[hrothgar]

Hi All

I am giving serious consideration to taking the big plunge into home ownership.

Prices are down
Interest rates are down
I want a honking big mortgage as an inflation hedge

Just about everything say that this is (finally) the right time to buy.

I found a property that I like; however, there's a major catch.

It's a high end condo complex thats just going on the market. There's low occupancy and the developer is really trying to get people to sign up. This means that the prices are very attractive, however, I anticipate some risk that the complex could go bankrupt.

Questions for the list:

1. How much disclosure can I expect to get from the developers? Is there a reasonable expectation that I can get access to their books (I'd really like to understand their cash flows before putting an money down)

2. Lets assume a worst case scenario: I buy in and the developer goes belly up. What happens next?

[PassedOut]

This is a good time to be a buyer. In a situation like yours, I strongly recommend that you hire a good real estate lawyer who knows the laws and practices in your state.

[macaw]

Make sure you're on the board for the homeowners association. Those governing documents for ownership are really crucial and should be reviewed by a good attorney prior to purchasing.

[hrothgar]

macaw, on Apr 22 2009, 05:01 PM, said:

Make sure you're on the board for the homeowners association. Those governing documents for ownership are really crucial and should be reviewed by a good attorney prior to purchasing.

That's part of the rub...

Until the complex is 50% occupied, there is no homeowner's board...

[Mbodell]

It depends where you are, but I suspect you are early on the bottom of the housing market. If the developer has so few occupancy why not wait until they are above 50% occupancy to put down the payment?

[hrothgar]

Mbodell, on Apr 22 2009, 10:51 PM, said:

It depends where you are, but I suspect you are early on the bottom of the housing market. If the developer has so few occupancy why not wait until they are above 50% occupancy to put down the payment?

Once the occupancy rate hits 50%, the properties become much more attractive and the developer has better cash flow.

I expect prices to increase significantly....

This is one of those fun (risk, reward) frontier problems

[Phil]

hrothgar, on Apr 22 2009, 09:47 AM, said:

macaw, on Apr 22 2009, 05:01 PM, said:

Make sure you're on the board for the homeowners association.  Those governing documents for ownership are really crucial and should be reviewed by a good attorney prior to purchasing.

That's part of the rub...

Until the complex is 50% occupied, there is no homeowner's board...

The developer will control the association until x% (usually 50%) of the units are built and sold. Is the developer a national builder or some local yahoo?

You have some very legitimate concerns about the viability of the association. Associations can be like Ponzi Schemes; the fees can be astronomical if there are vacancies / delinquencies, etc.. You are also spot on about the developer - if he is in financial straits, while they are supposed to fund the association, they don't always do that. I wouldn't count on your State to enforce funding the reserves.

If the deal is good however, I think this is the best buying opportunity we've had in 30 years, with the depressed market and cheap money. Even if you get stung a little with the HOA dues, it might be worth it.

Hire an attorney for the purchase contract, but its a waste of money for an attorney to do due diligence for a condo to look at HOA docs or other instruments. Be a nidge with the HOA and get everything you can to verify that the fees are covering the expenses, and building up maintenance reserves. Its paying for the capital costs that nail you. Maybe pay an accounting buddy to look into their docs and make sure the budgets match reality. Also make sure that the developer isn't using the HOA as their piggy bank by charging some silly management fee / overhead on costs.

Whats around the property? Is it on a hillside? If yes, I would be very wary about proper grading if the developer is unscrupulous. If you have a friend in the roofing business, take a quick look at the roof.

[hrothgar]

Phil, on Apr 23 2009, 05:05 AM, said:

Hire an attorney for the purchase contract, but its a waste of money for an attorney to do due diligence for a condo to look at HOA docs or other instruments. Be a nidge with the HOA and get everything you can to verify that the fees are covering the expenses, and building up maintenance reserves. Its paying for the capital costs that nail you. Maybe pay an accounting buddy to look into their docs and make sure the budgets match reality. Also make sure that the developer isn't using the HOA as their piggy bank by charging some silly management fee / overhead on costs.

Whats around the property? Is it on a hillside? If yes, I would be very wary about proper grading if the developer is unscrupulous. If you have a friend in the roofing business, take a quick look at the roof.

Hi Phil

Thanks for the recommendations. I have a few followups:

(Sorry if any of this sounds stupid, however, thiis is my first time purchasing real estate)

As I understand matters:

The HOA only comes into being when the condo hits 50% occupancy. Before that, the builder has broad discretionary power. Is there any good way (other than auditing the books to understand what they can / can not do?)

In a similar vein, how do HOA agreements come into being? I thought that the builder normally submitted a a proposed agreement. However, the condo association always has the option to do something smart/stupid.

In answer to a (few) of your questions:

The developer is local which has its pluses and minuses. There's obvious quesitons about cash reserves and exposure. At the same time, the developer is very tied in to the local town.

The property is nice and flat. (The developer leveled some old buildings in downtown Natick to get the property). I doubt that grading would be a major issue.

In case you have any interesting in looking at stuff, here's the URL

http://www.20-south....mon/content.asp

[helene_t]

hrothgar, on Apr 22 2009, 10:15 PM, said:

Mbodell, on Apr 22 2009, 10:51 PM, said:

It depends where you are, but I suspect you are early on the bottom of the housing market.  If the developer has so few occupancy why not wait until they are above 50% occupancy to put down the payment?

