Would You Like Pre-Paid HOA Dues With That Condo ? Banks May Say, "Not So Fast..."

My clients and I were expecting our loan documents to be at title and ready to sign Friday afternoon. Friday came and went, no docs. We were told to expect them Monday for sure. As I write this, they have not appeared at title.

"What's going on ?" I asked the broker, who normally gets things done when promised and is quick with responses. The reason was twofold, and could have a big impact on the way we have been structuring new construction sales contracts for almost three years.

When the market started to soften in San Francisco toward the fourth quarter of 2006, developers had to get creative. I remember brainstorming ideas on how to create an incentive for new buyers while not alienating those that were already in contract by reducing prices. The answer was credits !

Credits to the buyer in the form of pre-paid HOA dues,design center credits, interest rate buy-downs and/or closing costs became all the rage.They allowed the sales offices to keep their prices high while offering value-adds to skittish buyers that were spooked by what they were seeing in the Las Vegas, Miami and Arizona markets.

Even when sellers finally bit the bullet and lowered prices late last year,credits were still the icing on the cake for most deals. It seems this is about to change.

I'm not clear yet on whether it's lenders, appraisers or both; but banks are starting to take the dollar value of those incentives and reduce the appraised value by that figure. This throws a huge wrench into the gears that have been making deals happen in new construction and could spell out a new reality for buyers and developer sellers.

No matter how you feel about these credits, it does make one wonder why banks and appraisers should be allowed to dictate how deals are structured when incentives have nothing to do with an appraisers job of justifying value.

Even if this does come to pass and credits are somehow eliminated from these transactions, I'm not overly concerned. Where there is a will, there is a way and a developer that needs to sell units can be very willful indeed.