The Miami Herald
September 27, 2014
Buyer Beware: Condo ‘Reservation’ Prices, Details Can Change
By Martha Brannigan
Sleek towers with floor-to-ceiling glass and expansive views are a big selling point for the new wave of condominium projects rising on Miami’s skyline.
However, the process of buying a pre-construction condo from a developer can be far from transparent or smooth.
Price lists for pre-construction condo units change frequently — spiraling higher as a project gains momentum. The result: Buyers often end up paying significantly different prices for similar units in a building.
Fledgling projects, half-baked at the time they are announced, often are reconfigured with a different number of apartments and changes in floor plans. Buyers holding reservations can either accept the changes — which sometimes means paying thousands of dollars more than they planned — or they can settle for a deposit refund with no interest on the money held in escrow.
And developers’ promises made at the early stage of reservation aren’t always kept.
All of which is perfectly legal.
“A reservation agreement is a means by which people can express interest in buying a unit. It’s not enforceable,” said Steven Wallace, a Miami attorney who often deals with condo sales. “Either side can cancel.”
“There is no transparency,” said Mauricio Rojas, a Miami real estate agent, who learned the hard way that a reservation to buy a pre-construction condo unit doesn’t necessarily guarantee a buyer anything.
Rojas, a principal at Red Road Real Estate Co., said he ran into problems trying to sell units at 1010 Brickell, a 50-story tower marketed by Miami-based Key International. Key is co-developing the tower with 13th Floor Investments, a Miami-based real estate investment and management firm.
In October 2013, Rojas’s client, Alvaro Jose Velez, signed a reservation to buy unit 3811 in the 1010 Brickell project for $482,000, putting up a 10 percent deposit.
In February, Rojas said Key International’s sales department called and asked if Velez, a Colombian with ties to South Florida, would agree to switch to a different floor. The reason: Another buyer wanted to combine units, including the one Velez had reserved.
Velez refused to make the switch, but within weeks Key International gave his unit to the other buyer, anyway.
In an interview, Key International vice president Inigo Ardid acknowledged that his firm didn’t honor Velez’s reservation because the company sold the unit to another buyer who wanted to combine units.
“There was a double assignment of that unit by mistake,” said Ardid, whose family has been developing condos in Miami for years.
Ardid conceded that some other buyers also were upset over issues involving their reservations at 1010 Brickell. “There were definitely some small issues here and there,” he said. Still, he said, the firm has more than 90 percent of the units under contract — a sign of success.
Velez isn’t one of them. After losing his first pick, Velez agreed in April to switch to unit 2311 at a lower price to reflect the move to a lower floor and his inconvenience. But in May, that reservation also fell apart amid a dispute between the buyer and seller over what the agreed-upon price was.
Velez ended up taking a refund of his reservation deposit — after the money sat idle for months, earning him no interest.
“I feel, how do you say, engañado,” said Velez, using the Spanish word meaning “deceived.”
Rojas, who lost out on his commission, said he had other headaches at the 1010 Brickell project.
In October 2013, Rojas said a Colombian friend was about to sign a reservation for a unit in 1010 Brickell for his mother at a price of $751,000 — using Rojas as broker — when another broker offered to sell the same unit for $707,000.
Rojas said he confronted the sales manager at 1010 Brickell and was told the lower price quoted by the other broker couldn’t be valid — and he couldn’t match it. Yet, his client, whom he knew from college at the University of Miami, got the cheaper price from the competing agent, Rojas said.
“That’s a $44,000 difference. After that happened, I was furious about what I had lost,” Rojas said. “Especially with a close friend. It made me look very bad.”
Key International vice president Ardid said when he checked into the incident, he found that the second agent apparently acted just as a price increase was taking effect and managed to push through the reservation based on the old price list. “He outflanked Mauricio — and he outflanked us,” Ardid said.
