Affordable Housing Institute : US

Do you feel … lucky?

 

Ever get yourself into an oh-no fix?  One of those where, scarce seconds after you’ve slammed the car door shut, hit the delete key or the flush lever, or seen the subway doors shut behind you bearing away your luggage?

 

Not that lever!

 

Multiply that by roughly a thousand and you have the sentiments of a new-construction condo buyer who, having signed the binding purchase and sale (P&S) and plunked down the 10% deposit, now sees newspaper articles crowing about condo price drops, and developers slashing prices on remaining unsold units. 

 

Buyers would be less than fully human if they didn’t fervently wish that they could somehow exit from their obligations and recover their deposits – and when wishes are horses, lawyers will ride, as revealed in this Wall Street Journal article on some of the more novel theories of entitlement to recovery:

 

With Florida awash in tens of thousands of empty or unfinished condominiums, many investors there are turning to the courts in an effort to cancel their contracts and recoup their deposits.

 

In terms of motivation, there is a chasm of difference between a buyer-occupant and a buyer-investor.  The investor-buyer is hoping to take advantage of the property’s appreciation before having to put down the remaining cash … and seldom considers that the reverse may happen.

 

 

In America’s litigation-prone society, we can easily hire an advocate to ask a court to relieve us of the consequence of our decisions.

 

So far, they haven’t had much luck.

 

Condo buyers in hard-hit markets across the country have been scouring their contracts for loopholes and flaws that would allow them to back out.

 

At least we have laws, so the buyers know they cannot simply claim they changed their minds. 

 

New brain installed

 

Investors in Florida, where many were looking to flip their condos for a quick profit in a rising market, have been particularly aggressive in using the courts.

 

Every real estate down cycle reveals the same seamy side of human character – people who hoped to make a quick buck without having to think hard.

 

During the housing boom, Florida — like some other areas noted for tourism and retirement living — attracted hordes of speculators. By some estimates, more than half of all the deposits for Miami condos were put down by people planning to flip them for a profit without living in them, says Jack McCabe, chief executive officer of McCabe Research & Consulting in Deerfield Beach, Fla.

 

Hoping for a profit?

 

Investor-buyers have a very different mindset from buyer-occupants.  Aside from naively thinking they are somehow less committed than a prospective occupant, they are more prone to seek a quick pain-saving rescue through the courts.

 

Yet a series of recent legal decisions in the Florida courts indicate that it won’t be as easy as buyers might hope to get out of these deals. The bottom line: Unless it’s a bona fide contract dispute, an investor’s chances of winning appear to be slim.

 

As they should be!  The investor bought the upside, and the developer sold the downside.

 

Who owns the downside?

 

When prices start falling, out come the lawsuits:

 

Developers built far more condos than demand could absorb. The glutted Miami market now has close to 50,000 units — a record four years’ worth of inventory — for sale or under construction. The national condo market, by contrast, has a 12-month inventory, up from 4.7 months in 2005, according to the National Association of Realtors.

 

The Journal then submits for our consideration four Perry Mason cases

 

1.  The L-shaped Olympian

 

All mod cons, fit for a deity

 

Last month, the U.S. District Court in Miami dismissed two dozen federal lawsuits in which buyers said they were misled by an advertising brochure promising an “Olympic style” swimming pool at Opera Tower, a high-rise condo building near downtown Miami.

 

Plaintiffs could not reasonably rely on the drawings or advertisements, Judge Patricia Seitz ruled. The contract clearly stated the pool was L-shaped and 2,530 square feet — smaller than Olympic size, she wrote. The developers claimed that “Olympic style” didn’t refer to the pool’s size but to the fact that it would have lanes.

 

A little adjectival inflation is to be expected, which is why I tend to blur right past all descriptive adjectives in sales material.  Give me numbers.

 

Maintaining some contact with the truth

 

The decision was a big loss for consumer rights, says Miami Beach attorney Kent Harrison Robbins, who filed the lawsuits against Opera Tower.  “It gives developers wide-ranging room to promise whatever they want, as long as they change it in the written contract,” he says. “Honest developers will be outcompeted by dishonest ones.”  

 

Our verdict? 

 

Developer wins, buyer loses.

 

 

2.  The project is not its price

 

In one closely watched case, Florida’s Fourth District Court of Appeal sided in June with the developers over buyers who were seeking to recover a deposit in the Marina Grande, a two-tower, 26-floor complex that overlooks the Atlantic Ocean in Palm Beach County. The plaintiffs — two individual investors who operated under the name D&T Properties — cited a clause in state law that allows buyers to cancel over material changes in the project.

