Pre-construction investment-cannot afford to close

[luv4music]

What is the name of your state? Florida

Two years ago (when the real estate market was still booming) we purchased a "pre-construction" oceanfront condo from a developer. The condo faces the Atlantic Ocean to the front and the Intracoastal Waterway in the rear and we thought without a doubt we would have no problems flipping it before close. Well, we were wrong. We are expected to close sometime within the next 60 days and we have been unable to re-assign the contract/sell the condo. Here's the problem......we cannot get financing approval to close on the unit (nor could we afford to carry it). By the time the original contracts were signed we had developed a personal relationship/friendship with the developer and he never asked for proof of prequalification to close. He had sold us on the fact that it would never come to that (I think he too believed that we would never be closing on this unit). We cannot even give this condo away-we have tried advertising (at cost) and have gotten nowhere (which makes me sick because this condo is gorgeous)!

My question is....can we walk away? What do we do if we cannot sell the condo (now that we cannot get financing)? And, do we lose the $64,500 that is being held in an escrow account? Please advise!What is the name of your state?

 

[JETX]

can we walk away?

Of course you can. However, you will be liable for your breach.

What do we do if we cannot sell the condo (now that we cannot get financing)?

Then you take the 'hit'. Simply, you tossed the dice, hoping to win. And you didn't.

And, do we lose the $64,500 that is being held in an escrow account?

Of course that depends on the specifics of your contract, but yep, seems likely.

 

[seniorjudge]

Q: What do we do if we cannot sell the condo (now that we cannot get financing)?

A: If you own the condo now (I read your post three times and can't figure that one out), can you finance it yourself to a new buyer?

 

[luv4music]

Thanks for the reply-my neighbor said that if you do not "financially qualify" for financing that you should get your deposit back? He said that the developer should have requested a letter of intent (from a bank or broker) pre-qualifying us for a mortgage had it come down to closing. The contract doesn't specify "inability to obtain financing? Is my neighbor just sharing his "opinion" vs. fact? He said to get a letter from a bank saying that we do not qualify?

 

[seniorjudge]

Q: Thanks for the reply-my neighbor said that if you do not "financially qualify" for financing that you should get your deposit back?

A: Do you have anything in writing that says that?


Q: He said that the developer should have requested a letter of intent (from a bank or broker) pre-qualifying us for a mortgage had it come down to closing.

A: Ask him to cite the law, statute, case, ordinance, back of the cereal box, wherever he read this. Then post the text here for us to read.


Q: Is my neighbor just sharing his "opinion" vs. fact?

A: I don't know your neighbor, so I can't answer that one.

 

[luv4music]

Do we own the condo-kind of. We own the right to own the condo. Two years ago we put 10% down ($64,500) in an escrow account (the condo was $645,000) hoping to sell it before ever closing. Today the condo's are being appraised at $775,000 each. So in a perfect world we would sell the contract today and make $$$. The closing is in about 60 days. So I guess realistically the developer still owns the condo (until we close).

 

[tranquility]

I'm not sure what's going on either. From your description, you made:
1. An option contract to buy the condo on completion. If this is the case you will fail to exercise the option and your money is gone. Wipe hands on pants and move on.

2. A land purchase contract. If this is the case you have breached the contract and your money is gone. Wipe hands on pants and move on.

3. You made an installment purchase with a balloon at closing. If this is the case you have a duty to complete the contract or the seller will have damages. The amount of damages will either be liquidated as stated in the purchase agreement or will need be determined by the court in a suit for the breach. I'm not sure there would be any damages at the end of the day since the property is appraised at a substantially greater value than the contract price.

However, the appraisal seems suspect. If these are the real numbers, why don't you just find a buyer for the $645k? You get your money back and the seller closes and the buyer gets a great deal. The trouble with getting a loan to close makes me think this appraisal is suspect. Even with poor credit, I see a loan needed of $580,630 on a $775k property. Walking into a house with 25% equity and you can't get a loan? (Equity appreciation and amount already in escrow.) I'm thinking your numbers are wrong somehow.

 

[luv4music]

Sorry for the lapse-I am back. (1) The reason why we do not qualify for a mortgage of $580,500 is because we already have an existing mortgage of over $500,000 (primary residence) and our debt to equity ratio is off-we literally could not afford to make the monthly bank/mortgage payments. (2) The notion of buying preconstruction relies heavily on the Time Value of Money. So, two years ago this condo (if complete) would have run around $645,000. Today, the same beachside condo is valued at around $750,00+/-. So if the real estate market was still booming, theoretically we could sell low (because we bought in so low) and a buyer would come in and assume the contract (pick the final colors) and close on the unit (instead of us ever going to close). Everyone would get a great deal.

