To Close or Not to Close? – Tough Decision Ahead for Preconstruction Contract Holders as Closing Dates Approach
July 1, 2007 by Lucas Lechuga
I'm sure a good number of these contract holders have asked themselves whether or not they should close. Most have probably even crunched some numbers to figure out what they should do. With deposit money equal to 20 percent of the total purchase price at stake, it is a very important decision.
The question on everyone's mind is what percentage of these condo units are owned by investors versus those who intend to occupy the unit. An even better question though is of the investor-owned units, what percentage are owned by people who were looking to flip their unit prior to closing versus those intending to hold long term.
Those who were looking to flip their condo prior to closing most likely had their unit in the developer's resale program. Each resale program is a bit different and the fees required to resell the unit can vary greatly. Most charge a 6 percent commission as well as a transfer fee which I've seen range from as little as .75 percent to as high as 7 percent. For example, Ten Museum Park charges a .75 percent transfer fee, or 6.75 percent when including the commission, while Opera Tower charges a 7 percent transfer fee, or a total of 13 percent when including the commission.
I think Ten Museum Park might have a few forfeited deposits but nothing too serious. It gave contract holders another option besides walking away from their entire deposit. They are allowing contract holders to accept a loss but still get back a portion of their deposit money. This past week I had a client who purchased a unit at Ten Museum Park from a contract holder for $55,000 less than what it was purchased for in January of 2004. The contract holder also paid the 6.75 percent fee which totaled $61,087.50. Of the $181,000 that the contract holder laid down as a deposit, they will see $64,912.50 at closing. It's a big loss but it is still better than walking away from the entire 20 percent.
Buildings like Opera Tower and Quantum on the Bay, however, are not giving their contract holders many options. They aren't allowing people to take a loss until after closing. In fact, at Quantum on the Bay, it is required that you list your unit at a minimum of 16 percent above the purchase price. That is insane! Who is going to buy that? You might as well not have your unit in the resale program because it won't sell. Quantum on the Bay charges a total of 12 percent in fees to resell a unit in their resale program.
Of course, contract holders could do a simultaneous closing to avoid these heavy transfer fees. However, most first time investors are unaware that this option exists. Even if they are aware of this option, they still need to find a replacement buyer or hire a real estate agent to help find one for them.
Time is running out and many are asking whether it is better to close on their unit or walk away from their 20 percent deposit. Keep in mind that most developers charge a developer's fee which is due at closing. This fee is typically 1.75 percent of the purchase price. Also, units come "decorator-ready" so additional money will be required if you want to have the option of renting it out in case it doesn't sell. Too many times I have seen people hope that they could quickly flip the unit after closing rather than invest additional money into the unit. The unit ends up sitting on the market for six months and then they decide that they'll have to rent it out. They would have saved themselves a lot of money if they had prepared to have the option of renting the unit at the beginning rather than wasting six months. You'll need to spend money to install floors, window treatments, light fixtures and to have the walls painted since most come with the walls only primed.
A lot of people will end up pulling money out at closing to pay for these expenditures. For example, someone might choose to do 90 percent financing so that they can get 10 percent back at closing. That 10 percent will pay the developer's fee, closing costs and expenses for flooring, window treatments, light fixtures, etc. The money will also help pay the mortgage until the condo is either sold or rented. Unfortunately, in recent times, 90 percent financing isn't as readily available as it was in the past.