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March 23, 2009

That's Me In The Corner, Losing My Deposit

While there have been a few tales of people voluntarily walking away from their down payments because their equity was already annihilated before it was time to close, there's another side to the coin: Those people who are involuntarily losing their deposits because the declining market is causing banks to require buyers put up more than their original 10 percent. And in many cases, the buyers can't come up with the extra cash so they are losing what they already put down. In these cases, the developer gets to keep the cash, but has to go out and try to resell the apartment at much lower prices. The poster children for this phenomenon are the Pham family, who scraped together every last penny they had to put down $93,199 on a two-bedroom condo in Hoboken in 2005; when it came time to finally close last fall the they found they were going to need to put up another $150,000 or so. “It would take us another 15 years to save that money again,” Ms. Pham said. End of story: The Phams remain in their old apartment and Toll Brothers keeps the dough. Another buyer had a slightly better ending: They were able to end up buying a smaller unit than the one they were originally in contract for from the same developer. Anyone know instances of this type of thing happening in Brooklyn?
Up in Smoke: The Deposit Vanishes [NY Times]

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Comments

Very sad story but to sign a noncontingent contract when you knew a mortgage was necessary was very poor judgement. Any good lawyer would have advised them against that.

Posted by: daveinbedstuy at March 23, 2009 9:07 AM

agreed DIBS.

Playing devils advocate, do the failed buyers have any recourse to their lawyers for bad advice in this respect?

Posted by: the chicken at March 23, 2009 9:12 AM

I agree. Heartbreaking nonetheless. What I'm not getting is the fragility of mortgage approval. Even during the best of times a lost job essentially means no approval and a lost deposit, no? Unless there's a flexible time frame.

But I've heard of this in new "posher" developments. Guess developer used to call the shots. Not any more.

Posted by: Johnny at March 23, 2009 9:14 AM

I almost wanted to cry for these folks, but then my next thought was, didn't they protect themselves with some kind of contingency???
I suppose I shouldn't be surprised. Yesterday morning I watched a show about home design and remodeling where a young woman, per the advice of her realtor, declined a home inspection before closing. When she went to move in, it was discovered that there was a serious squirrel and rat infestation, which attracted flies, which then left maggots in the light fixtures, there was severe termite damage, the floor joists were totally unsupported and the floor was about 5 minutes from caving in, exposed and improperly run wires were throughout the walls and the living room fireplace was a fire hazard as it had a severely cracked flue. Instead of just cleaning, painting and installing new carpet and kitchen cabinets as originally planned, she had to have the house gutted down to the studs. Sad.

Posted by: InsertSnappyNameHere at March 23, 2009 9:19 AM

I see Mr. Pham was a real estate agent. So in the last 6 years or so I'm guessing he made his own pile of cash out of the housing ponzi scheme which he has now lost. Hmm. If its a case of easy come, then I'm not so heartbroken about this. If him and his wife have literally been saving their whole lives to get to that deposit amount, that's a different story.

Posted by: dittoburg at March 23, 2009 9:20 AM

Snappy...the developer made them sign contracts that did not allow for a mortgage contingency. That, in and of itself, should have been a red flag, especially to a real estate agent.

Posted by: daveinbedstuy at March 23, 2009 9:23 AM

article says "until late last year, virtually all developers required buyers to sign noncontingent contracts".

That surprised me - I thought, at least for existing houses/coops/condos as opposed to new construction , pretty much everybody did contracts w/ mortgage contingencies. The exceptions might have been during the height of the bubble when a buyer would try to win out in a bidding war by agreeing to no contingency if they planned to pay cash.

Posted by: Bklnite at March 23, 2009 9:27 AM

I thought during the housing bubble that most sellers were not agreeing to contracts contingent on financing or even contingent on inspections as there were always other buyers that would pay close to asking or above without requesting to include such contingencies in their contracts. I assumed this was yet just another quirk of the unique and very bizarre New York real estate process.

Posted by: Biff Champion at March 23, 2009 9:27 AM

"the developer made them sign"....

Who in their right mind agrees to that garbage??? Foolishness.

Posted by: InsertSnappyNameHere at March 23, 2009 9:27 AM

The behavior of the developers may be legal, but it is disgusting. Should I ever find myself in a position to buy a condo, I won't. I can't imagine anyone who ever read that article would.

Posted by: Brooklyn Chicken at March 23, 2009 9:28 AM

BIff, you are correct. During the bubble there were those that would pay without inspections and mortgage or lawyer contingencies. They did so at their own peril but hopefully most of them either had the cash or were more certain of the mortgage. These people were most likely certain of their mortgage but things changed! I'm wondering how much of a delay ocurrred due to the developer. Toll Brothers is usually a reputable organization.

