Expecting the world to treat you fairly
because you are a good person
is a little like expecting the bull not to attack you
because you are a vegetarian. -Dennis Wholey
I was perusing the web for real estate news when I came across this article written by Mario A. Iglesias which can be found here. The name of the article is “Hindsight over Condo Sales,” and he tracks the history of the condo boom that peaked in 2003 and the following bust that was fully evident by 2007. Mr. Iglesias wrote:
It was not uncommon to find buyers camped out overnight outside of a sales center upon the announcement of a new project. A buyer could easily have signed a contract to purchase a unit for $500,000, then “flip” that contract for a price well over $800,000 just one year later. As such, real estate developers rushed ahead with as many new projects as they could physically—and financially—handle at a time. In the mad dash to develop condominium units to feed this growing market, which led to as many as 60,000 new units in Miami-Dade County alone, real estate developers had to make business decisions that carried material legal consequences. * * * It was believed that the developer could complete a project of this size within two years following the date the units were pre-sold. The truth was that by 2003, there were no condo projects in excess of 100 units that could be substantially completed in two years. (emphasis mine.)
The article explains why developers chose to seek exemptions rather than comply with the Interstate Land Sales Act. (See two-year completion exemption 15 U.S.C. 1702(a)(2).) Factors such as: (1) cost and delay associated with compliance; (2) the limitation of damages to the developer to 15% of the purchase price in case of default; and (3) a developer would be required to provide a defaulting buyer with 20 days written notice and an opportunity to cure any default. (See 15 U.S.C. Sec. 1703(d).) All of these things represent a major inconvenience in a market where buyers are camped out at your sales trailer, and the majority of units are under reservation agreements on the first day of sale. If a buyer elects not to purchase in an hot market, you simply keep their deposit and resell the unit at a higher price. The developers undertook these condominium developments, and drafted the accompanying contracts, with eyes wide open. Many detractors like to use the stock market analogy making statements such as, “Real estate like the stock market can go down. Why is that so hard to understand? I don’t see people in the casino asking back for their bets when they lose?” If your stock broker violated FINRA and SEC rules, or your card dealer violated the laws of the gaming commission by cheating, you could seek your money back. Why is that so hard to understand? Should violation of the law be meaningless?
I mention this because of the unending attempts to cast the developer as a victim. A victim is defined as: “a person who is deceived or cheated, as by his or her own emotions or ignorance, by the dishonesty of others, or by some impersonal agency: a victim of misplaced confidence; the victim of a swindler; a victim of an optical illusion.” victim.” Dictionary.com Unabridged (v 1.1). Random House, Inc. 06 Aug. 2009. <Dictionary.com http://dictionary.reference.com/browse/victim>. This is usually accompanied by the ever popular refrain of “buyer’s remorse,” a tagline that is apparently irresistible. Examples of this can be found here, here, and here. This phrase inevitably appears in motions to dismiss, statements of umbrage in a motion for summary judgment, and almost every single article the media generates that concerns condominium buyer lawsuits. It represents one of the most egregious examples of intellectual dishonesty in recent memory. Developers are not blameless, and they certainly are not victims. They made the informed decision to seek a “self-determined” exemption rather than register with HUD. They approved the draft of the form contract to be employed in every sale. They raced to complete thousands of units that they actively encouraged to be bought as an investment. In some cases they violated a federal strict liability statute known as ILSA, and are paying the price. That being said, in the vast majority of contracts I have reviewed, I found no violation. Most developers understood these laws and followed them properly. Unfortunately, the minority of developers who chose to push the envelope, built thousands of units.
It does raise a fair question: Why did these buyers back out in such large numbers? When purchasing a home most buyers had to finance the portion of the purchase in excess of twenty percent. The bank performs an initial appraisal at the time of purchase, and a second appraisal after the building is constructed. It was not unusual for contracts that were signed 2005 and called to close in 2008, to have a twenty-five to thirty percent shortfall on the appraisal. The bank will only fund up to the second appraisal price regardless of your contact price. If your second appraisal results in a $100,000 shortfall, it is up to the buyer to supply that money in cash in order to close. Most of these buyers could not close, even if they had wanted to. Then there were those buyers who found out years after the one-hundred and eighty day presale contingency had expired that their lender had “blackballed” the project. The developer had failed to sell the requisite number of units and forged ahead with the completion of the building, instead of refunding the purchaser’s deposit monies and walking away. The buyers’ banks, fearing a loss of their loan monies, refused to lend in these “blackballed” developments. These buyer’s either faced a “Hobson’s choice” or were skewered with “Morton’s Fork.” The “shortfall” buyer had to make up twenty to thirty percent of the purchase price and the “blackballed” buyer had to come up with the remaining eighty percent of the purchase price in order to close. If the buyer was incapable of supplying this cash, they had to forfeit their twenty percent deposit, or fifteen percent in the case of a project subject to ILSA. See Santidrian v. Landmark Custom Ranches, Inc., 2009 WL 195575, at *5 (S.D. Fla. July 6, 2009)(developer not entitled to equitable exemption from ILSA because buyer’s initial reason for not closing was failure of financing.) If you purchase a stock that drops in value, you can at least try to hold it so the loss does not become permanent. Here, the buyer’s money was gone.
Even those buyers entitled to five percent of the purchase price back under an ILSA contract in most cases received nothing. See 15 U.S.C. Sec. 1703(d)(2). I can recall making a demand on a developer for return of the five percent of the buyer’s money and informing them we were not going to close. The developer’s reply was that they were choosing not to hold us in default, and therefore we were entitled to nothing. In essence, the protection afforded under 15 U.S.C. Sec. 1703(d)(2) was optional, based upon the choice of this developer. This event speaks volumes about the overarching problem. Developers, their lawyers drafting the contract, and even some courts, have developed acute tunnel vision. The protections afforded by Congress in drafting the Interstate Land Sales Act are optional, and the buyer’s rights under the law are a nuisance to be dealt with accordingly. When these buyers learned of the violations of the law committed by their particular developer (laws meant to protect them as a buyer) it was not remorse that motivated them, it was anger.
As to these minority of the developers who saw the law as optional: You waved a red flag at a bull with dollars impaled upon its horns. Why should it come as a surprise to you to be under attack?
This article, and the comments posted in response, do not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.
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