 

But the court affirmed that the plaintiffs, who paid a $99,000 deposit for a $495,000 condo, could not cancel their contract because of rising insurance and utility costs or for minimal increases in other costs.

 

A change in the economics is not a change in the project.

 

The court said an 18% increase in costs controlled by a developer is not “material,” but did not set a standard as to what level of increase would meet that bar.

 

Don’t buy condos unless you’re over 18

 

To me, this summary sounds like a précis of a casually written sentence in the decision.  I suspect the court found no material change, and then went on to dismiss plaintiffs’ claim that a cost increase was a project change. 

 

Gary J. Nagel, the attorney for D&T Properties, called the decision “incorrect” and said the court failed to define what a “material” change would be.

 

Our verdict?

 

Attorney Nagel is entitled to his opinion, as are the D&T investors, but they are not entitled to their deposit back.

 

 

3.  “The dog ate my condo documents”

 

In June, a Miami-Dade Circuit Court jury ruled against an investor named Alexandra Hiaeve, who claimed that she never received the condo documents from the owner she was buying a unit from at WCI Communities’ One Bal Harbour.

 

In most legal disputes, one party goes to some trouble to prove delivery, usually via certified mail or a receipt-requested overnight service.

 

When you absolutely, positively want to prove they got it

 

The jury said Ms. Hiaeve couldn’t prove that she never received the documents. The judge also ruled during the trial that Ms. Hiaeve had failed to establish that she had requested the condo documents in writing. Thus, the owner, Gedalia Fenster, was allowed to keep the $300,000 deposit.

 

I’m tempted to say that an investor who is trying to claim she put down hard cash without receiving the condo documents is asking us to believe that she is a fool, and hence deserving of sympathy … but I won’t.

 

Robert Zarco, the attorney representing Mr. Fenster, says that denying receipt of the documents is “very common in markets where people had been flipping and then the market turns and they want an excuse not to close.”  

 

Ms. Hiaeve declined to comment, but her business partner, Yona Kogman, says the jury’s decision was “ridiculous” and that Ms. Hiaeve hopes to appeal.

 

Note ‘hopes’, not ‘intends.’

 

 

Our verdict?  For the owner/ seller.

 

 

4.  The Missing Marina

 

Dora and Umberto Arena, of Hollywood, Fla., are among the thousands of investors who are looking to the courts for relief. When the Arenas bought their deluxe $595,000 condo in Hallandale Beach, developers urged them to move quickly to put down their $120,000 deposit. The planned 283 units at the Ocean Marine Yacht Club in Hallandale Beach sold out in only three weeks when they were offered to the public three years ago.

 

I wasn’t even born when Mommy put down the deposit

 

Developers often get buyers long before they break ground.  Banks require a certain level of –re-sales, to demonstrate that the property in fact has a market. 

 

“We saw this beautiful 48-slip marina in their brochures, and it sounded wonderful to have a place for a boat and to live in that brand new building,” says Ms. Arena, 64.

 

Despite the name, the Ocean Marine Yacht Club has no marina, as the developer was unable to secure the necessary permits. “We were inundated with literature touting it as a marquee feature of the complex while the developer was failing to disclose it didn’t have the necessary permits or approvals,” Ms. Arena says.

 

There’s nothing wrong with a developer touting an amenity anticipated to be in the final property.  There is something wrong with claiming that the loss of a stated amenity isn’t material.

 

Losing the stated amenity will  be material

 

Our verdict?  The buyers clearly win.

 

 

The only certain … is more litigation

 

Attorneys who represent condo buyers say many of the complaints of contract violations are legitimate — and that the battle is not over yet. “We are going to see a number of cases where buyers are successful, primarily in areas where something substantial was altered in the project and those that were not delivered on time,” says Jared H. Beck of Beck & Lee, a law firm in Miami. “The decisions represent just a tiny sliver of the universe of grounds for buyers’ claims in the ongoing litigation war between buyers and developers.”

 

Lawyers!  We need more lawyers!

 

Ironically, the growing number of lawsuits may actually make the problem worse. A high rate of units contested in court makes buyers nervous about closing and moving into a half-empty complex, which further depresses the market, says Mr. McCabe, of McCabe Research & Consulting. That, in turn, will give buyers more incentive to sue. “Just wait. We haven’t started to see what we are going to see,” Mr. McCabe says.

 

Just you wait — I have a plan!

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