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Bar News - May 13, 2011

Real Property Law: Buyers Beware: Two Sides of a Condominium Purchase


Due Diligence as the Successor Developer

In today’s economic climate, buyers of real estate appear to have plenty of bargains from which to choose. Some bargains, however, may not be as good as they first appear, particularly distressed, failed or bankrupt condominium or subdivision projects. The successor owner of any unfinished or insolvent development should be wary of the potentially burdensome obligations and liabilities associated with taking over such a project. From lapsed permits to state registration requirements, buyers need to beware of the several pitfalls before entering into a binding purchase agreement.

If a development has been inactive for any length of time, there is a good chance that one or more permits will need to be revived or extended. Some approvals, particularly the site plan or subdivision approval, may be invalid due to intervening regulatory changes if the project is not sufficiently "vested." Vesting of a project usually requires some actual development within a certain timeframe (e.g., in New Hampshire, a site plan may become vested for four years if active and substantial development commences within 12 months after approval). Otherwise, the plan may require modification to comply with new regulations. In addition, buyers should carefully review the terms of the approvals to ensure that all conditions have been fulfilled, including whether any local bonding requirements are still being met.

Another area of concern is tax and other property liens. If a developer has not been paying his bank, he likely has not been paying the property taxes or the parties who have furnished labor and construction services to the property. Tax and mechanics’ liens create a cloud on title that lenders and title insurance companies will require to be paid off. Keep in mind, too, that tax liens can be converted to tax deeds within strict timeframes, leading to forfeiture of title. Also, even if a previous contractor does not have a mechanics’ lien, that contractor may possess some leverage to be paid for past due amounts through ownership of plans or other intangible property needed to complete the project.

If a property has been foreclosed, additional concerns are warranted. As seen lately in the news, many lenders are being investigated for "wrongful foreclosures" amidst claims of legal errors committed during the foreclosure process. Defective or missing documentation and procedural oversights could result in purchasers being divested of their title to foreclosed property. Now more than ever, foreclosure proceedings must be scrutinized for compliance with all statutory and other requirements.

Finally, some states, like New Hampshire, have rigorously enforced consumer protection statutes for large condominiums and subdivisions. Before purchasing such a project, buyers should confirm that the project has been registered or exempted from the applicable registration requirements. Even if the development has been registered, a successor developer may need to provide additional information to the regulatory body about its ownership, financial wherewithal and any proposed changes to the original development plan and will need to update public offering statements and related material. All of this can be expensive and time-consuming.

Buying a development project always requires significant due diligence. Buying a development project in a severely depressed market requires an extra level of scrutiny. Legal counsel and other real estate professionals should be consulted prior to entering into a purchase agreement for any distressed project.

Due Diligence as the Prospective Homeowner

Another potential victim of distressed, failed or bankrupt condominium or subdivision developments is the prospective home purchaser, who should also beware of the problems that could arise in buying a lot or unit in a distress sale. While the selling price might look like a steal, the buyer might end up feeling like he was robbed.

First, buyers should make sure the developer has all necessary permits. This includes a building permit and certificate of occupancy. Keep in mind that some municipalities will withhold occupancy permits until streets and other off-site improvements have been completed. Another critical permit in some states is a registration certificate from the Attorney General’s office. To protect consumers from unfair or deceptive business practices, registration must happen before a developer sells any units or lots, and the developer must also provide informational materials containing specific facts about the property to potential buyers. Always ask to see the certificate and make sure you get a current public offering statement.

For condominium projects, be sure that the developer has properly recorded or filed the declaration, bylaws and plans. Carefully read the documents for information, such as what your percentage interest in the common area includes (e.g., decks, storage sheds, open space), the amount of monthly or annual dues, what type of maintenance the dues cover, what covenants and restrictions have been imposed on the property (e.g., can the unit or home be rented out) and so on.

Another area to focus on is the current and future financial condition of the development project. Developers who continue to be in control of the homeowners association should allocate a certain amount of money to a capital reserve fund to ensure that common elements are adequately maintained and repaired and to avoid significant special assessments being levied against owners down the line. In a condominium building, for example, the life of the roof, common area carpets, elevators and other such items can be predicted, and an appropriate budget should be set to account for when those will need to be replaced or fixed.

Along those lines, it is imperative that an inspection be conducted in advance of buying property in a distressed project. The livability and the resale value of a home greatly depend on the physical condition of the property. A very low purchase price might not reflect a good investment if buildings were hastily constructed and are in poor shape. Additionally, research of the developer and contractors could reveal a history of unsuccessful projects and dissatisfied customers.

Lastly, failed development projects are likely strapped with legal problems. It is especially important under those circumstances to retain legal counsel to assist you in evaluating the future success of the development and the probability that your investment will be a good one.

Elizabeth E.D. McCormack

Philip M. Hastings

Philip M. Hastings and Elizabeth E.D. McCormack are with Cleveland, Waters & Bass in Concord and may be reached at 603-224-7761.

Supreme Court Rule 42(9) requires all NH admitted attorneys to notify the Bar Association of any address change, home or office.

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