Crafting the Right Contract

What would-be buyers need to know about condos and master-planned communities

By JUNE FLETCHER

With the economy still shaky, many potential home buyers are sitting on the fence, especially when it comes to so-called "common-interest" communities like master-planned communities, condominiums and mixed-use developments. Would-be buyers are worried that they won't be able to cancel a contract if prices of similar unsold units fall, or that they'll buy a home in a failing development.

We talked to Roger Winston, a real estate attorney at Ballard Spahr Andrews and Ingersoll who specializes in common-interest law, at his office in Bethesda, Md. Here are excerpts from the conversation:

The Wall Street Journal: Many people are walking away from deposits that they've made on new condos or homes, because prices fell while their place was being built. How much of that are you seeing?

Mr. Winston: I have been seeing a lot of contract defaults. People who put down $50,000 on a $750,000 unit see that they could buy the same place now for $600,000. The money that they could lose by going through with the deal is greater than the deposit, so they walk away. Morally, they shouldn't, but from an economic standpoint, they may be better off.

WSJ: Can contracts be re-negotiated?

Mr. Winston: People shouldn't enter into a contract unless they intend to buy. But they should also understand that in this economic environment, the builder wants you to complete the purchase; he doesn't want another unit to sell. … It's not just the builder making the decision, however; the [builder's] lender must also agree to release the unit at a lower price. If the builder is able to renegotiate with the lender, it's more likely he'll be able to renegotiate with the purchaser.

WSJ: What contingencies can buyers can put into contracts to protect themselves?

Mr. Winston: You could put in a contingency that if you lose your job or your wages are cut before settlement, you could get out ... or if you can't get financing … or if the home isn't completed by a certain date. Builders are now more willing to accept reasonable modifications on contracts. But one of their concerns is, that as soon as you open the door a little, there's a possibility of a hurricane coming in. In situations where someone is trying to get out of a contract, they'll use any technicality to do that.

WSJ: What should buyers consider before buying in a mixed-use development?

Mr. Winston: Buyers should realize that the retail component that they see when they buy may not be what they get when they move in, especially if the economy continues to decline. A high-end retailer may be replaced by a low-end one.

WSJ: What should buyers consider before purchasing a condo in a new development?

Mr. Winston: It's a good idea to ask how many units have been sold, because when the building is under construction, the builder pays the condo fees for the unsold units; when he leaves, the owners are responsible for 100% of the costs of maintaining the building. Read the homeowners' association documents in terms of use restrictions, the maximum number of people allowed in a unit, leasing restrictions, architectural controls and covenants.

Some associations charge fees each time a unit is rented out, under the assumption that this causes more wear and tear on the property's common areas … and some charge resale fees that are some percentage of the purchase price. You should check if there has been a reserve study done by a third party that will show if there is enough money in reserves to pay for maintenance and repairs … Also, talk to the people who live there. They smell things, they hear things, and can tell you how nit-picky the board is about whether you can put beach towels out on the balcony or where you can park your car. They'll tell you things that no lawyer can find out.