“These cancellations were almost 100% out of fear — fear that they were going to lose their jobs or that they were paying too high a price.”
– Gerald Fogelson, chairman and CEO of Fogelson Properties, on Museum Park’s 15-percent contract fallout rate. Fogelson and The Enterprise Companies have filed lawsuits against approximately 100 buyers who didn’t close on contracts on condominiums at new Museum Park towers like 1600 Museum Park, Crain’s reports. The developers’ cases “generally seek recovery of earnest money deposits and half the cost of upgrade,” according to the article.
Crain’s has already had a look at the latest Appraisal Research Counselors Downtown Benchmark Report, which states that just 55 new condos and townhouses were sold in the downtown area in the first quarter of 2009. That’s an improvement over the fourth quarter of last year, when the market lost a net 253 contracts, but it’s also a 73-percent drop over the first quarter of 2008. We should get our copy of Appraisal Research’s benchmark summary any day, and we’ll be sure to pass along any noteworthy data and observations.
I do wonder when this was going to devolve into a legal mess. Any new news on 1717 S. Prairie?
1. 1717, while part of the larger PD application
for the Central Station Master Plan is not
a Fogleson or Enterprise development.
However, under the Central Station LLC,
Fogleson and Enterprise are the major players
in master plan creation and completion and
probably have desire to see this go away due
to the publicity and confusion. There are a
few independent developers working on
developments inside the Central Station PD
master plan, and in 1717’s case, that was
Legacy Development (now defunct I believe),
led by Warrman and Barr.
That being said, I found it ironic at a
public meeting discussing the Museum Tower
#2, with the attorney from Enterprise
development present, that Tim Desmond
commented publically that representatives
from his company were trying to assist in
resolution of the 1717 issues. I cringed
when I heard that.
2. Contracts – interesting that developers want
no punishment when they are behind 1-2 years,
but want their cake and eat it too. If these
are flippers, than teach them a lesson; the
flipping at these places drove up costs for
a whole lot of regular homebuyers.
3. Risk – It could be that Enterprise has a
strong case, but IMO, this is not with out
risk of publicity backlash when things
recover and they want to push the envelope
on requesting tens of millions of $$ for
unnecessary TIF funds to do Gateway over
the tracks.
4. Joe or Joe – interested in your take if those
owners did come to closing and what would
have been the process if those properties did
not appraise out and who is on the hook?
I had heard a few cases where developers had
to lower the price to get a closing.
Jeff — with respect to your #2: the delivery dates should be something set out in the contract, giving the buyer an “out” if the unit is not delivered by a certain date or within a specific time period following anticipated delivery. If there’s no clause like in the purchase contract, and a buyer can just drop out of a contract with no penalty, what’s the point of the contract? It is supposed to be a legally binding contract whereby BOTH sides are supposed to deliver what is promised in the contract. If the buyer drops out for no reason other than fear or change of heart, the developer should be able to keep the earnest money — that’s the purpose for it and that’s why you sign a contract agreeing to give up the earnest money if you don’t keep your end of the bargain. Similarly, if the developer fails to deliver the unit for whatever reason, the buyer is entitled to the earnest money back. To me, there is nothing complicated about it and no reason any lawsuits should even need to be filed. If the buyer breaches, developer keeps the earnest money. If seller breaches, earnest money returned. Done.
Warren Barr is now up to his neck in trouble in Milwaukee, construction stopped on his development recently. Does anyone ever think to do a little research on the principals in these businesses? Warren Barr inherited Barr Supply, started by his father, ran it into the ground and dodged a legal bullet when his former employees filed suit, only to wear them down (around 1990-check out court docs). Next thing I read he is a “prominent” developer in Chicago. What a crock.
Jeff,
If a unit doesn’t appraise, the buyer theoretically has to come up with more cash.
Assume the contract is for a $500k sale price. Mortgage contingency clause, if there was one, was waived long before the closing is to occur.
Assume a conservative buyer who planned to put 20% ($100k) down and secure an 80% loan ($400k). Appraisal comes in at $450k. At 80% loan-to-value the loan would be $360k and buyer would need to come up with an additional $40k in cash. Buyer might also shoot for a 90% loan of $405k (a long shot), which would leave him approximately where he planned to be in terms of cash at closing.
When an appraisal comes in this far under the contract price the scenario is rarely this predictable. It’s up for grabs and any number of results may ensue.
One option: look for a different lender who employs a different appraiser. Another option: ask the developer to hold a second mortgage, assuming the first lender consents.
The buyer’s preference, obviously, is to shoot for a reduction in the purchase price or to walk with a return of his earnest money. Some developers may agree to reduce the purchase price depending on how far along they are in the sales program and how much (i.e. how little) earnest money is on the table.
Any number of permutations are possible once an impasse has been reached. Any buyer in this situation should consult a sophisticated, experienced attorney. I’ve always been somewhat shocked at how often buyers wind up with a rummy attorney who overlooks some very obvious possible outs from the deal. In many cases, however, the buyer has only the options the developer is willing to grant if the developer has had good counsel.
“I’ve always been somewhat shocked at how often buyers wind up with a rummy attorney who overlooks some very obvious possible outs from the deal.”
Is that supposed to be “crummy” or “rummy”? Because both work, though (hopefully) only one applies to me.
FYI: We had a house underappraise several years ago. We just switched to a different lender with a different appraiser. But the crappy first lender kept our lock fee, despite this being technically illegal in Illinois.
Rummy.