Five Things Buyers Should Know About New Construction Condos

February 3, 2009

Residential

Sunrise On New Buildings in Chicago

Sunrise On New Buildings in Chicago

There’s a lot to love about a new building: the smell of fresh paint, the gleam of new stainless steel appliances, the anticipation of waiting for the cardboard protecting the walls of the elevator to be taken down so you can finally see what’s behind it, the excitement of people wearing hardhats carrying blueprints around the unfinished lobby. It’s exactly like an adult version of waking up on Christmas morning to a mound of presents, but then mom says you have to eat breakfast and wait for Aunt Flo to arrive before you can open them.

But, as many of the people who have bought new construction condos over the years are eager to tell you, there are a lot of pairs of underwear waiting for you under all that wrapping paper. Sure, there will be the occasional Lego Death Star or Cuddle Me Elmo, but red checked flannel shirts and itchy hand-knitted scarves will be in the mix as well.

Here are some of the basics that buyers of new condos, be they in high rises or three flats, need to know:

1. How the Turn Over Works

When looking at a new building, you need to understand exactly how the developer is going to turn the building over to the association. Huh? Fair question?let me explain. As the condo building is being built and the condos are being sold, the developer’s company owns the building. At some point, when a specific percentage or number of the units has been sold, the responsibility for the building is turned over to condo association. At that point, the developer simply owns the remaining units and is no longer the owner of the entire building. Undoubtedly the developer will have more units, and therefore more votes, than anyone else in the association, but he/she is still just a unit owner after the building has been turned over. All of this is spelled out in great detail in the mountain of paperwork that comes with buying a condo. This mountain of paper that used to be a pine tree is usually divided up into two documents: the condominium declarations and the condominium bylaws.

It’s important for you to know how many of the units have been sold and how many more need to be sold before the turnover happens. Why is this important? Read on.

2. The Assessments Will Go Up After The Turn Over

Going Up!

Going Up!

While the developer is trying to build and sell the condos, he/she/it owns the building. They can say the assessments are whatever they want. They are supposed to reflect what the developer believes the operating expenses will be after the turn over, but somehow they often seem to under budget…often by a lot. When the turnover takes place, the condo board then starts getting the bills instead of the developer: electric, gas, insurance, maintenance (yes, it starts right away), staff for large buildings, and on and on and on. The developer is supposed to have built up some money for the association to begin paying these bills, and of course there is money coming in from the assessments. But, is it enough? Not usually.

It’s simple…the developer wants to make the building attractive, so they keep the price of the assessments low. However, when the board has to begin paying the bills, they may find that the money coming in isn’t going to cover the money going out. And that’s when you see your assessments go up.

Take my good friend, Kelly. She bought a gorgeous unit in the south loop with views of the lake, the skyline, and Veteran’s Stadium. She was in heaven. Then the board took over the building and they quickly realized that they needed to nearly triple the assessments to get out of the hole they were in. After four months of triple, they were able to reduce the assessments to double of what they were before the turn over.

This doesn’t happen every time, and the assessments aren’t always going to double, but your agent and your attorney better be digging into the numbers to give you an idea of what to expect after the turn over.

3. There Will Be Problems With the Building

You’re buying new construction. Everything is new, right? Everything should work, right? Agreed, but that’s not the real world. In the real world, there are manufacturing defects in heaters, windows, and tile glue that can’t be seen when they are installed. All of these problems will usually present themselves sooner rather than later. Be prepared that your brand new dishwasher’s water pump may spring a leak after it’s fifth load. That’s why it’s under warranty. Be prepared for these types of things to happen. The developer didn’t do it on purpose, and they’re bound to happen.

Equally importantly, the building is going to settle. Gravity works. And, like rust, it never sleeps. Walls will crack. Windows will need caulk to fix newly appearing gaps. Cupboard doors will need to be adjusted. Unless you can get a reprieve from Sir Isaac and his pesky laws, you have to expect that you will have issues regarding settling for a year or two…maybe more. Complaining to the board will do no good (unless one of them knows Sir Isacc). This is something you have to expect.