Posted by: daveinbedstuy at March 23, 2009 9:33 AM

"Who in their right mind agrees to that garbage???"

maybe people who drank the koolaid for 4 years about how they were fools not to buy and were flushing their money away by renting?

Posted by: travy at March 23, 2009 9:33 AM

"In these cases, the developer gets to keep the cash, but has to go out and try to resell the apartment at much lower prices."

Who, if anyone, polices that? What would stop Toll Bros. from selling that same apt. for the same price the Pham's agreed to pay?

Posted by: InsertSnappyNameHere at March 23, 2009 9:36 AM

Full disclosure....I went into contract without an inspection (I've done so many houses that I can do that myself) and without a mortgage contingency. I had a commitment letter for more than I needed already and the house was vacant so there'd be no drawn out move in issues. Contract was in May and closed in June of 2007. There was no sign of anything turning down and I got a full docs 30 year mortgage. It was an individual seller, not a developer.

Posted by: daveinbedstuy at March 23, 2009 9:38 AM

Snappy, come on. Of course they'd try to get the same but they most likely cannot. Holding the deposit, Toll Bros. is not incentivized to get the same though. Most likely the contract states that they would give back the difference.

Posted by: daveinbedstuy at March 23, 2009 9:39 AM

Well, they can try to resell the condo at whatever price they want, but good look getting market-peak prices today...

Posted by: brownstoner at March 23, 2009 9:40 AM

Yes, Mr. B., it'd be a rare case that they did.

Posted by: daveinbedstuy at March 23, 2009 9:41 AM

"Most likely the contract states that they would give back the difference."

I'm a little slow this morning...are you saying TB would have to give the Phams the difference between what they eventually sold for and their contracted price?

Posted by: InsertSnappyNameHere at March 23, 2009 9:43 AM

From what the article said, they got mortgage approval and everything was on track and they were going to close. It was the bank, after the fact, that told them they had now had to come up with more money. Seems to me, the bank is the real bad guy- crash or no crash, these people were already approved. And screwed.

Posted by: bxgrl at March 23, 2009 9:44 AM

Yes, Snappy...up to the size of the deposit. If they contracted to buy it at $950k and put up $95k, they, theoretically would get money back as long as TB sold it for more than $855k. TB may have thrown in other fees that would get taken out as well.

Posted by: daveinbedstuy at March 23, 2009 9:46 AM

Agreed, bxgrl.

Posted by: daveinbedstuy at March 23, 2009 9:46 AM

So sad. It's easy to look back and think, "Who would be so stupid?" But who would have guessed we'd be in this economic situation? And I'm sure they had countless professionals advising them to sign...

Posted by: alsawo at March 23, 2009 9:47 AM

Ok, I get it now. Thanks for having the patience to deal with my slow hooked-on-phonics pace of learning about real estate and finance :)

Posted by: InsertSnappyNameHere at March 23, 2009 9:48 AM

"Who, if anyone, polices that? What would stop Toll Bros. from selling that same apt. for the same price the Pham's agreed to pay?"

In this case, the market.

Hoboken real estate is in particularly bad shape and they just had a significant property tax increase.

http://hobokenrealestatenews.com/

Posted by: northsloperenter at March 23, 2009 9:58 AM

"But who would have guessed we'd be in this economic situation?"

The What.

Posted by: dittoburg at March 23, 2009 10:03 AM

Unfortunately, I think this experience is likely one shared by many more potential buyers than we realize. As I said above, during the boom years, most brokers I spoke to when looking told me that people just don't accept mortgage and inspection contingencies and suggested buyers who insisted on them would be left out in the cold. For people who have less experience with the New York market, it is easy for them to assume this is how it works - just like the co-op process/concept is new to most people not originally from this area. Of course, one should consult with counsel when being told such things, but most real estate agents can sound very convincing to the uninitiated. This is why brokers and developers don't exactly have stellar reputations. Fool me once...

Posted by: Biff Champion at March 23, 2009 10:04 AM

Mortgage contingency was the norm during the bubble - even after it. Hell even now. With the RE crash, that is SLOWLY changing. More devs are offering contracts that have removed that provision. It was nothing you can do really when you where buying a new condo during the boom. Virtually EVERYONE was doing it. Your only other choice was NOT to buy a new condo. Go for a traditional single, co-op, etc.

It is sad and hopefully this insanity will go away.

Posted by: crimsonson at March 23, 2009 10:05 AM

If all they had was the 10%, why were they buying a condo this expensive in the first place? Where was their rainy day fund?

And why on earth, especially given that Mr. Pham was a real estate professional, did they sign this sort of noncontingent contract?

Posted by: SnarkSlope at March 23, 2009 10:08 AM

Snappy....this is definitely not meant to pick on you but to be held up as a real life example. I don't remember what kind of law you said was your specialty but you are a lawyer. This should serve as an example that just because a friend is a lawyer, said lawyer knows the ins and outs of residential real estate. Get a real estate lawyer, people.

