Condo Crunch
For Boom-Time Buyers, the Stakes Are High as Values Drop

By Renae Merle
Washington Post Staff Writer
Saturday, December 15, 2007

Even after the repeated construction delays and all the talk about a housing slump and falling home values, Barrett Thornhill was excited about moving into his new two-bedroom condominium this summer.

He had picked the unit two years earlier, based on nothing more than building plans. But Thornhill was looking forward to the swimming pool, the extra space and the luxury kitchen that he had put down more than $30,000 to secure. The condo's location along H Street NE in the District would make him an urban pioneer, he thought.

But there was trouble. The first sign was when a friend forwarded Thornhill, 28, a posting on a local blog reporting that his building, Senate Square, was converting condos to apartment rentals. The Web site for the project confirmed the news with a new advertising pitch for "luxury apartments."

Now, after three months, more than two dozen phone calls and an expensive consultation with a lawyer, Thornhill is waiting for the return of his deposit. "The least they could do was notify us. . . . It was more of a slap in the face," said Thornhill, a health-policy lobbyist. "It's outrageous."

Charles Herzka, a spokesman for New York's Broadway Group, which developed the project, said in an e-mail that the marketing firm should have alerted buyers about the conversion to rentals and that many deposits have already been returned.

Just two years ago, condo hunters around the region were lining up for hours to gawk at computer renderings of homes that wouldn't be ready for months or years. They put down thousands of dollars in deposits to secure their prizes and hoped the housing boom would keep pushing values higher. Instead, prices have dropped since then, and sales have slowed. Thousands of units have been repositioned as rentals as developers abandon the for-sale market.

In some cases, buyers are grappling with the declining value of homes they have yet to occupy. One of the most common problems facing these buyers is when their condos are worth less than what they committed to pay for them. That can make it more difficult to find a lender. It also has some cringing at the prospect that they are overpaying and that it may take years for them to recover the difference.

To keep buyers from walking away from their deals, some developers have negotiated price drops or offered free parking spaces or upgrades such as granite countertops. But others have refused to budge. "It wasn't costing them less to build the building," said Robert M. Diamond, a real estate lawyer with Reed Smith who represents developers.

Caught Without the Cash

Danah Leeson, a registered nurse, agreed to pay $615,000 for a two-bedroom condo at the Phoenix in Arlington in July 2005. She put down a deposit of about $31,000. But this summer, when she tried to secure a loan to complete the purchase, the lender told her she would have to come up with an extra $100,000 to make up the difference between the purchase price and the current value of the unit. "The lender won't give us more than the appraised value," she said.

Her choice? Find $100,000 or lose her $31,000 deposit.

Leeson attempted to move forward but soon realized she wouldn't make enough profit on the sale of her Loudoun County home to cover the difference. Her neighbors had been lowering prices and taking losses to sell their homes. A $100,000 profit "wasn't going to happen in this market," she said. Leeson did not complete the purchase and is still trying to get her deposit back.

Surviving the tumultuous market for new condominiums takes preparation, real estate lawyers and others said. Some buyers, like Leeson, can try to enter mediation with the developer in the hope of having their deposits returned. (Many contracts require both sides to attempt mediation before the buyer can file a lawsuit.) Others can see whether there are provisions in their contract that call for the return of the deposit if they cannot find proper financing.

If the developer has decided to convert the project to apartments, buyers can request the return of their deposits.

As it's turning out, a buyer seems most likely to get the deposit back if construction is slow because many contracts have a two-year deadline for finishing the unit, unless there are unforeseen problems such as a construction strike or extreme weather.

Many buyers are finding that the contracts they signed don't give them many choices. "Unfortunately, because of the way the market was, [buyers] didn't take the time to look at the contract. Even if you had wanted to change the terms of the contract, the developer didn't have to negotiate and could have just given it to someone else," said Claudia S. Hines, a real estate lawyer with Claudia S. Hines and Associates of Arlington.

Lessons Learned

Many developers remain in the condo market and are aggressively marketing their new units. For those who are thinking of buying now in an unfinished condo development, there are lessons to be learned from what the buyers of two years ago are dealing with today.

Would-be buyers should check out their developer and make sure they understand their rights and obligations under any agreement they sign, real estate agents and lawyers said.

To find out about a developer, talk with friends, conduct research on the Internet and ask the developer for the names of other completed projects. A developer with a track record of delays and construction snafus is more likely to continue to run into trouble.

One of the quickest ways to judge whether a development is at risk of being turned into apartment rentals is to ask how many of the units have been sold, said Peter Antonoplos, a real estate lawyer in Carter Ledyard & Milburn's District office. "I think upwards of 50 percent is the rule of thumb. Then you are in a safer area."

But negotiating a buyer-friendly contract can be tough. Provisions that require a developer to drop the price of the unit if market conditions sour can be difficult to insert in a contract. So can terms that allow buyers to walk away from a deal if they run into financial or medical problems before the project is completed. But it is worth a try, real estate experts said, and may be easier in a slow market.

The contracts written by the developer often start out with vague terms, so it is up to the buyers to ask for as many specific provisions as they can imagine, including allowing an inspector to enter the unit before the deal is completed. And what about a guarantee that the developer will not offer a similar unit in the building for a lower price without giving the buyer a price break?

If a deal falls apart, the developer and the purchaser can be left arguing about the deposit. Being careful upfront can reduce problems at this stage, too. The buyer should ensure that the deposit is put into an interest-earning escrow account, perhaps with a settlement company, and is not being used by the developer as working capital, Antonoplos said. To do so, a buyer should ask for written verification when the funds are deposited. That will make it easier to recoup the money if the project hits a snag.

Sometimes a sales agent will offer to hold the money in a separate account. But if the agent works for the developer, the buyer cannot count on him or her to be impartial if there is a dispute, Antonoplos said.

"If the development goes bankrupt and the money has been placed with a settlement company, you are in good shape," Antonoplos said. If not, the buyer could have a difficult time locating the money, he said. "The real question is: Who is holding the money?"

The Deadline Clause

The contract clause that requires developers to deliver units within two years has been a savior for some buyers who want their deposits back, but the deadline can also push some developers to rush closings.

At the Phoenix, the developer, Keating Partners, began scheduling final walk-throughs and settlement meetings before the last touches were completed. "Because of the two-year problem, some inspections were scheduled earlier than they would have been, [and] some of the closings were scheduled earlier than they would have been," said Diamond, Keating's lawyer. That was the best way for Keating to meet its contractual obligations, he said.

But some prospective buyers said the uncompleted items were not minor, such as an unpainted wall, but instead included missing or unfinished pantries, the wrong quality of hardwood flooring and deep scratches on the windows. Those were significant enough for some buyers to walk away days before closing, fearing that the developer could not be compelled to complete the work after the contracts were signed.

Diamond said Keating has committed in writing to fix any problems. "The developer was not any happier than the purchasers to have to do it in this order," he said.

Sunny Singh, a software sales manager, faced that situation when, days before closing, he found that his unit at the Phoenix was not completed. Singh said he found a partially blocked air duct, scratches on the windows and no pantries in the kitchen. He had pointed out many of the items to the developer during a previous visit, but of a list of 31 items, only seven had been addressed.

"It's where I wanted to live. Lots of light, windows," said Singh, 34, who is now attempting to enter mediation with the developer and recoup his deposit. "These were major issues. I wasn't even able to verify that I had gotten the right-quality floors."