4. The Developer May Not Be as Responsive as You’d Like

The cheerful sales agent working for the developer isn’t going to come out and tell you that the developer will have started a second or third building by the time you move in. Many of the crew that are working on your building will be moving on to the other buildings. Normally the developers will get everything fixed, but it may not happen as quickly as you’d expect. Make sure to talk about this with sales agent and the developer. What are their policies? How long will the developer take care of small problems? I have seen developers who have fixed problems long after their legal liability expired (see below). They were fixing problems to make sure their reputation was polished to a high shine. These are the people you want to buy from.

5. Usually a Company Built the Building

A company built the building you’re going to buy into, not a person. And, that company will likely be dissolved as soon as possible. Most developers create companies for every building they make: “123 N Main Development LLC.” As soon as the company is no longer legally responsible for the building (one year after turning it over to the association) they will undoubtedly fold the company. This means if there are problems, the entity that built the building no longer exists and the association is on its own. The developer isn’t 100% off the hook at this point however; there is no statute of limitations on negligence. But for cracks in the walls, broken tile, and under lit hallways…the developer is essentially gone.

You and the association need to make sure you know exactly what day the developer can close up shop. You need to make sure that you have all of your issues on the table by then.

Get a Good Team to Help You

This post is not to try to dissuade you from buying new construction. It’s simply to make sure you, dear buyer, go into your new home with your eyes wide open. And how best to do that? By having a bulldog of a buyers’ agent working for you. You need to have someone who has a lot of experience and knows the ropes. The agent working for you should know all of the information above and be able to dig deep into the building to find out as much of what you face in the future as is possible.

You need to make sure your attorney is earning his/her money and looking over the condo declarations and bylaws very, very carefully and alerting you to potential issues. You should have an experienced inspector look over the unit very carefully. They may be able to hear the bad water pump in the dishwasher, giving you the chance to make sure they’re taken care of before you move in.

Mostly, you need to know that your gorgeous new home will have issues, but that’s life isn’t it? All homes have problems. (Want to see my To Do list??) The important thing is that you know as much about what is coming down the path as is possible. It will make enjoying that view and gorgeous kitchen all the better.

Photos by Alan Levin & Iris Shreve Garrot

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About Katie Anderson

Katie Anderson is a respected and successful broker at Sudler Sotheby's Realty as well as a certified appraiser. She specializes in representing clients who purchase and sell condominiums, town homes, single-family homes and income property in the Chicago land area. In her small amount time in the real estate game (she became an agent in 2003) she has assisted in excess of 400 deals and over $200 million in sales and continues to use her skills as a certified appraiser. Katie resides in Chicago's Bucktown neighborhood with her loving husband and 4-year-old-daughter, where she spends much of her spare time with her family and friends. You can contact her at katie@thechicago77.com or at andersonbraack.com

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3 Responses to “Five Things Buyers Should Know About New Construction Condos”

  1. Kelly Says:

    Sad but true article, my friend. My question to you is … once you have lived in a new construction condo for two years and are ready to move on, how do you attract a buyer when your neighborhood is overflowing with even more new construction, which still seems to be the preferred choice over resale?

    Do you think the 2009 stimulus package will include low interest (4%) Federal loans for buyers and for refinancing? If that were to happen, surely that would spark renewed interest in real estate. Homeowners would have affordable payments and still have a little money in their pockets. This gets my vote!

  2. Brad Walbrun Says:

    Another informative article, Katie. Again, I’d like to throw in my two cents worth. If the association has not been turned over, it is next to impossible to get financing for it.

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    […] is especially true in older and vintage buildings that require relatively more maintenance than newer buildings. With larger buildings, the association will be run by a management company.  Depending on the […]