Recently I had a conversation with a client with regard to a condo-hotel unit that he purchased, pre-construction, at a resort which is nearing completion.

The reason for his call, being an investor, was to basically get my opinion on what he should do with his unit. It was clear that his first thought was to put the unit up for re-sale when it closed. As our conversation progressed, I offered him some other options to consider with regard to his investment.

Some of his options are:

1. Price the unit VERY aggressively and to try to line up a buyer prior to closing. Since what he owns is basically an option to purchase, and he has owned that option for more than two years, the profits would be taxed on a long-term capital gains basis. That would allow my client to sell quickly, for a lower price, and limit his exposure and holding costs.
2. Knowing that he has an extremely desirable unit, close on the unit, wait a specified time period (less than one year) and then sell at a much higher price. Since he now took title to the asset, his profit would be taxed on a short-term capital gain basis.
3. Close on the unit, sign a management contract with the hotel operator and put the unit in the hotel pool and sell at a later date, past the one-year period of owning the asset. His profit would then be taxed on a long-term capital gain basis. There are some draw-backs to this option:

a. When he sells the unit, the management contract stays in effect with the unit, so if the new buyer is NOT an investor and doesn’t want the unit in the hotel pool, that unit would not be an option for the new buyer.

b. The hotel operator has the right of first refusal on the unit when the owner decides to sell.

After we went through all of the above, and he was processing the information, he paused and said ‘you know, Kevin you are really acting more as an advisor, and not like a typical salesman, and I’m really impressed’. I responded by saying that I don’t think or operate like a salesman, and it wouldn’t be my objective to ‘set you up’ for a quick commission. My goal is always to serve the client, and being compensated, now or much later when the time is BEST for the client, is the reward for a job well done.

I appreciated his remarks very much. It’s just how I am. But it’s nice when someone notices.

Today my friend and colleague, Beth Butler, COO of EWM Realtors and I, discuss one of the recent changes to the Florida Association of Realtors contract. Hopefully this discussion will shed some light on how these changes may impact the consumer with regard to open building permits, and the rights and obligations of both parties in as-is vs. warranted contracts.

Beth: Kevin, how would you describe an as-is sale from the standpoint of the seller?

Kevin: Well Beth, very simply put, in an as-is sale, the seller is not contractually obligated to repair any items.

Beth: From the buyer’s standpoint, what happens if the buyer finds something, as a result of the inspection that they can’t live with? Must they proceed with the sale on an as-is basis?

Kevin: No, the buyer has a few choices, including:

1. Accept the property in it’s as-is condition

2. Negotiate the finding with the seller

3. Cancel the contract.

Beth: Ok, so in short, the buyer does not lose the opportunity to discuss any negative findings, even though the contract says he is buying the property as-is?

Kevin: Correct.

Beth: On a warranted sale, is the seller agreeing to fix everything regardless of cost?

Kevin: Not necessarily. The contract will provide a dollar amount within which the seller agrees to repair all items which are considered warranted items. This way the seller understands the limit of his financial commitment to repairs at the time the contract is signed. The buyer also benefits because he has some assurances that the seller will address concerns within a reasonable cost limit. By having a pre-arranged agreement for repairs, both parties have a reasonable expectation that concerns will be addressed, and the property will close without further need for negotiations after the inspection phase.

Beth: How do you usually sell your listings? As-is or warranted?

Kevin: As-is. It has been the standard for about the last 10 years here in Miami Beach. At this point in time I don’t see the new contract impacting the practice in the near term.

Beth: Even in condos?

Kevin: Especially in condos. The condos that I deal with tend to be newer and have fewer repair issues. So I really don’t see the new contract changes affecting my clients dramatically, except that we will discuss the pros and cons of as-is vs. warranted contracts.

Beth: And what about open building permits? Do your sales include the closing of permits?

Kevin: Yes, for the last few years we have been manually adding the open permit language to the contract in the addenda, which basically obligates the seller to close any open building permits that are attached to the property before closing.

Beth: Well, the new contract might change the way you do things.

Kevin: That is what I hear, and I do think it expands the options of the parties. But as I stated before, I don’t see any dramatic impact on common practice in the near term.

Beth: The new contract has some major changes; one of the changes addresses the treatment of open building permits.

Kevin: Open permits have been an issue here in Miami ever since Hurricane Andrew. The new contract also includes a provision for structures that have never had a permit, which could be a bigger problem than just an open permit.

Beth: Can you explain that provision?

Kevin: Sure. Permits and non-permitted items are now considered to be a repair item, just like the roof and termite. In fact, the standard contract now even includes a liability cap for permits.

Beth: So, what you are saying is that now, when a property is sold as-is the warranty and liability obligation for the seller does not exist?

Kevin: Only if the buyer chooses to accept the property on that basis. The parties still retain the right to negotiate based on the specifics of each sale.

Beth: I’m seeing a slight trending back to a warranted sale because sellers do not want their property off the market while buyers continue to shop for homes during the inspection period. An as-is contract essentially gives a buyer a free “look-see” during the inspection period while having the option to easily cancel the contract if they find another property.

Kevin: Yes, since the market has changed to a buyer’s market, it benefits sellers when they are willing to make more of a commitment to the property repairs; fewer surprises and a stronger commitment from both parties from the beginning.

Beth: So, the new contract really encourages as-is only because of the open permit situation?

