Having second thoughts about that High-End Condo presale?

As with any blog, this is not legal advice. If you want legal advice, consult an attorney in your area.

Escala. 1521 second avenue. Olive 8. Just a few of the many luxury, high-end condominiums going up in the Emerald City. Needless to say, when its “designed exclusively for the confident few,” you can be sure there will be a stiff price of admission. Indeed, these developers not only charge a high price, they also typically require a substantial earnest money deposit, usually 5% of the purchase price. On a million dollar condo, thats $50k. You’ll pony up this sum months, and even years, before the condo is complete and ready to close.

So what happens if you change your mind between the time you signed the presale contract and when the closing date approaches? What happens if the market goes in the tank and you want out of the deal? Or you foolishly went long on a can’t-miss investment opportunity, and now you’re not so sure you’re one of the “confident few”? Can you get your money back?

The short answer is “no.” Developers typically structure their contracts so that the earnest money will be forfeited if the buyer does not close. Buyers backing out of the deal is every developer’s nightmare — they need to sell the units and move on to the next project. Accordingly, developers do everything they can to “lock in” a buyer.

That said, there are typically a few avenues of attack if you really want out of the deal. To determine whether you are really serious about getting out of the deal (versus typical “buyer’s remorse”), ask yourself: “What would be worse, buying this condo or losing my earnest money?” If buying the condo is the worst possible outcome, worse even than losing your earnest money, then you’re ready to head for the exits.

One fertile area of inquiry is the Public Offering Statement (POS). By law, the seller of a new condo must provide the buyer with POS, which contains a variety of information about the condo development. Upon receipt, the buyer has a 7 day right of rescission and can therefore rescind the contract within that period with a full return of the earnest money. The seller must also provide the buyer with “all material amendments” to the POS, and upon receipt the buyer has another right of rescission if the “purchaser would have that right under generally applicable legal principles.”

Therein lies the rub, of course. These “generally applicable legal principles” are not spelled out in the statute, so it is a bit of an open question as to the extent of a change in the POS (between when provided to the buyer initially and when finalized) that gives rise to another right of rescission. Regardless, however, it creates an arguable point with attendant risk to all parties if they are unable to voluntarily resolve the dispute. Since every POS changes between the initial, presale version and the final version, a buyer can usually use these changes to negotiate at least a partial return of the earnest money.

There are other “arguable points” as well, all of which can lead to a negotiated resolution and a return of at least some of the money. Many developers are apparently unaware of the Interstate Land Sales Disclosure Act, a federal law that applies to large-scale developments. This statute has several requirements, including a disclosure requirement similar to the POS. If the seller fails to abide by the requirements of this federal statute, the buyer may have a right of rescission. There are many exceptions to this statue, but as long as there is some doubt, it will assist the buyer in negotiating a resolution.

In the final analysis, it is probably worth it to hire an attorney if there is a substantial amount of earnest money at issue (almost guaranteed if you’re talking about a luxury condo). The attorney will be able to identify those legal issues that can be used to negotiate a resolution. In doing so, you will probably get some of your earnest money back, and that total will probably be more than what you spent on attorney’s fees.

26 thoughts on “Having second thoughts about that High-End Condo presale?

  1. I haven’t seen this in the context of new construction, but I have seen it in the context of repossessed property sales. The bank has an addendum that calls for election of remedies rather than forfeiture of earnest money, and the addendum states it controls over the rest of the contract. It wouldn’t surprise me that a builder addendum might try the same trick.

    Anyway, if you’re dealing with such a contract, your penalty for walking away might be a lot more than just the loss of your earnest money.

    Read the contracts you sign.

  2. Kary — an excellent point. The Form 28 (Condo PSA) allows the parties to either choose forfeiture of earnest money or seller election of remedies upon buyer’s default. If the parties have selected “election of remedies,” then that raises the stakes significantly in terms of getting out of the contract. The situation would require additional finesse.

  3. But in the scenario I wrote about in my first post, they could select forfeiture of earnest money on the first page of the P&S, but still be in an election of remedies situation. It’s a real trap for the unwary.

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  5. My office window looks directly out on Olive8, the fab condo-tel.

    OH MY GOD what a disaster it will be. It doesn’t even have a worthwhile view, for crying out loud. Its birth was only made possible by loose lending. Now it will die.

    I will post some pics of it in Deflation Land.

  6. How can anyone verify if a developer is supposed to be registered under the
    Interstate Land Sales Disclosure Act? I went to the website, it’s not registered, so either it is exempt or should be regsitered. I called the Seattle and Spokane HUD office and neither knew how to find out?? There is an address to send complaints to in Washington D.C. I will send that, but wondered if there is quicker way to find out (by phone), called the Attorney General and they had no clue?


  7. SFM — we typically check with HUD in Washington DC. They are good about sending a reply email promptly. If the development is not registered, you can safely assume that they believe they are exempt and have written their contract accordingly. In our experience, given the complexity of the law, it is almost always possible to at least craft an argument that the developer has not complied with the exemption and therefore the buyer has a right of rescission.

  8. Thanks Craig,

    I did get an email back from HUD that they have nothing on this subdivision. Interesting that a Canadian buyer into this project was given a Disclosure Statement under Canadian law, being the developer is Canadian. So either they checked with their attorney and determined they would be exempt, or?? they should of resigistered and did not, which I would find hard to believe they would be that dumb, or given bad legal advice. Looks like there might be some anti-fraud requirements, even if they were exempt from this registration.

  9. Opus NWR Development LLC, the developer of the Fifteen-Twenty One Second Avenue condominiums, marketed the building as housing the premier condominiums in all of Seattle. However, despite Opus’ representations about the grand scale and spaciousness of the condos, a number of buyers for “A” unit at the building — which was represented to be the best unit carried a matching pricetag — have discovered on their initial walk-throughs that they were hood-winked into reserving the “ugly stepsister” unit of the entire project. Instead of the 8′ foot entry door, open floorplan, and high ceilings they were promised, the buyers of unit A have discovered that the long, narrow entry to the unit is more befitting of an underground bunker that the “spacious living” they were promised (and paid for). As a consequence, several buyers of unit A have retained Dan Donlan of the law firm of Lane Powell to represent them against the developer. In addition to the design problems with unit A that have been admitted by on-site Opus agents, the owners have discovered shoddy workmanship and a laundry list of defects. However, instead of trying to resolve these issues with the tenants, Opus has thus far tried to blame the complaints on current market conditions suggesting the buyers are only complaining because their units are not worth as much as they once were. Despite the suggestion that the buyers are only looking to back out of their deals, none of the buyers has asked for a refund and have only asked to have the defects fixed.

  10. My friend told me that he hired a lawyer name Steve Crane from Crane Dunham and although he couldn’t tell me the specifics, he said he was pretty happy with the results. It might just be worth it to at least talk to a lawyer. You could always have a contingency fee agreement instead of rates. Just a thought.

  11. RJava — I think it certainly is worth it to at least discuss with a lawyer. After determining the approximate cost of getting a lawyer on board so you can make an informed decision (whether by contingency, flat fee, or an estimated amount of hourly work) you can decide whether you want to risk sending good money after bad. If the attorney believes you have a very good chance of getting at least some of the money back, it may be money well worth spending.

    Oh, did I mention I was a lawyer? And I am handling many of these cases right now?

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