Many Buyers Must Try, Try Again As Condominium Market Shrinks
Wednesday, August 15, 2007
A growing number of condominium developers are backing out of projects as the worsening real estate market causes lenders to tighten their standards.
For buyers, a project's cancellation can be an unexpected jolt. They get their deposits back but nothing for their time and aggravation.
In the past 12 months, nearly 20,000 condo units have been removed from the glutted local development pipeline, said Gregory H. Leisch, chief executive of Delta Associates, a real estate research firm in Alexandria. By Delta's count, in the second quarter of this year, developers abandoned plans for 22 local condo projects.
Victoria Hammond signed a contract for a one-bedroom condo in Arlington more than a year ago, but two weeks before she was scheduled to close, the developer, Monument Realty, notified her that the conversion from rentals to condos would not go through.
Hammond, a government consultant, persuaded the people taking over her group house to let her stay. In December, she put money down on another one-bedroom in Arlington. In April, developer Ed Peete Co. canceled the condo plans.
"I had no idea this was possible with my first contract. That was a complete shock," she said. "The second time, I was prepared and skeptical about what was going on."
In a recent survey, residential developers said lenders are making smaller loans and charging them higher interest rates, according to David Ledford, staff vice president for housing finance and policy with the National Association of Home Builders.
During the real estate boom that ended two years ago, developers could get loans even if they presold only one-quarter of their units, said Peter Antonoplos, a real estate lawyer in Carter Ledyard & Milburn's District office. But then sales slowed drastically, and many would-be buyers cancelled their contracts. Now lenders are asking that 50 percent or more of the units be sold before construction, he said. Others want the developers to contribute more of their own money.
"Institutional lenders don't have the appetite for condo properties that are going to sit around and present a credit risk," Antonoplos said.
Developers are more likely to get financing for rental properties because the rental market is healthier, real estate experts said, hence the push to convert condos to rentals. However, there are concerns that the recent turmoil in the mortgage market could cause that financing to tighten.
The list of abandoned condo projects is growing.
Level 2 Development of the District decided late last year to build View 14 at 14th Street and Florida Avenue NW as luxury rentals instead of condos. "It was clear to us from the sales pace and activity that we were going to have a difficult time preselling the number of units required to meet both the lenders' presale requirements and our own investment criteria," said Jeff Blum, a principal at Level 2.