When I bought my condo in Manhattan, the seller, a bartender, got one of the patrons from some swanky Park Ave law fiorm to represent him. My lawyer had to hand hold him through the entire process.

Again, apologies to Snappy.

Posted by: daveinbedstuy at March 23, 2009 10:08 AM

Developers in 2005 were pretty aggressive, and in my experience in 2006, new developments came with an 'exclusive' mortgage broker. Who would invariably be a slimebag. We briefly considered a new condo, but the policy (exactly like this one) sent us running. I could totally see, though, how someone could be bullied into it.

Posted by: Kris at March 23, 2009 10:11 AM

I never understood the logic of contracting to by condo just on floor plans and brochures for bldgs barely in construction. You'd never know when they'd be finished or really what looked like (and views). And now I'm I hear people put deposit down with no mortgage contingincy?
and no other way to back out?

Posted by: Petebklyn at March 23, 2009 10:14 AM

No offense taken Dave. As you probably know by now, I'll be the first one to admit what areas I know nothing about. Which is why I ask so many questions about real estate and finance. There are plenty of people out there who will hold themselves out as experts or even semi-knowledgeable when they in fact are as clueless as I am. It's scary, but people have got to be careful and surround themselves with true experts before jumping into all of this. It may save some heartache or at the very least make them aware of the heartache-inducing possibilities, no matter how remote.

Posted by: InsertSnappyNameHere at March 23, 2009 10:16 AM

I'm sure the developers also promised that the building would be complete in a few months time.

Posted by: Kris at March 23, 2009 10:17 AM

Folks;

This is just one data point. I purchased a Boymelgreen-Katan condo at almost the peak of the bubble - late 2004. In the case of this development team, they certainly allowed both a mortgage and inspection contingency. I am somewhat shocked to find that other developers did not allow these contingencies, and that people would accept such a deal. Just want to point out, however, that not every developer was demanding these terms.

Posted by: benson at March 23, 2009 10:19 AM

benson...i think the bubble ran well into 2007. Some would argue that it didn't peak until sometime in early 2008. But, you're right, traditionally, a mortgage contingency was always allowed. I suspect things changed somewhere in 2006 though.

Posted by: daveinbedstuy at March 23, 2009 10:22 AM

Benson, it's nice to know that not everyone during this time was making such crazy demands, but it again begs the question, why would anyone sign something that didn't allow for such contingencies? I guess folks truly were without good guidance and/or were easily pressured.

Posted by: InsertSnappyNameHere at March 23, 2009 10:24 AM

Snappy;

I guess the only way to explain it is the old formula:

irrational exuberance = bubble!

DIBS, you're probably right that the bubble peaked after I purchased my place, but I can tell you that is was certainly getting "frothy" at that time.

Posted by: benson at March 23, 2009 10:28 AM

NY'ers who bought new construction and are faced with this kind of situation should immediately file a down payment dispute (it's in your offering plan) with AG's office. NY AG is NOTORIOUSLY, and rightfully so, buyer friendly. They take the regulation of new construction condos very seriously. Part of that is making sure sophisticated developers do not take advantage of less-sophisticated buyers.

Posted by: k91 at March 23, 2009 10:28 AM

The article also says that they borrowed on their equity in the Hoboken place. If things were that tight they also should have only gone for a place ciontingent upon the sale of their existing property whic; in that environment, would have been impossible to find anyway.

Posted by: daveinbedstuy at March 23, 2009 10:28 AM

The Pham's condo was in Hoboken? In NJ both the seller and the buyer are required to have an attorney represent them. So I'm quite surprised that the attorney didn't strongly advise against this. I know our attorney insisted that we have the provision included in our contract (private home, not a condo).

That said, how many years did we go with nobody having any problems getting mortgages. Then very suddenly the rules changed. Now it seems crazy to us to do this but back in the day it was the norm.

A lot of these people got caught in the eye f the storm just when the rug got yanked away.

Hard lessons learned.

Posted by: TownhouseLady at March 23, 2009 10:29 AM

Snappy - i saw the same show and was horrified. especially since the old owners had 2 children living there - they were just plain and simple people who did not care to notice their surroundings.

this article is sad. i have bought a few houses and have always had a mortgage contigency. DIBS - it's just simple prudent to have one, even if you are confident that you don't need one.

Posted by: bkny at March 23, 2009 10:29 AM

What is involved in a down payment dispute?

Posted by: InsertSnappyNameHere at March 23, 2009 10:30 AM

BKNY, "plain and simple people" is perhaps the nicest understatement/euphemism imaginable when speaking of the old owners! And yes, the fact that they had two children living in such filth and unsafe conditions was mortifying. At least the kids were gone before the maggots appeared. Sigh.

