August 21st 2012
Buying pre-construction has its perks. You can be part of a unique and special project, like a brand new condo in the West Village, or have first dibs on the penthouse in the latest hot building. More practically speaking, you can also, in many cases, take advantage of some discounted early phase pricing (more on that below).
But how do you buy an apartment without touching, seeing, or walking through it? How will you know what the views from the 31st floor will really be like? How do you buy pre-construction smart?
Here’s some advice from the experts:
“That document needs to be considered the Bible for the purchasers,” says Shirley Hackel, executive managing director at Warburg Realty.
The offering plan includes everything from the appliances that have been chosen to the opinion of a tax lawyer on what taxes will be after the city asseses the finished building. It will also have a “special risks” section, which will include things like whether or not the developer has the right to rent any unsold units.
Note that the developer is only legally obligated to deliver what’s in the offering plan, not what’s in the rendering or the brochure (“How to analyze a rendering” may help).
“Take a look at the track record and the reputation of the developer,” says Stephen Kliegerman, president of Halstead Property Development Marketing.
“If the developer has a long list of satisfied customers, then chances are you will be another satisfied customer,” says Kliegerman. “If they had leaks or problems then maybe hold off until you can touch, feel, and see everything before you buy.”
Googling around for any articles and discussion threads about the developer can help, and an experienced real estate attorney (one that was not recommended to you by your broker or the developer) should also have a bead on which developers to avoid.
Kliegerman also suggests turning to your broker for advice: “I would speak to a knowledgeable broker about the reputation of the developer, quality of past developments, re-sale history, success in those developments and quality of construction.”
Pre-construction apartments usually get sold in phases or waves of pricing, and if you buy in the first phase, you can save anywhere from 5 to 10 percent off the final listing price, says Brian Morgan of Citi Habitats, who also bought his own apartment pre-construction and estimates he paid close to 10 percent less than the final listing price.
Note, however, that the choicest units are often saved for last, when prices are highest.
4. Inspect the quality of the materials
The materials will be listed and highlighted in the offering plan, but you should still ask extremely detailed questions about them.
“Sometimes a thin sheet of oak will be used and covered with engineered floors,” says Morgan. “So, you really have engineered floors instead of the oak floors promised in the offering plan.” Ask the sponsor specifically, for example, what percentage of oak is in the floor.
Sponsors are allowed to make so-called “normal construction variations” from the offering plan in everything from materials to ceiling height, says real estate attorney Karen S. Sonn of Sonn & Associates, “and your attorney should find out what the construction industry standards for variations are and detail that in the contract.”
Also try to negotiate the right to inspect the apartment, says Sonn. However, she says, sponsors don’t like to allow this and it’s easier to negotiate if you are buying a ‘signature’ apartment.
Get as much information as possible so you don’t come have any surprises.
Here are some questions to keep in mind:
6. Get creative“What we saw was that the living room was going to be decent but the bedrooms would be facing a wall,” says Morgan.
7. Be clear on what gives you the right to walk away No crystal ball could have predicted the housing crash of 2008. Those who bought their apartment pre-construction in 2007 paid more regardless of any pre-construction savings. The market will ultimately adjust your final price. You should also keep in mind that, “your mortgage interest rate is from when you close, not when you go into contract,” Feeney warns.
A good lawyer will help you look for all the loopholes. For example, if a developer gives you a construction end date of August 1st, 2013 but doesn’t deliver by January 1, 2014, then you should have the right to walk away.
8. It takes a long time to close on preconstruction, so keep in mind market-rate and interest-rate exposure
“The contracts are written with a lot of flexibility for the sponsor,” says closing lawyer and NYC real estate expert Jerry Feeney, “not for the buyer.”
Views are important in Manhattan, but if you’re looking into a hole in the ground, you have no idea what the view will be. Morgan shared a story about a buyer who decided against a pre-construction property after he and Morgan sneaked into a nearby building to ascertain what the view would be like.