course there are also the usual risks inherent to new construction. Contact me to discuss more on these.

One quick note of warning -- if you intend to use a real estate agent to advise you and help review the contract(at no additional cost to you), make sure your agent is with you when you register or the builder will not allow you to be represented.

Looking for Alexandria real estate news? Read our new blog here.

22 Condo Projects Canceled? Come on, now...get serious.

Let's get serious. Here's another "the sky is falling" example from the press. Today's Post has a good article on some condo projects that have been canceled, and how that situation leaves buyers in the lurch. Sure they get a refund, but no place to live, and no compensation for their efforts. (A good warning on the risks of buying new construction.)

Delta Associates is quoted in the article saying that developers had canceled plans for 22 projects in the 2nd quarter alone! Really...22?! I just don't buy it...unless they're using "plans" pretty loosely. (As an aside, it's not a bad thing that condo projects get cancelled--it keeps inventory reasonable and supports prices.)

I've been hearing about these conversions back to apts for a year or more. And the same developments are always mentioned: the Joule in Arlington, View 14 in DC, the Bellmeade in Leesburg (Leesburg? That’s a VERY different market than Arlington or DC), Four Winds at Oakton, and a few others. Those conversions happened months and months ago. So where are the 22 from THIS QUARTER? Someone please find this list so we can map them out. I'll bet they're further away than this article would leave you to believe. And what counts as a "planned" development? My guess is most of these "plans" are on paper--units were years away from delivery anyway. We'll never see that list in the Post though, because alarmist headlines sell more papers.

Builder Permit Drop: If this is bad, then what counts as GOOD?

Real estate articles in the Post often drive me batty. Take an article in today's paper with this headline:

"Builders' Permit Requests Tumble; Drop Seen as Bad Sign for Housing"

The article goes on to describe that permits for future construction dropped by the largest amount in 17 years, and that this is yet another indicator that the five-year boom ended last year. Really? Duh. Anyone who has looked around their neighborhoods at the For Sale signs in the last year can see that. What I think they missed in this article is that rather than this being a BAD sign for housing, this is actually a GOOD sign. Maybe even a GREAT one. It means that the builders recognize that the pace of building was unsustainable, and that inventory flooded the market. Permits is obviously a leading indicator of deliveries, so now we can expect a drop in deliveries later this year and into next. How can anyone argue that fewer houses being delivered is a BAD thing in this market? It means the market will be coming back into a more reasonable balance between available inventory and buyers. But, as we all know, bad news sells papers, so any available statistic gets spun as "bad news." I'd be willing to bet that if permits went UP, then the headline would have been something like "Builder Permits Increase; Flood of Inventory Expected to Worsen Housing Market's Woes"

Once again, I have to advise that if you're looking to buy a home (not an investment property--that's a whole other post), then you have to look at your individual situation, talk to a Realtor, and run the numbers yourself. Don't let the press--which is certainly a LAGGING indicator--overly influence your decisions.