Had we not personally known the developer, when we signed the original contracts he would have asked for a letter from the bank saying that if we have to go to closing, that the bank would issue a mortgage. Because we all thought it would never even get this far (we should have been out of this investment months ago), we never did that.

I have advertised in the local papers. We are getting ready to run an ad in The Wall Street Journal. We have it listed on the MLS in south Florida. We have just had no luck finding a buyer (we had been asking $745,000). Now we are asking $645,00 (just to break even). If we could afford to hold it (after close) for a couple of years while the market recovers, we would make a killing (it is a fabulous place for someone to retire or keep as a winter house). We just cannot afford the investment.

Honestly, I know we had no business getting into this investment. Just truly thought the odds were in our favor and never expected the market to plummet. Was just trying to make some money (young family with young children) Now I was hoping that somehow we could walk away (since we could not get the appropriate financing) without losing the money that's being held in escrow. Is this situation any clearer or am I still talking in circles?

 

[tranquility]

It's clear, believe me. The "value" of a property is what a person is willing to pay for it. You can't find a person to pay $645K for a property appraised at $775K. Makes me think the appraisal isn't very good. But, I already said that.

The damages you will face if you walk away will either be listed in the contract as liquidated damages or will be the amount the builder is out because of you walking away. Many times the liquidated damages in this speculative of a situation is the amount in escrow. Part of the reason such a high amount was requested was so that you had more at risk and couldn't just speculate on the builder's dime. The calculation of damages if not liquidated would be more along the lines of the eventual amount the home sells for and the difference between that amount and the contractual amount. You then would have to add in the builder's carrying costs (security, interest on the funds, insurance etc.) and the amount of marketing costs and agent's commission. Even if the house were to sell for more than your agreement, the builder can be "out" more because of these things combined. It is impossible to know how much that would be until events play out--that's why I bet there is some liquidated amount in your original contract.

 

[JETX]

my neighbor said that if you do not "financially qualify" for financing that you should get your deposit back?

That MIGHT be valid... but only IF the purchase agreement included a contingency clause. There is nothing in your post to even suggest your contract had that clause.

 

[luv4music]

I read the contract-no contingency clause in regards to an inability to obtain financing. It does state (if I am reading it right) that damages are limited to the amount in escrow (if purchaser defaults).

I know that you are having a hard time with the purchase price vs. sales price. I am sure that there are many people out there that would love this deal. We have just not been able to "reach them". In this area, the $700's is not really a lot of money for housing on or near the water. It is a growing community (and right now going through the pains of a stagnet market). I come up with $775,000 because the developer sold a unit a couple of months ago and that was the sales price.

Our sales strategy had absolutely not been up to par and now we are scrambling. It was also difficult to "sell" up until this point because the units weren't complete (it was a construction zone basically). In addition, we thought that our sales agent (who represents the complex) would have flipped it for us a long time ago, so we didn't put much energy into this whole process (and now we are about to pay the price). I was just hoping that we had a viable way out-we are in over our heads. I had been running ads to sell the condo at $745,000, but now I am going to refocus and try to sell at cost $645,000.

 

[CraigFL]

Some people have 'fire sale' auctions for this kind of property/situation.

 

[SadieOdelle]

same song, different city

I did a similar thing as you and could kick myself now. I put 60k down on a pre-construction & went ahead and closed. A year later, I still have the house. In retrospect, I would have gladly lost the 60k, because now I am looking at loosing 120k.

 

[JETX]

I did a similar thing as you and could kick myself now. I put 60k down on a pre-construction & went ahead and closed. A year later, I still have the house. In retrospect, I would have gladly lost the 60k, because now I am looking at loosing 120k.

Thank you for your wonderful legal ADVICE..... oh, that's right... you didn't offer any!! Never mind!!

 

[myadviceislame]

Suggestion

Perhaps you should look into selling the unit at below cost since you're potentially going to lose at least $64,500. Plus people get all excited when you list a property at below cost. You might end up having multiple offers that push the price over the cost.

Your property is unlikely to appraise at 775K if you've been unable to get anyone to buy at $645K. In your situation only recent sales comps matter. And by recent sales comps I don't mean your neighbor Loretta telling you that Bob downstairs sold his unit for about 775K.

Your sweet deal is no longer sweet and you need to find the best way out without losing all of your deposit.

Good luck! And let us know how it turns out.