Posted by: InsertSnappyNameHere at March 23, 2009 10:33 AM

> "The Phams...live in a two-bedroom in Hoboken... they borrowed on their
> equity there to help put together the deposit on the new apartment."

[sound of head exploding]

Posted by: SnarkSlope at March 23, 2009 10:50 AM

Down Payment Dispute Form:

http://www.oag.state.ny.us/bureaus/real_estate_finance/pdfs/etf_1_application.pdf

If there is no written agreement between the parties to release the escrowed funds, the escrow agent shall not pay the funds to the sponsor until the escrow agent has given the purchaser written notice of not fewer than 10 business days. Thereafter, the funds may be paid to the sponsor unless the purchaser has already made application to the Department of Law pursuant to the dispute resolution provisions contained in these regulations and has so notified the escrow agent in accordance with such provisions.

Posted by: k91 at March 23, 2009 10:51 AM

DIBS - you said: "Yes, Snappy...up to the size of the deposit. If they contracted to buy it at $950k and put up $95k, they, theoretically would get money back as long as TB sold it for more than $855k. TB may have thrown in other fees that would get taken out as well."

I am invloved with the development of "for sale" residential real estate and have never heard of a former buyer, one that walked away from a deposit, having any claim to future seller/developer income. Is this what you are stating? If so, would you be able to provide me with a sample of contract langauge that provides for such a claim? Thanks.

Also, your statement that "the developer made them sign contracts" is a little over the top. Developers never force buyers to do anything they don't want to. Contracts are always entered into by two willing and able parties.

Posted by: ITM at March 23, 2009 11:08 AM

ITM, it didn't sound like the Phams "walked away from a deposit", instead, it seemed more like they lost it despite all efforts to continue with the sale. That said, I can't speak to the veracity of Dave's statement about the Phams being entitled to any $$ back.

Posted by: InsertSnappyNameHere at March 23, 2009 11:13 AM

ITM...it has nothing to do with a "claim to future seller/developer income." Its in the language dealing with the deposit escrow.

And, you took the second phrase out of context..it was "the developer made them sign contracts that did not allow for a mortgage contingency" I didn't say they were forced to sign a contract, I said they had to sign one (of their own free will) that did not allow for a mortgage contingency. It says so in the story.

Posted by: daveinbedstuy at March 23, 2009 11:13 AM

ITM- that's a little disingenuous. If you're buying a place and you're told this is how it will be done, AND especially when all other factors look good, you may not feel you have the option to say no. Don't forget- the Phams had gotten mortgage approval- it was the bank, that after everything was done changed the terms. I think, under the circumstances they should get their deposit back- they acted in good faith. It wiped them out- and they did nothing wrong.let the developer and the bank duke it out.

Posted by: bxgrl at March 23, 2009 11:15 AM

K91, what you cite there seems pretty narrow...we are talking about contracts to buy new condos that were so tight that a mortgage contingency wasn't even allowed in there. What is the likelihood that there was not written agreement regarding what to do with the escrowed funds that are the subject of your form? I'm pulling this out of my ass, but it I would guess that the subject contracts specifically said that the downpayments held in escrow would be turned over and become the property of the developer/sponsor if for whatever reason not caused by the developer/sponsor the buyer didn't go through with the purchase. If any type of provision is made regarding what to do with the escrowed funds in the contract, then the provision you cite does not apply.

Posted by: InsertSnappyNameHere at March 23, 2009 11:20 AM

I hope these developers enjoy the deposits they are confiscating now and quickly throw themselves a few last parties, because when word of this spreads around, they can be pretty sure they won't be getting any deposits on new construction for a long long time.

Legal issues aside, this is a public relations nightmare that will create a new conventional wisdom among buyers (i.e., "never put down a deposit on a place still under construction").

Posted by: northsloperenter at March 23, 2009 11:25 AM

"never put down a deposit on a place still under construction").

Or at the very least not without a mortgage contingency.

But is a P.R. nightmare really likely to have a long-standing impact? I have to wonder when times get 'high' again if people will forget the days of yore and go all in again with no protection. Folks seem to lose their heads when it comes to home purchasing.

Posted by: InsertSnappyNameHere at March 23, 2009 11:28 AM

Yup Snappy....Fish bowl...

Pretty coral...

Pretty coral....

Posted by: daveinbedstuy at March 23, 2009 11:35 AM

"Legal issues aside, this is a public relations nightmare that will create a new conventional wisdom among buyers (i.e., "never put down a deposit on a place still under construction")."

Excellent point.

Posted by: infinitejester at March 23, 2009 11:36 AM

I think stuff like this will postpone the day when things are "high" again.

