Top Five Things To Know When Buying A Condo
By Adam Milam, Esq., Condo Owner Magazine, Volume 18, Issue 3 (Summer 2014)
While it appears that the Gulf Coast market has stabilized and even rebounded to an extent, the real estate crisis over the last ten years has hit Gulf Coast buyers of newly constructed condominium properties pretty hard.
Negligently built units with serious construction problems, un-built or deleted amenities, and ghost town communities that were supposedly “sold out” have caused many condominium owners to wonder if relief is available. Many builders have run out of money, many utilized and hid behind shell corporations, and others have employed creative measures to keep control of the association and common areas out of the hands of the individual owners. Lawsuits are more expensive than ever, what can individual condominium owners do?
- Know The Offering Statement, And ALL AMENDMENTS
First, Federal and State legislatures have enacted condominium statutes to protect purchasers of condominiums. In the pre-construction context, when a buyer goes to contract in the pre-construction phase of the building of a new luxury condominium, the buyer sees only a spot on a map, extravagant promotional material, and dirt, or sand, as the case may be. Thus, the buyer is completely reliant upon the promises made by the developer and its marketing and engineering team. So, in this economic atmosphere where many development companies are mere shells and often not around to honor their obligations, without key sources of recovery for promises not kept, the buyer is especially vulnerable. Developers know this, and unfortunately, many times take advantage of it.
The new condominium buyer generally knows about an Offering Statement, but Alabama and Florida also require the Offering Statement to be amended any time a material change occurs.
You need to be aware of some key aspects of the condominium statutes to help make a well-informed buying decision. The statutes require that the developer, builder and marketing team tell the buyer the whole truth, all the time, even in the promotional material.
In the Offering Statement, the developer is required to disclose all material information to the buyer, to not misrepresent any material fact, suppress any material fact, or to state or represent a material fact in a way that would be misleading to any reasonable buyer. Furthermore, the developer is required to amend the Offering Statement if during construction the project changes in any way that would be material to a reasonable buyer. Therefore, the real estate crisis should have taught all new condominium buyers to get a copy of the Offering Statement, read it thoroughly, and understand what it says before agreeing to buy. And read and understand all amendments.
Why are amendments important? When a developer amends the Offering Statement/Plan, the buyer, has a window of time to decline to proceed with the purchase due to the amendment, or to proceed with the project as amended. Likewise, if the developer fails to provide the buyer with an amendment when a material change is made, the buyer has legal rights to demand his/her money back and possibly more.
Some key things to look for in the Offering Statement are 1) what amenities are actually committed to construction, 2) what unit finishes, materials and equipment is the developer actually committing to build, 3) what are the actual common areas, i.e., does it include the pool or just the exterior of the unit/building, 4) how is the association set up to protect a buyer’s rights, 5) when will construction be completed, and 6) and what are the proposed declaration and by-laws. These items are required to be disclosed fully and truthfully to the new condominium buyer in the Offering Statement.
- With Condominiums, The Developer’s Sales Pitch Creates EXPRESS WARRANTIES In Your Favor, Enforce Them.
Under both Alabama’s and Florida’s Condominium Act, a developer’s colorful brochure, model, renderings, and promotional materials create express warranties that the condominium will be built as represented in those materials.
“Need Not Be Built” is a phrase we all see on such marketing material. However, this language does not mean the developer does not have to build what he has sold the buyer and still keep the money. Rather, it is a statutorily created phrase with a special, specific meaning that only pertains to a buyer’s remedy against a developer for not building what was represented in the promotional materials. “Need Not Be Built” simply, and only, means that a buyer cannot seek to force the builder to actually build what he failed to build, what attorneys call specific performance. But buyers are entitled to seek and recover full deposit funds or re-conveyance if a deed transaction has already occurred. Those colorful brochures and marketing materials are enforceable by the new condominium buyer.
As a sub-point to this, buyers should get more warranties from the other parties that built the condominium. The crisis has taught us that even if the developer clearly violated his duties, there may be just a shell corporation or defunct builder that has no money to fix the problem. Buyers have tried with some moderate success to then sue the architect, engineer, or contractor for negligent construction. The problem is that the new condominium buyer did not have the contract with these other parties.
However, when a building professional makes a Certification in the Offering Statement/Plan for the benefit of prospective buyers, relief may be obtained against a vendor such as a contractor, engineer, or architect. One of the keys is whether the particular vendor executed a Certificate for the buyer’s benefit in the Offering Statement/Plan.
Buyers should request that the architect, engineer, and contractor certify in the Offering Statement/Plan that their work is guaranteed to be in compliance with industry standards “for the benefit of all persons to whom this offer is made.” If the developer is confident in the project, this should not be a problem.
Buyers successful in obtaining such a certificate may be a third party beneficiary of the contract that the architect made with the developer, and, therefore, have more options for recovery and repair if construction defects arise.
- Know Who Is In Control
Hint to buyers, you want to be in as much control as possible. For example, buyers should know who actually owns and controls the prized amenities in the condominium project they are buying into. Some project’s “common areas” are only the outside of the building. The developer’s best friend’s company may actually own the pool and golf course. And now buyers are at that company’s mercy to use and maintain these amenities.
Second, buyers should ask if the individual unit owners control rentals, association fees, and budgets, or has the developer attempted to structure the project in a way to maintain control and run the condominium more like a monarchy instead of a democracy.
Knowing who is in control of what before the purchase puts buyers in an ideal position to know when and how to enforce their rights when needed.
- Past Problems Are the Best Indicators of Future Problems
We all want to believe we are buying the best condominium ever, perfect in every way, our own heavenly happy place. Sometimes buyers get so caught up in the joy of being able to buy their long-awaited vacation home, they forget to the do even the most basic due diligence.
Buyers are entitled to know what construction problems have existed in the past, i.e. water intrusion, bulkhead issues, drainage problems, etc. — so ask about them. Ask specific questions, and find out how problems ere solved. If there have been serious problems in the condominium before, buyers need and want to know about these before signing a purchase agreement.
- IT’S ALL ABOUT THE MONEY
Buyers need to know the annual history of the condominium association’s dues and budget. What were the monthly dues ten years ago? What are they now? How many special assessments have had to be assessed? What are the current reserves? How many units are owned by individual unit owners?
If a condominium has raised the monthly/annual dues rates by more than 10 percent in any one year, a potential buyer should investigate the reason. There may be a very good explanation. However, an association that has budget troubles is a red flag for any buyer.
Unfortunately, many condominium buyers look only at the aesthetics of the unit, the amenities and location, and forget to investigate the association, accounting, and budget (except, perhaps, how much the dues are) until after they have made the purchase. Buyers are entitled to schedule a meeting with the association’s president to go over these items.
The real estate crisis hit the Gulf Coast hard. However, it has taught us important lessons. Most importantly, well-informed condominium buyers are powerful.
Adam Milam is a founding partner of Milam & Milam, LLC located in Baldwin County, Alabama, where he is licensed to practice condominium law in Alabama and Florida. Mr. Milam has obtained some of the largest judgments and awards in favor of condominium purchasers.