Kevin: It would seem so. It makes it easier to purchase as-is, but again, that contract really benefits the buyer. The warranted sale commits both parties a bit more. If a seller knows his/her property is in good condition, it would benefit the seller to have a warranted sale contract.

Beth: Let’s give an example her to clarify the difference with regard to permits in the new contract (FAR 9).

Kevin: Ok.

Beth: You said that you usually do an as-is contract with an addendum for the seller to close any open permits. You can’t do that anymore.

Kevin: Correct. Open permits/non-permitted items are now considered a repair item and the get treated just like roof and termite defects.

Beth: So what happens if a buyer finds an open permit in an as-is sale?

Kevin: The buyer can cancel the contract ONLY if they are within their inspection period.

Beth: So, if the buyer doesn’t check the permits until two days before closing, which happens all the time, is the buyer out of luck?

Kevin: If the buyer is out of their inspection period, yes. A good agent would immediately inform the buyer to check to see if the property has any permit issues. To be clear, this is the responsibility of the buyer, NOT the agent.

Beth: So the moral of this story is for the buyer to do a permit check during the inspection period?

Kevin: Yes, do if right away. You can check anytime even BEFORE presenting an offer, which I strongly recommend so the buyer can address any issues when writing the offer and not wait until the inspection phase. It is better to address the expectations and responsibilities of both parties up-front. You can check them on-line for the City of Miami Beach here or for Miami-Dade County, here.

Beth: In conclusion, I would add that the City of Miami Beach and Miami-Dade County have GREAT sites for consumers to check for permits. There are Title companies and permit checkers that will do this as well.

I would like to thank Beth for taking the time to review this topic with me. My goal for this post, and many more to come over time, is to provide consumers with the opportunity to be a “fly on the wall” during discussions I have with colleagues, clients and external industry professionals. Thanks for joining us!

Prodigy Network sent me an email recently, announcing “exciting news” about the “progress” of the Beach House Designed by Richard Meier in Surfside. My new concerns stem from the fact that during the last two years or so, this project has switched developers twice. In April of 2006 the original developer, Lynx Strategic Development, announced a new partner, Turnberry Developers, a well-known and well-respected residential and commercial developer. Fast forward to my email of last week, yet another TOTALLY different development team, Wavestone & Development Services Solutions is in place and “ready to bring to life the design of one of the masters of modern architecture”. So for me, this email did not offer “exciting news”. Quite the contrary; this email reinforced concerns I already HAD regarding this project, and raised some new ones on top of that.

1. Who are the new developers? What is their track record?

2. What happened to Turnberry? With all the resources available to Turnberry, did they not feel this project was worthwhile, and if so…WHY?

3. Why has it taken three developers to bring this project to where it is today? (two years behind schedule)

4. If pre-sales were so strong, why would it take so many development teams to get this project built?

Regarding #4 above, attached to the email was an inventory list of available units. What surprised me was the low number of units available, as I know this project well and remember in April, 2005 (coincidentally the pinnacle of the recent real estate boom in Miami) bringing clients to the project when it was first announced. Even back at the beginning, this project was, in my opinion, both chaotic and disorganized. So much so that my clients and I put The Beach House on the back burner. We just didn’t get a good feeling and decided not continuing to pursue purchasing at the Beach House. Sometimes you have to go with your gut, even when you can’t put your finger on the concern in a factual way.

I’m not saying that this is a bad or undesirable project, what I am saying is that the history of this project gives me cause for concern. In fact, I hope that “The Third Time’s A Charm”, and the Wavestone Group can deliver the unique design of Meier’s vision. But this situation with The Beach House, highlights the risks of preconstruction development I have addressed in the past. Even with a strong developer involved like Turnberry, markets change, construction costs vary, and projects may never be built. In Florida, it is likely that only the first 10% of the monies paid to the builder are placed in a protected escrow account. Any additional deposits, or pre-payments of upgrades, may be used by the developer for construction costs. If the developer shuts down, some portion of the buyer’s money could be at risk.

That said, even with all the uncertainty of the market and the development teams, Richard Meier’s name and design, combined with a prime oceanfront location, has created a lot of interest among the international elite. I wish them well and will take a fresh look at the project as it moves forward. Everyone is best served when a new construction project finds its way to a satisfactory resolution. I always hope for the best, as a bad market is bad for everyone. But this project will have to prove itself to me, and I will have ten times the questions I might normally have, given its history, before I could comfortably recommend it to my clients.

Stopped over at Apogee South Beach the other day to see how the building was coming along.  I overheard a buyer compaining to their agent that they didn’t like their unit, and wished they had picked a corner unit. Uh…DUH!  Of course the corner unit is better than the flow-through unit.

Flow through units have been “all the rage” in Miami Beach condo floor plans in the last four or five years.  I would describe these units as typically having exposure on the ‘prime’ side of the building and exposure on the street-side as well.  When a building goes up for sale in the pre-construction phase, these are usually the best selling units in the building for a couple of reasons:

1.  they are less expensive $ psf than compared to units which enjoy more exposure on the “prime” side of the building

2.  the developer “highlights” the fact that you have “both views”, thus making you feel like these units are steals compared to the corner units.

APOGEE SOUTH BEACH FLOOR PLATE

The problem with flow-through units is that they look great on paper, but in reality they are not.  Though they do have two exposures, the units tend to be narrow and dark.  Whenever one of my clients thinks something looks really great…on paper..I try to take them to a similar unit in an existing building.  This way they get a chance to see what I already know:  some things look a whole lot better on paper than they do when they are completed.