Real estate is supposed to be "safe" and "smart". Nothing safe or smart sounding about losing deposits that represent a significant chunk of people's net worth.

And while savvy buyers will understand they can protect themselves with proper contracts, the people who drive bubbles are rarely savvy buyers.

Posted by: northsloperenter at March 23, 2009 11:38 AM

> "the people who drive bubbles are rarely savvy buyers"

QOTD.

Posted by: SnarkSlope at March 23, 2009 11:41 AM

"the people who drive bubbles are rarely savvy buyers."

Interesting point. I don't know enough about real estate to agree or disagree with that statement. I would however like to ask this....

Let's assume that the above statement is true, that the non savvy tend to drive R.E. bubbles. If a home is only worth what someone is willing to pay for it, what does this say for the so-called savvy buyers who bought in the middle of this bubble? If the non-savvy drove up R.E. prices with their, for lack of a better phrase, real estate ineptitude, what is the excuse of the savvy? Why don't they just refuse to buy until the market looks like it does now?

Posted by: InsertSnappyNameHere at March 23, 2009 11:45 AM

I don't know if my last question made any sense at all and I can't think of how to rephrase it. Feel free to ignore it.

Posted by: InsertSnappyNameHere at March 23, 2009 11:46 AM

Having been on both sides during the bubble (I bought and sold), I can attest to the requirement that buyers pretty much had to sign contracts without a mortgage contingency, or risk losing the property, since there was such fervor that other buyers would step in to eagerly sign without the mortgage contingency. This helped sellers (like myself) but when I was on the buying side, my answer to this was to ensure my mortgage before buying - that is, I would never have signed a contract to buy something unless I knew that I could get the mortgage. Also, my having the pre-approval and/or commitment letter from the bank in hand strengthened our position as buyers since it showed sellers we would not get cold feet due to finance problems. I think it's tragic that buyers are losing their deposits like this article points out, but I also think it points to overreaching on the part of both sellers AND buyers - as Obama says, buyers need to take some responsibility for making bad decisions such as these buyers, sadly, seem to have done. One silver lining is that the return to mortgage contingencies in contracts should make the whole process more sane from now on.

Posted by: Miss Muffett at March 23, 2009 11:46 AM

DIBS and Snappy - In my statement above I was operating under the assumption that the contract was void as the buyer was unable to close and the developer declared them in default. I was not viewing it from a perspective of ongoing litigation were the deposit funds were still being held in escrow. I understand that is what the story states but it was not clear to me that that was the same scenario you were both discussing above. My apologies for not following your question and answer exchange correctly.

bxgrl - I think DIBS's first post sums up the lesson to be learned here. I am not trying to be disingenuous, I am just trying to be rational. Moving forward with a non-contingent (mortgage) contract with only a pre-approval letter from a bank is like walking the high-wire without a net. Macro economic conditions did conspire against many like these buyers, but to suggest that the buyer be absolved from all responsibility in the matter is a bit much.

I am pretty sure the buyer in this case had other options at their disposal and not all developers were offering non-contingent contracts. While I, as a seller, proposed non-contingent contracts I was, on occasion, willing to remove the contingency if other particulars of the deal met with my approval.

Also, the developers lender probably required non-contingent contracts.

Posted by: ITM at March 23, 2009 11:48 AM

If I was the developer, I would return them their deposit. I don't care what the contracts say, TB stole their money, legally or not. They still stole it.

Contracts are written by lawyers for lawyers. These people just thought they were buying a condo. I guarantee they had no clue that there was a chance they would lose their entire deposit due to technical clauses in a contract that was probably over 50 pages long.

TB, being a recognized name, should return their deposit, and also to whoever else got screwed by the bank. How do we know that there wasn't any backroom deals between TB and the banks. Could easily be the case. Both would make millions extra by having the banks change their policies at the last second.

Posted by: GabeS at March 23, 2009 11:50 AM

Miss Muffett...you're right, under normal 30-60 day closing situations. These buyers signed a contract in 2005 but the story says that it wasn't until Sept 2007 that the closing was to occur. The terms of 99.9% of mortgages wouldn't hold that long. If this was a mortgage offered by a captive broker to the developer its even more egregious.

Posted by: daveinbedstuy at March 23, 2009 11:51 AM

"my answer to this was to ensure my mortgage before buying - that is, I would never have signed a contract to buy something unless I knew that I could get the mortgage."

Sounds to me like the people getting screwed now also "knew" they could get a mortgage, then closing time came and the Bank decided the game was Gin Rummy instead of Uno. This hardly sounds like something the buyer could be faulted for.