Once the occupancy rate hits 50%, the properties become much more attractive and the developer has better cash flow.

I expect prices to increase significantly....

This is one of those fun (risk, reward) frontier problems

Would make a good case study for a chaos theory course

[y66]

Looks like you're going into this with your eyes wide open and that you're getting some solid advice on this thread.

re: timing, Dave Leonhardt makes some useful observations in his column today.

[pclayton]

hrothgar, on Apr 23 2009, 04:13 AM, said:

Phil, on Apr 23 2009, 05:05 AM, said:

Hire an attorney for the purchase contract, but its a waste of money for an attorney to do due diligence for a condo to look at HOA docs or other instruments.  Be a nidge with the HOA and get everything you can to verify that the fees are covering the expenses, and building up maintenance reserves. Its paying for the capital costs that nail you. Maybe pay an accounting buddy to look into their docs and make sure the budgets match reality. Also make sure that the developer isn't using the HOA as their piggy bank by charging some silly management fee / overhead on costs.

Whats around the property? Is it on a hillside? If yes, I would be very wary about proper grading if the developer is unscrupulous. If you have a friend in the roofing business, take a quick look at the roof.

Hi Phil

Thanks for the recommendations. I have a few followups:

(Sorry if any of this sounds stupid, however, thiis is my first time purchasing real estate)

As I understand matters:

The HOA only comes into being when the condo hits 50% occupancy. Before that, the builder has broad discretionary power. Is there any good way (other than auditing the books to understand what they can / can not do?)

In a similar vein, how do HOA agreements come into being? I thought that the builder normally submitted a a proposed agreement. However, the condo association always has the option to do something smart/stupid.

In answer to a (few) of your questions:

The developer is local which has its pluses and minuses. There's obvious quesitons about cash reserves and exposure. At the same time, the developer is very tied in to the local town.

The property is nice and flat. (The developer leveled some old buildings in downtown Natick to get the property). I doubt that grading would be a major issue.

In case you have any interesting in looking at stuff, here's the URL

http://www.20-south....mon/content.asp

I'd take a little time and speak to a HOA that is in one of RFR's existing projects. They don't seem to have an extensive resume (quite the opposite, but IMO, you've gained 90% of what you need to know when you build one or two projects), but the building looks nice enough, as do the units. I'd be particularly interested what kind of warranties the builder obtained for the physical plant of the building.

CCR's and the other managing documents are drafted by the developer's HOA attorney. In California, they are submitted to the CA Department of Real Estate for review. I'm a little fuzzy on the process myself (its been 15 years since I put together anything like an HOA), but there are stages the documents go through, depending on how far along the project is, and the reports are called 'white' and 'pink'. The more complete the disclosures, the deeper into the sales process the developer can proceed with - iei, taking deposits for units, opening escrows, etc..

HOA's have some power, but it is limited by their governing documents. They usually are prudent, but I recently had a friend in Palm Springs who added 18" (yes, inches) to the back of their patio (an improvement btw) that encroached into the common area. The HOA spent over ten grand pursuing this. All that really matters is that they are reserving enough money and spending the associations money wisely.

I really comment on how things work in Massachusetts, sorry, but I think you are asking the right questions.

[mike777]

1) In general a developer going belly up in a new development is a bad thing. You do not want this to happen.
2) Having no idea what the rules of the Condo board will be is another big risk.
3) The location and the price are very important but one needs to be able to sleep at night without any worries about these two issues.
4) As a side note when I bought new townhomes they came with alot of warranty insurance on the project and home, the projects were 50% sold or more.

[Winstonm]

I echo Mike's advice. I would be nervous about a new condo development with the oversupply of condos on the market and the tight credit standards. If I were to buy now I would look for a house in a long-established neighborhood.

[Echognome]

Well at least half the occupants in the building will be in the first 50% of ownership, at least initially. I think Richard is right in that you just do your own risk reward and follow the advice of friends who tell you what to look for in the disclosure docs. I'm sure you can also look up advice online. It certainly looks like a hip place and it wouldn't surprise me if it got to 50% relatively quickly and you found prices rising again. I mean no one has a crystall ball, but you may be able to find a great bargain if you are willing to take on some of the risk. Wish you luck with it.

Edit: By the way, the flat screen over the fireplace, may look fashionable, but the screen is way too high for anyone that is a true videophile. For optimal viewing, your eye level should be about 1/3 of the way up from the bottom of the screen.

[pigpenz]

I would talk with others who are livng there to see how the HOA runs and how they feel about, alot of times you will find that a HOA is being run by just those on the board with out ever any input from the other owners

[TimG]

Real Estate Slump Hits Luxury Condos -- Boston Globe.

[JA Farr]

Dave Ramsey - one of USA's foremost financial teachers agrees that now is a good time to buy IF.

If you have your fiances in order. 1. All other debts paid off. 2. A FULLY FUNDED
energency fund of 3 to 6 months expenses saved for those things that life will throw your way. And 3. you pay as much down as you can with the mortage no longer than 15 years.