What are the risks of buying a pre-construction condo, i.e. an apartment that’s not even built yet? What should we look out for in the offering plan?
While the most obvious risk with pre-construction is that the project never ends up being completed, most buildings will put your payments in escrow so you don't wind up losing money if the plans fall through, says Steven Wagner, a co-op and condo attorney with Wagner Berkow LLP who's been advising buyers and negotiating contracts for more than 30 years in New York City.
"There are a number of potential issues in the offering plan"--a document that lays out the terms and conditions of the sale, including details about the quality and construction of the building-- that can be difficult to get around," says Wagner, and it's worth having your attorney give the documents a close read, as well as doing some digging of your own. Even though some of these are risks that can't necessarily be mitigated, it's always best to go into a deal eyes wide open. Below, details in the offering plan to keep a close eye on:
Has the developer reserved the right to alter plans?
"The most common thing I've encountered is offering plans that say the construction of the building shall be 'substantially in accordance' with the plans," says Wagner. In essence, this means that they agree to mostly adhere to the original building plans you signed onto, but with option to make changes that can, in practice, wind up siginficantly effecting an apartment's value or desireability.
"For instance, the plan might say that the ceilings will be 10 feet, but that they definitely won't reduce them under eight feet, which is the legal minimum," says Wagner. This issue reared its head with a client who had planned on buying two adjacent pre-construction apartments—with plans to combine them into a larger unit—only to find that the developer had lowered the 10-foot ceilings down to 8'1" in one of the bedrooms.
"The developer did this to accommodate the redesign of an upstairs neighbor's apartment, and to redirect ducts for air conditioning," Wagner explains. "And because the offering plan stated that they could do that, it was still 'substantially in accordance.'" Eventually, Wagner's client was able to back out of the purchase but "it cost her a good deal of money in legal fees and anxiety," he says.
Similarly, Wagner cites a client who had already bought all the furniture for their pre-construction corner unit, only to discover after its completition that there was a huge, 2.5-foot-wide column in the corner of the living room that threw off all her design plans—and had most definitely not appeared in the original floorplans. "In that case, we settled the case for a discount, but again, it was a huge legal fight, with no initial guarantee that the client would get what they wanted, because of the question of whether a change is 'substantially in accordance,'" says Wagner.
While these kinds of protections for the developer are standard in offering plans, it's still smart to go through them to see what they anticipate the finished product to look like, and also, what kind of alterations they've given themselves wiggle room on. "You have to look at the language," says Wagner. "There's generally language giving specific examples of things they can do, such as the change in ceiling height, and stating that as long as the finished product complies with legal standards, it counts as 'substantially in accordance.'"
What promises do they make about the quality of construction?
Besides the specifics of your apartment's design and layout, there's also the more basic issue of quality control. "The quality of construction can vary enormously, and the standard disclosure in many offering plans is that they'll comply with the law, which establishes a minimum requirement," says Wagner. "And people think that meeting legal requirements should be enough, but you might wind up with things that look good, but are of inferior quality. For instance, what if you just dropped $2 million and you've got loud next door neighbors—how high quality is the sound insulation?"
"When I have clients purchasing in buildings that are to be constructed, I always caution them and ask if they've seen other buildings the developer has done," says Wagner. "Some have reputations for doing things very high quality, and taking extra care." And some, well, do not.
While the offering plan itself won't get into the specifics, the developer does have to disclose if they've been sued, as well as what other buildings they've worked on, so even though you're always running a risk, a little research into their track record can give you a pretty good idea of what you'll be getting.
Can the other condos be turned into rentals?
If you think you're guaranteed to buy into a building fully comprised of other condo owners, think again. Many offering plans will specify that if they sell a certain number of apartments—say, 15%—the plan can be considered "effective," and beyond that, they won't make any guaranteees that they'll continue to sell the rest of the units.
"The sponsor isn't guaranteeing that they will sell, and they fully reserve the right to rent the apartments out for any reason," says Wagner. "So you drop a ton of money on a beautiful apartment, only to find out that you're going to live in a building that's primarily rentals, and with minimal regulation."
"Obviously, the other people in the building will still be somewhat high-end, but you think you're signing up to live in a condo, and technically, it is, in fact, more of a rental," says Wagner. "And this is in practically all offering plans now."
Are your skyline views guaranteed in the long run?
Another key thing to have your attorney look for in the offering plan is any disclosure of "adjacent property," and what the developer plans to do with it. This means that a developer has purchased a large plot of land, and is planning to build multiple projects on site, something that can cause big snags if you have lot line windows.
"I've seen at least two different instances where conversions took place, and the disclosure didn't make any statement at all about use of adjacent property or construction in the area," says Wagner. "So you had people who thought they were buying apartments with views that didn't end up having them." In other words, you might buy into the first building that's going up on the site, and have a beautiful view at first, only to have it blocked when the second phase of the developer's project gets underway.
"Now, developers have to put in disclosures about lot line windows, and any plans they have to use adjacent properties when they're constructing new buildings," says Wagner. "But with pre-construction, it's not like you can just go up to the apartment and take a look around to check out the views, so again, it's a risk."
When can you move in—and how long do you have to request repairs?
"An offering plan usually sets out the maximum time frame for the building to be ready, and you get that from the developer," says Wagner. "But again, who's the developer?" As with building quality, this is a case where it pays to research the developer to get a sense of if they have a reputation for sticking to their schedule, or endless delays.
Another thing to keep in mind here is that new construction buildings will usually have specific time limits within which you can request repairs or punch lists for things that need to be taken care of in your new apartment once it's completed. "Don't take a laissez-faire position on this," says Wagner. "Ask what those deadlines are so you don't get a bad sponsor saying, 'No, it's too late, I won't fix that.'"
Ultimately, buying pre-construction should be approached as a calculated risk. "If you love the neighborhood and really want your apartment on a certain floor, or with a certain design that's been promised, just understand that you may not always end up getting exactly what you want," says Wagner. "You need to know that you're dealing with a reputable developer that is adequately funded."
New York City real estate attorney Steven Wagner is a founding partner of Wagner, Berkow, & Brandt, with more than 30 years of experience representing co-ops, condos, as well as individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.