Posted by: InsertSnappyNameHere at March 23, 2009 11:52 AM

I hear you, snappy, but I certainly never had the guts to buy something with 10% down. In fact, all during the bubble, mortgage brokers were practically throwing huge mortgage offers our way (the same way we got tons of credit card solicitations, which we routinely turned down). Despite the brokers' assurances that we could "afford" such high mortgages, it always struck me that they were living in some parallel universe, since I could see by my down-to-earth budget that the mortgage payments they would would require would put us under too much financial strain. But then, I'm the kind of person who pays off my credit card balance in full each month. I guess what I'm saying is that while yes, the banks are at fault (the same way that credit card companies are), I also think it's wrong to absolve buyers of all responsibility when they were in many cases simply over-stretching, with no Plan B. This is why I think in the current crisis, everybody needs to also look inwards and adopt more personal responsibility. I am to the left politically, by the way, so think the gov't does have a big role to play in this with regulation etc but individual responsibility must factor into the equation too.

Posted by: Miss Muffett at March 23, 2009 12:06 PM

Snappy,

You are right and wrong. You are right in thinking that a sponsor's attorney can draft a purchase agreement as he/she sees fit. And trust me, a sponsor's attorney would love to draft language such as what you have proposed and have it stick.

However, you are wrong in thinking that if there's a conflict between the offering plan and the purchase agreement, the PA controls. New construction purchase agreements MUST ALWAYS defer to what is in the offering plan, and if they don't then the AG/courts will make it defer. And offering plan's are required by law to notify a purchaser's right (also by law) to apply for a down payment dispute determinations by the AG's office.

So in this order - 1) Law 2)Offering plan: which is basically law 3)Purchase agreement

In case of a RESALE, you are correct. There's no AG or plan to look out for buyers.

Here's more:

"(viii) Disputes.
(a) In the event of a dispute, the sponsor shall apply and the purchaser or the escrow agent holding the down payments in escrow may apply to the Attorney General for a determination on the disposition of the down payment and any interest earned thereon. Forms for this purpose will be available from the Department of Law. The party applying shall contemporaneously send to all other
parties a copy of such application."

Posted by: k91 at March 23, 2009 12:09 PM

"If the non-savvy drove up R.E. prices with their, for lack of a better phrase, real estate ineptitude, what is the excuse of the savvy? Why don't they just refuse to buy until the market looks like it does now?"

I think there are a lot of us who have been refusing to buy for many years now...

Some of us were savvy and some of us were lucky.

I can't claim to be all that savvy, because I was in no position to think about buying before 2006, and by that time things were pretty clearly overpriced (compared to renting).

Posted by: northsloperenter at March 23, 2009 12:11 PM

Thanks for the clarification K91.

Posted by: InsertSnappyNameHere at March 23, 2009 12:17 PM

Miss Muffet, I'm all for personal responsibility, hence my annoyance at the Phams for signing this thing without the mortgage contingency, but I still think in this type of situation the bank has a bit of blood on their hands.

Why in the hell are we bailing out banks, etc. and f'ing with interest rates and the like in a push to get banks to lend $$ to home buyers when the bank turns around and yanks funding and is thereafter reluctant, if not out right refusing, to give loans on previously guaranteed terms? Again, I say it's not fair for the bank to wait until closing and change the game to Gin Rummy instead of Uno. It all stinks to high heaven.

Posted by: InsertSnappyNameHere at March 23, 2009 12:21 PM

For all those who believe that everyone who bought into predatory lending loans were greedy so-and-so's, or just stupid, this cautionary tale shows that ordinary people, otherwise intelligent people, can sign documents that come back to haunt them. Real Estate is a tricky business, and even the best, even people in the industry, can blow it big time, and lose out. There are very few people who are immune to a really good, sounds reasonable and legal, super sales pitch.

I feel sorry for the Phams, and I hope tales like this will encourage people to read the fine print, do some research, take a class, take the docs to a housing non-profit clinic, or, best yet, hire a real estate attorney. There should be no shame in knowing you don't know everything.

Posted by: Montrose Morris at March 23, 2009 12:22 PM

The consequences of a collapsing Mutant Asset Bubble....

The What

Someday this war is gonna end...

Posted by: Return of The What at March 23, 2009 12:37 PM

If I look back over the years, I've done over 20 closings as either a buyer or a seller and I have ALWAYS, no matter how straightforward it looked, used an attorney.

Posted by: daveinbedstuy at March 23, 2009 12:39 PM

To those who try to sell this story as a parable of the real estate market collapse, I say: not so fast.
These people brought this on themselves. Plain & simple.
To put down that much cash, that far-away from the actual closing & to have left themselves no margin of error was plain dumb - bubble or not.
Also, I seriously doubt they had consulted a lawyer before signing the no-contingency contract. Even at the bubble's peak, there were plenty of contingency deals being signed - and any decent attorney would have advised them to walk away from this lousy deal.
So, no sympathy here for these would-be buyers - or for those who want to portray their behavior as somehow 'typical' of people who bought during the bubble.
And please, save the bank & developer criticism for cases where they genuinely acted unethically/illegally. They only took what their contract entitled them to take from a family that willfully over-reached.

