As the cranes come down and the buildings go up more and more new condo listings appear everyday.  Whether you are the flipper or the real estate broker involved you want to make sure you get what's due- your payout.  In order make sure the dollars make sense, here is how a new construction condo flip works.

1.  Buyer Bob writes a contract for a condo pre-construction. The sales price is $300,000.  Bob came to the condo with Broker Betty.  Bob puts down a 20% deposit with the developer and signs a contract. The contract typically contains a paragraph that states that the condo may not be assigned, listed, advertised or in anyway resold prior to closing. 

A this point you are probably scratching your head saying... what??? how can I flip my condo if the contract prohibits me... read on

2.  Many other buyers join Bob in the flip frenzy and plunk down 20%.  Once a sales threshold is met, typically 80% of the building sold, the developer breaks ground and some of Broker Betty's commission gets paid up front.  It is important to note that construction lender is involved at this point and those funds get the building well underway.

3.  Time passes, the crane is up.  Buyer Bob gets a letter in the mail stating that the contract restrictions on resales have been lifted.  Alleluia! Let the resales begin.  Buyer Bob  calls Broker Betty to put that sucker in the mls and let the profit taking begin.

4.  Broker Betty, processes the listing and her clever manager asks... has Buyer Bob closed yet? If not, please get all of the paperwork from the sales office so we can understand how we can list this property.  Broker Betty begrudgingly complies and finds out that only the "inside" sales office can list the resales.  WAIT Broker Betty says, this is my client!!!!  Evil inside sales office person says - let me fax you the fine print.  The fine print reveals that the unit can be resold if, and only if, the inside sales office lists the proerty and the developer is paid an "assignment fee".  Broker Betty queries the office and finds that this evil inside dealing is not always the case, but is fairly typical, and is told to ask for a referral fee.  Borker Betty reluctantly turns Buyer Bob over to the lesser evil inside sales staff and agrees to the referral fee.

5.  Inside sales staff markets Buyer Bob's resale and eventually affect a sale to Buyer Come Lately.  Buyer Come Lately drags along his agent, Second agent Sue and Come Lately agrees to pay $400,000.  A new contract is drawn between Come Lately as the buyer and the developer.  Buyer Bob gets his 20% deposit refunded to him as soon as Buyer Come Lately's deposit is cleared and the rescission period is over.

6.  Time passes and the building is complete- let the closings begin!  Buyer Come Lately is dying to move in and is among the first to close.  The closing statement shows a sales price of $400,000 and Broker Betty is the selling agent, getting paid the remainder of her commission on the sales to Buyer Bob - but there is no referral fee paid. Second Agent Sue is at the closing and leaves empty handed and confused.  Buyer Bob is looking for his $100,000 profit which is also not to be found on the closing statement. In fact, the construction lender seems to have siphoned off most of the developers profit because the lender's payout is based on a $400,000 sales price and not $300,000.  Buyer Bob and Second Agent Sue want to be paid.

7.  Bob and Sue find out that the developer can't pay them until the bank loan is totally paid off!  There are furious!  Not to mention Broker Betty who will also have to wait for her referral fee.  Eventually, they might all get paid, but they do have to go to the back of the bus and ride around town until everyone else gets off.

To save yourself the bus ride make sure you ask these questions....

Does the developer have the resources to "fund" resales?  In other words, if there is not enough left over on a per unit basis after the bank has been paid, will the developer set aside funds to make sure you get paid at closing?

What is the assignment fee?  These fees can be all over the place - typically you will see them anywhere from one half of 1% to 6% - this fee is retained by the developer for lifting the presale requirement and not making the original contract holder close twice.  The higher the assignment fee, the better closing twice appears.  In short, you might actually be able to save money by paying 2 sets of closing costs.

How many people have actually contracted for this unit?  Some units have been sold and resold more than once - I have seen 4 or 5 filps on the same unit... more people sitting on the already crowded bus!

This is a typical scenario and will probably lead me to write a few other posts... but at least now you know how to get what's due.