A growing number of Washington area developers and builders of high-end condos are tightening up their sales contracts to discourage real estate investors, who they say are helping to artificially drive up prices.
Their fear, say builders such as Bush Cos., which is active in luxury construction in Clarendon, Silver Spring and Washington's U Street corridor, is that the investor portion of the market is escalating so much that it raises serious questions about how deep demand really is and what will happen if the market turns sour. A new estimate puts investor buyers at 30 to 35 percent here, higher than a national average of 25 to 30 percent and higher than in any of the top condo markets except South Florida.
If speculators were to walk away en masse from the typical 5 or 10 percent deposits on expensive condos to be built 18 months in the future, the developers could be left holding the bag, officials of several companies said.
Developers say their lenders are also worried about financing projects if prices have been hyperinflated by speculators and are pressing builders to do more to make sure projects are owner occupied. Owner-occupied buildings are considered more stable investments and appreciate more than rental buildings, according to traditional lending philosophy.
Developers say that to try to limit investors, they've always asked buyers if they intend to live in the units, "but we found out that these people were lying through their teeth," said Andrew A. Viola, vice president and regional manager of Bush Cos. "These people" include traditional real estate investors and others who have turned their back on the stock market.
The contract language, which condo experts say began showing up about a year ago and is now commonplace, typically says that if a condo buyer rents out or sells the unit within the first year, the builder has the right to buy the property back -- at the original purchase price. In some contracts, the clause covers only the first six months.
Some speculators have conducted simultaneous settlements, with the developer and with their new buyer, to get their profits as fast as they can.
Some agents and developers question whether such contract language can be enforced. Because the language is relatively new, the time for testing it may come in the next year or so.
To discourage investors, developer contracts have also typically barred buyers from assigning, or transferring, contracts to others before settlement. Some builders, citing insurance issues, also try to stop flips by refusing to let buyers take other people through the units before settlement.
Condo 1's Tom Meyer in Falls Church, who specializes in condos, said developers are also requiring that buyers put down bigger deposits. "On a $700,000 unit, it used to be a $10,000 or $20,000 deposit. Now it's more like $40,000 to $50,000."
Meyer and another condo specialist, Thomas P. Murphy of Coldwell Banker in Georgetown, said builders may be trying to protect themselves from a dark day when they might have to sell units that investors walked away from. But they think the developers' real motivation is to cash in themselves on the extraordinary price hikes occurring between preconstruction sales and settlement.
"The developers are aware of some buildings that have gotten way out of kilter in their investor ratio," Murphy said. Builders generally are trying to limit the number of investors to 10 or 15 percent, he says. "But the big part [of their reasoning] is they don't want to leave any money on the table."
They also "don't want competition from the flippers," Murphy said.
If an investor buys in the preconstruction period, he "might want to sell to a new buyer for a lower price than what the developer is offering," Murphy said.
The estimate on the number of investors in the area -- 30 to 35 percent -- comes from new data collected by Alexandria research firm Delta Associates for an investor client. (Delta officials say they could find no other data on the subject from the past.
Michael J. Darby, principal at Monument Realty, which has 2,400 urban condos for sale or expected sale in the next five months, thinks some developers are going too far in their contract restrictions. "We do not sell to people" who intend to make a quick profit, aren't financially sound enough to carry the debt or could duck out if the market turns, he said. But Monument does sell to "a second category of buyer, who has the financial wherewithal to buy and own another property at the same time."