Posted by: parkedslope at March 23, 2009 1:09 PM

Ok- I don't mean to sound repetitious but these are not people who lost their deposits because they couldn't get a mortgage- they had the mortgages approved already and then the bank pulled a fast one, demanding a lot more money before going ahead. After they had already approved the mortgage. Here we are with AIG saying they have to honor their contractual obligations and pay bonuses, but banks get a free pass on basically breaking their agreements?

Maybe I'm naive, but in these cases the problem was not the contract with the developer, but the bank going back on its contract with the buyer. Why should the buyers lose their money- sorry. I just don't get it and I think the developer and the bank should take responsibility as well and give these people their deposit back.

Posted by: bxgrl at March 23, 2009 1:30 PM

parkedslope,

While I agree with you that buyers need to beware, I disagree with you that these examples are unrelated to the bubble.

Market prices are NEVER set by the "typical" buyer. They are set by the buyer who is willing to pay the most who is often the buyer willing to take on the most risk (e.g., 10% down on projects early in construction without considering appropriate legal protections for all eventualities).

So, in a very real way, the prices at the end of the bubble were set by the people who were, as you put it, "plain dumb". I wouldn't call them dumb though. I would call them naive or confused.

And exploiting the naive and confused, while legal, is not ethical in my book nor is it good business in the long run.

Even if you don't think the developer acted unethically here, I suggest you consider how this affects the developers future business.

Is it good or bad for these companies to be associated with "stealing" people's deposits? Whether you think it is "stealing" or not is irrelevant. It's what the general population of future buyers thinks that matters.

Does this make the average (reasonably naive) buyer more or less willing to do business with them?

If the average customer willing to do business with them in the future is less naive than the past, is that good or bad for their profit margins?

Maybe what they are doing is legal, and maybe what they are doing is ethical, but it is definitely bad business.

Posted by: northsloperenter at March 23, 2009 1:34 PM

> "the problem was not the contract with the developer,
> but the bank going back on its contract with the buyer."

They were preapproved for a mortgage back in 2005.

Three years later they were finally ready to close.

Does a pre-approval generally last that long?

Posted by: SnarkSlope at March 23, 2009 1:42 PM

No, Snark, it does not. Its usually only good for 30-60 days.

Posted by: daveinbedstuy at March 23, 2009 1:46 PM

Ouch, so if the pre-approval lasts only 30-60 days, then why go in for a incomplete home? Yikes. And why would the developer/sponsor accept a down payment based on a pre-approval that they know will expire long before completion? I guess no one foresaw this mortgage crisis all around.

Posted by: InsertSnappyNameHere at March 23, 2009 1:57 PM

Let's recap:

1) They only had 10% to put down.

2) They tapped the equity in their current apartment to put down that 10%, so they didn't really have even that 10%.

3) They signed a non-contingent contract on an unfinished property when their mortgage was only pre-approved for an short time period.

Posted by: SnarkSlope at March 23, 2009 2:02 PM

4) They are clearly asshats

Posted by: dittoburg at March 23, 2009 2:13 PM

I'm surprised by the direction the top posts are taking. Before the October meltdown it was completely standard to sign a contract with no mortgage contingency. It may not have been reasonable, but no seller would allow one. Now, of course, that's no longer the case.

The poor people in this article are caught between two markets.

I know of one house in Bushwick where the contract was signed more than five months ago and to my knowledge it still has not closed. They're not having a problem with the mortgage, but they can't get PMI.

I would urge anyone buying a place with less than 20 percent to get a PMI contingency in addition to the mortgage contingency.

Posted by: mopar at March 23, 2009 2:20 PM

> 'it was completely standard to sign a contract with no mortgage contingency"

Really? Almost nobody I know would agree to those terms. Then again almost nobody I know would by an unbuilt condo based on drawings and snake oil.

Posted by: SnarkSlope at March 23, 2009 2:26 PM

> "I would urge anyone buying a place with less than 20 percent to..."

...wait until they have 20% saved up before they buy?

Time to get back to fundamentals, kids.

Posted by: SnarkSlope at March 23, 2009 2:27 PM

This is simply untrue:
Mopar: "Before the October meltdown it was completely standard to sign a contract with no mortgage contingency. It may not have been reasonable, but no seller would allow one."
As a buyer/seller in 2006, I can assure you there were contingencies in both contracts.
And yes, daveinbedstuy, mortgage commitment letters don't last indefinitely.
And northsloperenter, I concede that 'atypical' buyers play a part in driving-up prices during a bubble. But I think that only explains the spike in condo prices - where financial shennanigans were allowed/encouraged. It doesn't explain the rise in co-op prices where you couldn't get past a board with the type of financing the Phams attempted. I suppose a rising tide lifts all boats, but the % of condos in NYC remains quite small relative to co-ops.
I also disagree with your assessment that this story will somehow convince prospective buyers to avoid this developer & this bank: your 'average (relatively naive)' buyer wouldn't even be aware of this incident...
And a well-informed buyer would never have entered-into this contract in the first place.

