Inside Third & Bond: Week 71

One bright spot in our dreary real estate world recently has been interest rates. Mortgage rates are very low and conforming loan amounts are increasing, which will be relevant for our studio and one bedroom sales and maybe even our two bedroom sales. Developers refer to the mortgages that our buyers secure as end loans, and there are numerous issues we’re always discussing in terms of end loans: getting project approval for Fannie Mae or FHA loans; deciding to work directly with a specific bank or mortgage broker; pre-sale requirements of different lenders; and offering buyers forward commitments through lenders so that buyers can lock-in their interest rate at the time they sign a contract for a period of time necessary to cover their closing date. (And some developers in truly desperate times spend huge amounts to pay down the interest rate of their buyers’ loans). However, there’s one juicy threshold issue we’ll discuss today: mortgage contingencies.

In the good ole days (for developers), providing a mortgage contingency in the contract for a unit in a new development was verboten…
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A mortgage contingency allows buyers’ downpayments to be refundable during a period of time (say 30 days) while they confirm with a lender that they can get a mortgage commitment for 80% of the purchase price. When Hudson started marketing our first condo project more than 10 years ago, our brokers told us that other developers were not offering mortgage contingencies. You mean people will sign a contract without having the comfort of knowing they can get a mortgage? we asked. That was the market, we were assured. Buyers will either pre-qualify before they sign a contract or they’re comfortable with their purchase price. In good markets, buyers don’t want to lose out on the unit they love because they’re asking for something other buyers are not.

What’s the downside for a developer in offering a mortgage contingency? One way to think of it is as a free 30 day option to anyone who wants to tie up a unit. We assume that any buyer can effectively ruin their own chance of getting a mortgage commitment if they want to get out of a contract. We try and avoid this by ensuring that any mortgage contingency has to be processed through a bank or mortgage broker who works with us to create an environment where the buyer has to make a good faith effort to seek a mortgage commitment. But we’d rather have a contract that has no contingencies, where the downpayment goes hard upon execution. We like those contracts; our construction lender loves those contracts.

But developers also want flexibility. Even if the market is booming and we can sell units without offering mortgage contingencies, there’s always that one pesky line of apartments that’s not selling (e.g., the C line) and that one buyer who says, I love 2C but I’m very anxious about my finances and want to get a mortgage commitment with a six month rate lock. We think to ourselves, finally, someone with a pulse wants to buy the C line, hooray! We appear very reluctant and say, OK 2C buyer, we’ll let you have a 30 day mortgage contingency but don’t come crying for more time on the 31st day.

The way we have this type of flexibility is through language in the offering plan that Sponsor may offer financing contingency to buyers. That way we don’t have to file an amendment to the plan if we start offering them.

So what does this mean for Third + Bond? We shall see. We have the may language in our offering plan. If we were selling right now and a prospective buyer wanted to buy a unit from us and requested a mortgage contingency, we’d probably give him/her a mortgage contingency, followed by a hug, a back rub, and a cupcake from Sweet Melissa. What are we going to do later in the year when we start selling? We’ll see…that’s why they call it a market.

Inside Third & Bond: Weeks 1-70 [Brownstoner]

From our lawyers: This is not an offering. No offering can be made until an offering plan is filed with the Department of Law of the State of New York.”