I discussed the contract my first-time buyer is faced with while considering the purchase of a condo in a brand-new 5-unit development in Echo Park. 
The contract looked daunting on the surface, but I thought, reading through and using my knowledge of the real estate transaction would go much of the way towards ensuring that my buyer would be protected. Wrong!
There is no way any of us who are not attorneys should be attempting to decipher a developer's own contract. There is way too much to look out for, at least in California.
I mentioned a few points points in my previous post: the request for the homeowner to pay two extra months towards the homeowners reserves; the seller being able to cancel the contract at any time if a better offer comes in; the tract map not having been approved, and there needing to be a certain amount of units sold before the seller's lender removes the blanket monetary encumbrance, and the buyer can obtain a loan.
In discussion with the buyer's mortgage broker, I learned that some developers don't understand that they have to get the project Fannie Mae approved (and FHA, but this is a conforming loan), and that I should check whether it has been approved. The listing agent didn't know but found out that it is in process. Another hurdle.
I decided to contact a real estate attorney, Scott, who is very generous with his time on the phone before he agrees to take your business. We should all have someone like him to consult. This is what he had to say after I asked if he would be prepared to review the contract for my client. He basically said he would not touch it with a ten foot pole. These contracts are a nightmare and you cannot change them. It would take hours to read. Then he taught me some things about new projects.
Scott asked who the developer was and whether there had been any actions against him, explaining that if there had been then even though the contract states that the developer is responsible for major repairs, getting him to perform is another matter. He suggested I do due diligence by knocking on doors and asking previous buyers about their experience. He also told me to google the developer to see if there were any complaints agains him. As it happens, this is the first larger scale project the developer has completed with one still in construction. I am pleased to say nothing showed up in Google.
Another question is, who is going to pay the homeowner assessments if the building does not fully sell? Are the existing owners going to be liable?
Who is going to manage the building? Is that in place?
Scott pointed out that this could sit in limbo after the contract is signed and earnest money deposited, for six months.
And he said that the arbitration in these contracts is going to benefit the Seller not the Buyer.
In closing, Scott said that if we could satisfy ourselves that we are comfortable with all the issues, he would be prepared to go over the contract.
The moral of this tale is that if there is the slightest doubt, err on the side of caution and advise the client to seek legal counsel.
Jane Peters, connecting you to the L.A. real estate scene
Buying or selling real estate in Los Angeles can be an overwhelming process. Contact Jane Peters, Los Angeles realtor specializing in absentee owners, out of town buyers, and those who need that extra attention, in order to make the transaction a smooth, trouble-free, and fun experience.
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Hey look at you! Great post. I've handled developers own contracts, and some of them are pretty easy to read, understand, etc. But I know that it's one thing with a sub-division of single family, and a whole 'nother can of worms with condos. Surprised the listing agent didn't get the FHA hurdle. Hope your client appreciated all you did for them!!
Thanks, Carla. California is its own world. I was warned from day one to beware of of this contract. I am not about to take chances with 40 pages of words.
After countless client experiences, I can also tell you that I PERSONALLY learned the hard way. My attorney (30 years in the biz), also teaches for several MLS boards said he had never seen such a well crafted contract that appeared 'normal' until he read through one particular paragraph regarding the appraisal.
I cannot emphasize enough how important it is to RUN the other way. Your attorney provided some excellent advice.
Solid Advice Jane. Condo projects are a totally different animal aren't they? Has the Developer filed the Declaration yet? Is this the first building? What happens if they go belly up? So many questions --sounds like you were smart to call the attorney.
Bill, thanks for dropping by. Not sure we are running yet, but I will certainly make sure that an attorney is involved if my buyer decides to continue on.
Mary, I don't know what a Declaration is. It might be a different term in California or not required. Do enlighten me. This is the developer's first completed multi-unit project. His website shows 3 single family homes built and another multi-unit under construction. Thanks for dropping by and go to bed, it's late.
Oh from my Title Insurance Days Jane -- the developer records a Declaration of Covenants, Conditions and Restrictions..blah blah blah -- but they set out in that Declaration the percentage of Ownership for each unit in the common elements, address how they will add additional units, those percentages etc. That document also sets out the Condominium Association, dues and manner in which they will be paid etc, etc....
Ah, the old CC&Rs we call them. Now that's another question to be addressed which hopefully the attorney would come with. However, judging by what else is still hanging out there. i doubt it. Thanks for that Mary.
Jane - In Ontario, each developer has its own agreement. A lawyer who has extensive experience with these types of agreements is essential for a proper review
Jane:
I think, in many respects, condos are more complicated to sell than single families. There is so much due diligence involved. Having an attorney to go over all of the documents is really a must.
Excellent post. A few years back, builders up here held all the cards on their projects and demanded that anyone wanting to move into their developments agree to an extra 14 pages of one sided, right waiving contract. The majority of them went BK with the market correction. I can't say that I miss them.
Hi Jane ~ Buyers and sellers in Massachusetts almost always have an attorney representing them - ideally a real estate attorney. Thank goodness - I couldn't imagine wading through an agreement like that.
Liz
Mark S., that certainly makes sense. Way too risky without.
Claudette, you are right. There is way more to consider in a condo development where so many other people are involved.
Mark H,. thank you. Hopefully the more reasonable ones are still in business. The others give everyone a bad name.
Liz, attorney's are not common here with our standard contracts, no real reason. But anything outside that i would definitely advise my clients to consult one.
After reading your posts on this Jane, I'm so glad we don't have anything like this in Murphy, NC :)
It is probably a handshake there, right, Carol.
Jane, we had a couple of highrises in uptown Charlotte come to a screeching halt-just in the past few months. The developer couldn't get any more money from the banks and couldn't pay the contractors. They stopped. The building was just about half way up on its rise to being a skyrise!
One third of it had already been sold. Anyway, after a couple of months of legal and financial wrangling, the building is back in full swing.
This was a great article. Too many things can bite our clients (and us) in the rump, right now! CAREFUL we go!
Jane, this building is actually finished, but there are so many loose ends to tie up, my hair is standing on end. I have a nervous buyer as it is.
Hi Jane sage advice...here in Florida developers wants buyers to use their contract forms and some of the clauses say..not negotiable..and of course everything is....Important to always advise buyers to seek a real estate attorney to understand the contract terms being offered,prior to executing any developer document. It is miney well spent......
Eileen, definitely money well spent. And you are right. The attorney here actually said you can't change the contract, but of course you can try. Important thing is to be able to catch everything.