Posted by: parkedslope at March 23, 2009 2:46 PM

I bought late last year, right at the start of the collapse, and I walked away from my deal when the seller tried to insist on no mortgage contingency. A day later, they came back and agreed to my terms.

This was a single unit resale, so obviously people's MMV, but all the advice I got from all the RE professionals and homeowners I spoke to, even when I first started looking during the bubble, was not to move forward on any deal without a contingency. Even though I knew I'd 99% likely get a mortgage, I'm glad I insisted.

(For myself, I really don't understand the allure of buying an apartment I can't live in for two years under ANY circumstances! But that's another story.)

Posted by: phbalanced at March 23, 2009 2:53 PM

That photo of Dr. Beitler on Page 2 with the Obama image in the background is the money shot. "Save us!".

"'We felt that this was through no fault of their own, so we offered them 20 percent of their deposit back, even though we had no requirement to do so,' Mr. Gladstone said in a statement."

Only 20%? "Sad Satisfaction"? ROTFLMMFAO.

***Bid half off peak comps***

Posted by: Brownstones Half Off at March 23, 2009 2:55 PM

Mopar and all;

I once again refer you to my post above. I purchased a Boymelgreen-Katan condo almost 4 years ago to the day, right in the thick of the bubble. AT NO TIME did they propose a contract with no contingencies. It is simply not true that everyone was demanding no contingency contracts at that time.

Posted by: benson at March 23, 2009 2:56 PM

If I were the sponsor/developer, I would offer people like those in this article a change to move in on a rent-to-own basis. You do not want an empty buildin or the bad pr and you are likley to rent it anyway. let them move in and apply the dp to purchasing down the road.

Posted by: BH76 at March 23, 2009 3:17 PM

I bought a coop in 2004 with a board approval contingency but no mortgage contingency. I sold the same coop in 2008 with the same terms. I had two different lawyers each time, and they both told me that no seller would allow a mortgage contingency.

More recently, I almost signed a contract (but ultimately did not) for a two family house. It had a mortgage and PMI contingency. Same lawyer as in the 2008 sale, now saying mortgage contingencies are standard because it's a buyer's market.

Posted by: mopar at March 23, 2009 3:26 PM

Again, my experience with respect to contingencies while looking to buy a few years ago and the time I bought before that in NYC is identical to mopar's. I have no reason to doubt Snark and benson, but every agent and lawyer I spoke to back then said what mopar said above. Not saying it was impossible to add them in, but it didn't seem to be the trend in my own experiences.

Posted by: Biff Champion at March 23, 2009 3:58 PM

> "I bought a coop in 2004 with a board approval contingency but no mortgage contingency"

I assume though that you were able to close within a reasonable amount of time, say the amount of time that a pre-approved mortgage might still be good.

If you are buying into a building that is not even complete yet, doing the same sounds like painting yourself into a corner.

Posted by: SnarkSlope at March 23, 2009 4:18 PM

Well clearly some sellers were "allowing" mortgage contingencies, so it seems you might not have been dealing with a summa cum laude lawyer...

Posted by: dittoburg at March 23, 2009 4:20 PM

Snark, that makes sense and is why I wasn't personally overly worried about having a mortgage contingency in either of my last two purchases. I didn't have financing concerns.

ditto, I don't doubt it. Unfortunately, I have little faith in the agents and lawyers I have dealt with in NYC, including my own.

Posted by: Biff Champion at March 23, 2009 4:51 PM

Biff - I am an attorney and I have no faith in the attorneys I have occasionally employed outside of the office apart from my very good immigration attorney.

Posted by: dittoburg at March 23, 2009 5:20 PM

ditto, that's interesting. I'm only speaking based on my limited experience with one particular real estate attorney who was "representing" me. I ended up filing a compaint with the NY State Bar Association against him. He was unbelievably non-responsive and gave questionable (at best) advice in my opinion. Oh well, live and learn. At least I don't think I suffered financially because of him; he just caused an unbelievable amount of frustration.

Posted by: Biff Champion at March 23, 2009 6:03 PM

"He was unbelievably non-responsive and gave questionable (at best) advice in my opinion. "

Exactly my experience. Now I will only go to attorney's that other attorneys know personally and actually recommend.

Posted by: dittoburg at March 23, 2009 6:48 PM

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March 23, 2009

That's Me In The Corner, Losing My Deposit

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