Builders put heat on buyers with cold feet
Condo slump - Two companies sue to keep the deposits that would-be buyers put down on units
Monday, November 26, 2007
Facing a painful sales slump, two of Portland's largest condo developers are taking a hard-nosed stance toward buyers trying to back out of their purchase agreements.
Williams & Dame Development and Gerding Edlen Development Co. are fighting in court to hold on to thousands of dollars in earnest money deposits placed by would-be buyers who failed to close their deals. Failed sales in the South Waterfront's John Ross condo building alone have prompted 12 lawsuits since July by the title company in the middle of those deals. Gerding Edlen is also pursuing deposits put down by four buyers in its Civic condominium near PGE Park.
The lawsuits are the latest indicator of the Portland condo market's plunge into slower, more difficult times. Dozens, perhaps hundreds, of buyers have attempted to extricate themselves from condo purchases since the real estate market stalled earlier this year.
"These people had a contract and they did not honor that contract," said Mark Edlen, managing principal of Gerding Edlen.
The John Ross building is a case in point: In the summer of 2005, 222 buyers raced to make deposits of $5,000 or more. But so many have canceled that, as of last month, the building actually had fewer buyers than two years ago -- 192.
The purchase agreements state explicitly that buyers who fail to close their purchases forfeit the deposit, generally equal to 3 percent to 5 percent of the price. Still, developers until now have rarely fought to keep deposits in the case of a failed sale, confident that another buyer would soon fill the breach.
Some buyers said they couldn't find financing because of the mortgage industry's travails. Others said they couldn't afford their new condos after the value of their existing homes plummeted. For some, the lower sales price for their homes meant they would face larger and possibly unaffordable monthly mortgage payments on the new ones.
The money in play in the 12 lawsuits involving the John Ross barely exceeds $200,000, less than the price of a single condo in the building. But for individual buyers, who stand to lose $15,000 to $30,000, the deposits represent a big chunk of change.
Ticor Title Insurance Co. actually filed the lawsuits -- all in Multnomah County Circuit Court. Ticor holds the deposit money in escrow and is asking the court for directions on how to distribute the money.
In the John Ross complaints, Ticor filed the suits against both the individual buyers and Block 35 Investors, the partnership of Williams and Dame and Gerding Edlen that built the building.
Jacob Lawrentz was one of those buyers. The 30-year-old Portlander signed a contract on Jan. 13, 2005, to buy unit 2202 for about $330,000. He deposited $16,450 in cash as earnest money, according to court documents.
Lawrentz could not be reached for comment. In his answer to the Ticor complaint, he said he's bought real estate as an investor for eight years. So confident was he in his ability to buy the John Ross unit, he paid an extra $1,800 for granite countertops.
But by the time construction crews completed work on the John Ross this summer, the real estate market had gone south and the mortgage industry was reeling. Lawrentz said he couldn't find a lender willing to loan him the money to close.
But the developers expressed little sympathy for Lawrentz. In its answer to the Ticor complaint, Block 35 Investors said it is entitled not only to Lawrentz's $16,450 deposit, but also accrued interest, investigation and expert witness costs, as well as attorney fees.
"I'm sorry for his situation," Edlen said. "At the same time, if we enter into a contract, we live up to our obligations and we always hope that others will do the same."
Edlen said the deposit money was pledged as collateral to the developers' consortium of construction lenders. If the developers prevail, which seems likely given that the vast majority of individuals named in the suits haven't bothered to file a response, the money will go to those lenders, Edlen said.
So far, most developers have been reluctant to do battle with prospective buyers.
"I just never did that," said Bob Ball, developer of several Pearl District condo buildings. "I felt that it would do more damage in the long term to my reputation as a developer."
Tiffany Sweitzer, president of Hoyt Street Properties, primary developer of the Pearl, echoed that sentiment. "As a developer, fail-sales are frustrating," she said. "You typically have taken the unit off the market for two years. But we try to avoid any lawsuits. We're trying to build a neighborhood down here. Our buyers are our best sellers."
Hoyt Street is facing the same fail-sale issue as Gerding Edlen and Williams & Dame. Buyers of 22 of the 136 units in Hoyt Street's newest building -- the Metropolitan -- pulled out of their deals, Sweitzer said.
Hoyt Street has not sued any of the 22, but rather is trying to work out some sort of compromise in which the developer keeps a fraction of the deposit, Sweitzer said.
The John Ross developers are taking a tougher approach. "For one reason or another, these people have chosen not to live up to the terms of their contract," Edlen said. "We are extremely disappointed with their decision."
Jeff Manning: 503-294-7606; firstname.lastname@example.org