I’ve had multiple requests in the last couple of days on the topic of the reservation process for new construction. There is no uniform policy so the answers here mostly use The Strand as an example. Keep in mind that we are not the listing agents for any of the new construction developments, this post outlines my experience to date.
1. How much to reserve? $2,00? $5,000? $10,000?
$5000 for under $600,000, $10,000 over. When they convert to binding reservations, a total deposit of 5% of the purchase price will be due. Once binding contract is taken it all becomes nonrefundable.
2. What’s non-binding really mean?
Either party can back out. They probably won’t, even if they could sell the unit for more. Imagine the public relations nightmare. We are working with a buyer that had to back out of his reservation and he had his money back within 72 hours.
3. Advantage of having representation?
We sold two units in the Pinnacle. They fell behind schedule and we knew before they simple mailed out letters moving closing dates. Rather than being six weeks delayed moving in, both of our buyers ended up at two weeks. We know a fair amount about the different projects where the developer is selling theirs. You get to ask us questions and we track down the answers. Agent’s commissions are built into the co-op arrangement between brokers. There is no additional fee for using a buyer’s agent.
4. How “connected” or in the loop do you need to be to get the best spots?
Interesting question. Still trying to figure that out. The top floor units in the Strand were not released in the first round. Then they were “reserved” when the second round price sheets came out. There is a waiting list for the West Tower that is not available for purchase yet. I certainly felt that during the two open reservation periods, the listing office did everything they could fairly assign a limited amount of units. It’s the developer’s project, they don’t have to release anything they don’t want to.
5. What’s the longest period of time you’ve seen between “taking reservations” and “move in”?
Benson Tower started (and has currently stopped) taking reservations last year. They’ll be done Spring ’07. Reservations will resume when their sales center opens.
6. What if you reserve today and by the time you’re ready to finance, interest rates kill you, price you out … what are your options?
First, I’d budget and plan based on a higher interest rate. What rate? Maybe 1.5% over rates now and then if it doesn’t go that high, you are happy at closing and if it does, you are prepared. Some lenders can lock a rate as much as a year out. It is mostly the big banks (Wells Fargo, US Bank, etc. that provide lending on these sorts of projects (most likely is the bank that provided construction financing).
Second, you could walk away, you would most likely lose your deposit.
Third, most offers that we write have a financing contingency but you would have to show that you no longer qualify for the loan. That being said, new construction uses their own paperwork that may write that out. If you could claim the financing contingency, you’d get you $ back.
Forth, complete the purchase and resell it. If you purchase early enough in the process there should (no promises) be enough appreciation to make some money even with expenses. See Portland Real Estate Market Action.