Beware Of “Sold Out” Signs For Condos- By NEIL SISKIND

Condominiums have long been the part of the housing market most susceptible to “builder speculation” when a market is hot. The reason is that you can build many apartments at once, and the amenities make each small apartment very attractive as the part of a greater, luxurious whole. So, a small apartment, as opposed to a home, can be bought along with things like swimming pools, exercise facilities, doormen … things one could never afford in a house. The nature of a building, in that there is always someone overseeing the property, also makes condominiums appeal to investors and second home buyers, who won’t be there often- if ever.

So, when real estate markets heat up, so does the building of condominiums. Florida is often a hot spot for this. New York, despite its limits on and costs of land, this time around, has become a hot spot- especially Long Island City, where buildings under construction dot the skyline.

When houses become too expensive, building three hundred apartments with various amenities can offer prices that investors or frustrated house hunters see as “relative” bargains. While a “decent” three-bedroom, two-bathroom house in a “decent” suburb with a good school could cost $1.0M (and more), a nice 2-2 condo may cost $700,000.00[1]. While the condo would be smaller, with less bedrooms and bathrooms, the fact that the housing market is so expensive, and the fact that the condo offers so many amenities, in addition to the fact that it can be rented out for income when not in use by the owner, makes it enticing to jump in, with the belief that all prices will only keep rising. It is impossible to compare a two bedroom two bath condo apartment with a similar sized house with such amenities. Nothing like that exists. So, comparing apples to apples is impossible. Yet, the condo, with all of its great amenities, seems so sensible to buyers (in light of how little one gets from a house) when prices are on the way up[2].

Here’s the problem of which buyers must beware[3]:

Condominium developers “play games”.

For one thing, they “release” apartment onto the market slowly, so that only a few come available at a time, creating “artificial” demand, and price support.

Second, they “pre-sell” apartments (selling them before they are even built). “Pre-sell” can mean many things and can be a trap for buyers. In Florida’s last boom and bust, “pre-sales” usually meant that a buyer had to put down five percent (or, “only” five percent) of the total purchase price in order to have the developer hold the apartment for the buyer, subject to the buyer obtaining financing and condominium project completion (or near completion). In many of these cases, the buyer never closed on the apartment for one or more of the following reasons: (i) The real estate market crashed and the buyer would just walk away and forego their deposit, or (ii) the buyer did not have the financial ability to get a mortgage, or (iii) the building was not financially sound enough for a lender to make a loan, or (iv) the apartment was bought to be flipped, so that the buyer could get back his or her five percent deposit, plus a profit, before the building was even built- but such transaction never came to be, and the buyer, who never had enough money to close in the first place, just walked away.

So- when developers say that they are “sold “out” or are “mostly sold out”, one must be aware that this most likely means that the developer has received small deposits on all of the apartments- but the buyers may never close.

So, when you look at a condominium at this dangerous stage of the market, and the salesperson says that they are 90% sold out – ask that salesperson to define “sold out”- or else you may be buying an apartment with empty units next door that are owned by the bank or the sponsor, and your apartment’s value may decrease.

Moreover, if investors and/or sponsors own many apartments in the building, you may end up living in a rental building, when you thought you were buying an upscale home. So, try to get a feel of who is buying in the building.  If you have a good realtor, he or she will know.

If you are buying as an investor, rather than as a resident, consider that condominium development has already started pushing apartment rental prices downward, which will affect your rental income potential. If you are buying to be a resident, your next door neighbors may be less financially qualified than yourself to live in that building. You may even get college kids living next door.

Persistently low interest rates encourage unneeded real estate development and undisciplined investing throughout an economy- and these things often materialize in condominium developments by builders and apartment purchases by flippers, or by those not knowing exactly what they are buying. At this stage of the cycle, you should consider being neither of the two latter, to the benefit of the most former.

__________________________________

[1] I am being very broad, and very general. These numbers are just to illustrate a general premise. In some neighborhoods a decent 3/2 can cost $500,000.00; in others $1,000,000.00. 3/2 condo apartments can run from $250,000.00 in Central Florida to $15,000,000.00 in Manhattan. I am being general. Use your own numbers. And everyone has their own definition of “decent”.

[2] I am not suggesting that the buyer of a three-bedroom home would instead buy an apartment. These are, of course, different buyers. I am explaining how people seeing the prices of real estate, in every bubble, get lulled into the attractiveness of relative pricing- even if the investments are not comparable. People see rising prices as an incentive to buy whatever appears to have good potential and is affordable. After looking at how little one gets in a house, a condo, with all of its amenities and panoramic views seems like a good investment, even though entirely disconnected from the value of a single family house. This is how people persuade themselves into condo investing in hot markets- using a “where else could you get all this at this price anymore?” mentality.

[3] Of course, rising interest rates (and declining prices) and rising inventories (causing price declines) and a bad builder who is under-capitalized (and never finishes the building) are additional risks to a buyer.

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
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Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
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The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

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To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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