Brokers sometimes backdate contracts at the time of price increases to try to get lower prices for their clients, Ardid said. “That is something that happens a lot, and it’s very hard to catch,” Ardid said.
The 1010 Brickell tower isn’t the only Miami project to leave unhappy buyers along the way.
Buyers left out
At Echo Brickell, a luxury condo project going up in downtown Miami, the number and size of units changed, resulting in some would-be buyers getting left out.
New York-based Property Markets Group launched Echo Brickell in early 2013, taking reservations from a number of prospective buyers.
But the developer decided to reconfigure the project from 320 units to 220 units and finally settled on 180 units, based on demand for larger apartments, according to Craig S. Studnicky, principal and co-founder of Aventura-based International Sales Group, which handles sales and marketing for Echo Brickell.
“Some units literally got eliminated, and we had to go back to them and say, ‘Your apartment is being eliminated,’” Studnicky said. “Or the size of the units increased from a two-bedroom to a two-bedroom with a den.” For those holding reservations, that meant deciding whether to pay the additional amount for a larger unit or to drop out of the project and get back their deposits.
Agents say the changes spawned some disgruntled buyers and brokers.
Still, Studnicky said, “Most people adapted.”
Even under normal circumstances, prices for pre-construction condo units change significantly during the sales process. There is little transparency for buyers to know whether they are paying the lowest price or the highest.
When a new condo project is introduced, developers typically will release a fixed number of units for sale at “price point one” or “price list number one.” That is generally the lowest price and it’s offered to those willing to jump into a project early, creating a buzz.
As a project gains momentum, more units are released at incrementally higher prices: price points two, three, four and so on.
Developers say it is only fair that the first buyers, who take the most risk, get the best deals.
As a project advances and more renderings and details are available, and the financing is nailed down, unit prices spiral higher.
“The first buyers, usually they get the pick of the units and the best prices,” said Edgardo Defortuna, president of Fortune International Realty, a marketer of pre-construction condos and a condo developer in its own right. “They have less information, and they’re taking a leap of faith to believe in the developer and the project.”
“The best buy in preconstruction is in the reservations stage,” Studnicky said. “Usually, at contract comes the first price increase, and a second one when they break ground.”
Developers say prices per square foot — the standard metric for condo sales — have risen so much during the current condo construction cycle that even those unit buyers who purchased from the fourth or fifth price list in a project are in the money.
The real test, of course, will come when the apartments are completed in the next few years and become eligible for resale.
Developers say changes in plans and prices are an inherent part of building complex projects.
When Miami-based Related Group was about to launch SLS Brickell, a condo hotel project, real estate agents were briefed on what prices were expected to be and began taking $10,000 deposits from buyers who were given letters of intent — a way of showing interest before reservations were available.
Demand was so strong for the hip project that some would-be buyers couldn’t get a reservation — despite having put up $10,000 and signing letters of intent.
And when SLS Brickell sales were formally launched, the prices were higher than agents were originally told at the letter-of-intent stage, and many prospective buyers were angry — as were their agents, who take the brunt of criticism for such shifts.
Defortuna, whose Fortune International led sales and marketing for the SLS Brickell project, said, “The bigger complaint, quote unquote, was that people didn’t get their units. There was such a demand.” He said the snafu happened very early on in the marketing — prior to reservations.
Ardid of Key International said increases in unit prices reflect the big rise in construction costs since the new condo boom began more than two years ago.
“Developers’ costs in Miami have gone through the roof, because people [in construction] got busy and the world changed in the last two years,” he said. “People [in construction] went from being hungry to being greedy.”
Hard construction costs at 1010 Brickell “went from $100 million to $120 million,” Ardid said.
Ardid said at 1010 Brickell, “luckily, we had a GMP,” or commitment from the contractor for a guaranteed maximum price. But those are given at the time of groundbreaking. “You’re working off estimates before that,” he said.
“These projects take four years, and there are a lot of moving things we as developers have to juggle,” Ardid said.