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How the “If U Seek Kay” Does This Whole Buying a Condo in a New Construction Project Work?

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Real Estate Agent with Rich Kids Real Estate: The Brokerage

frustration-7147291As a rich kid with a vocabulary that has a tendency to lean towards, let's just say, the less demure end of the language spectrum I do try to keep it pretty subdued in my writings and certainly in the professional world. Lately I have  had a lot of agents and buyers alike that are totally confused and frustrated about the buying process in new construction condo developments. For those agents that have never done a deal in new construction, it is a totally different animal than doing a deal on a resale property. It can be even more unsettling for the buyer because if the agent is new to this process, than it makes it all the harder for them to address the questions of their clients.

I am currently representing two new construction projects (The Luminaire - 928 Croft and Metropol - 6001 Carlton Way) as well as resale, so I'd like to provide everyone with a little education that might put you at ease. I have to say that I have been very blessed to work with the most amazing buyers and real estate agents on these projects! As I have said before, I get a lot of enjoyment from working with a cool agent/buyer team. Everyone (no matter how savvy they are) typically have the same questions. I love slick new projects and so do most of my clients, so this post is really to help you navigate through this very different buying process. Brace yourselves - there is a lot of info to digest!

#1 - The Developer Has Their Own Contract Approved by The Department of Real Estate (DRE) and a Typical Purchase Agreement Used in Resale Cannot Be Used (9 times out of 10 at least) - This is a very hard concept for some real estate agents to grasp, as we were never trained in this at Realtor University. My very first deal was in new construction and I had a  hard time not following the typical procedures that I was trained in. Developer's contracts can be upwards of 40 pages long, are typically slanted towards the best interests of the seller, and often have language that buries the items most important to the buyers (contingency periods, opt outs, etc). Always have your agent (hopefully me - shameless plug) write a supporting addendum that clearly states what you want out of the deal - closing costs, inspection contingencies, loan contingencies, credits for upgrades (washer/dryer/fridge/closet build outs), and an opt out date if the building is not ready or does not have the reports it needs to close by X date with all monies returned to you (there is always a 3% of the purchase price deposit held in escrow until closing and is deducted from your total down payment).

#2 - What is With This 51% Occupancy Requirement? The Building is Complete and I Want a Traditional 30 Day Escrow Period - In this economy, lenders what to make sure that the projects they are providing loans for are solid and that more than half are in escrow before they will issue loan docs/close the deal. This can be frustrating to the buyer because there is not a finite timeline as to when these occupancy requirements will be reached. When you buy in new construction, always assume it will be longer than sooner before you close. If you need to close within a set time for whatever reason and escrow requirements have not been reached, than you are probably better off sticking to resale. Often the building will have Certificate of Occupancy (C of O - meaning building has been inspected by the city and is deemed inhabitable), but not the final White Report (report needed to close escrows - see #3).  Should you be an all cash buyer and the building has both White and C of O, than you can skip the lender's 51% requirements and facilitate an immediate closing.

#3 - Pink, Yellow, and White Reports - There are three reports issued by the city - Pink, Yellow, and White. Pink is typically issued when a building has just been completed or in the final stages of completion and is ready for sale. During this time, a buyer can fill out a Pink Report and place a deposit to hold a unit that they like. During the pink period, the DRE mandates that there is to be no negotiation and no sales contracts written. Putting a deposit down is non binding and basically puts you first in line to negotiate on the sale of the unit. It also gives you first right of refusal. This does not mean that the developer has to accept your offer nor does it mean he cannot be looking at other offers. Pink seems to work best when there are many units to choose from and it basically puts yours on hold until the Yellow Report is issued and you can start negotiating. If there is a lot of potential interest on a unit, submitting pink can often tell a developer you are serious and he may try harder to make the deal happen as he sees that you are committed. As my friend says, it puts you in the "cat bird seat" - I'm not exactly sure what that anology means but seems applicable to this scenario. The Yellow Report means that you can now negotiate a purchase price and enter into a binding escrow. Most buildings that are totally done have Yellow and is the interim report until the elusive White Report is issued.  Ahhh, White...you tricky little bastard! Of all the things that agitate both buyer and agent is the recordation of the White Report. The building can be completely in escrow, yet you can't close and all you get from the selling agent's office is, "It looks like it should happen in the next few weeks, but I can't give you an exact time". Nothing is more frustrating than that! Trust me when I say, we are all doing our best to get the White Report. What has to happen is that the city has to record the Tract Map and Preliminary Title Report (basically saying the property is free on liens and encumbrances) before it can issue White. Since we are typically dealing with the City of LA, how fast this happens really depends on how expeditiously all the paperwork makes it through the chain of approval. Anyone can tell you that I am probably the most impatient person on the planet, so trust me, I get it. Once we have white, we then can close all escrows concurrently and everyone is happy!

Did your eyes glaze over reading this? I hope I wrote it in a way that makes sense. Buying new can be a  great way to go and by having this education, it will hopefully save you some future headaches and empower you to make the best choices for yourself! Disclaimer - these are the basics of new construction as I know them from experience. Every scenario is a little different as is the developer, so please always read the contracts fully, consult your agent (me) and any other council you see fit.