Real Estate Mistakes – Buying Before Construction

Real estate investment mistakes can be costly, and I almost made a big mistake and did make a whopper – from which I thankfully recovered.

When buying real estate, most people know to write the purchase contract so that you pay percentages over time as the property is built. For instance, if you are having a home built, you pay some up front money to the developer and then set a schedule for the rest of the payments with some benchmarks that have to be completed prior to you making the additional payments.

We neglected to do that – and we paid in full (no mortgage)! This was my whopper mistake.

But first, the big mistake I almost made.

We bought a condo unit around Branson, MO at the height of the real estate market (we won’t be talking about that mistake) to use for our family gatherings as well as to hopefully generate a bit of income.

At that time, a commercial development was being sold – pre-construction – which included a condo hotel that was to be run by one of the high end hotel chains. I was offered a free option to buy a unit in that (yet to be built) condo hotel – at a fairly reasonable price – and I took it.

This development was close to shows, shopping and other attractions. It was to contain conference hotels, the condo hotel, high end shops, restaurants and etc. This looked like it would be a great investment and I eagerly awaited the time when we could actually exercise the option to buy.

We held that zero cost option for several months until the units were nearing completion and then started to negotiate in earnest. The developer sent a salesperson to our home (5 hours from Branson) to help us choose the interiors and then they started tweaking their asking price – up of course. The pressure built – the developer wanted to close on the unit at the much higher price or get rid of me as an option holder so they could sell to someone else at the higher price. I consulted a lawyer and tried to negotiate for the original price but was quickly and (I felt) rudely cut off by the developer.

Feeling that the developer was already strong arming me, I looked ahead to what I might ‘enjoy’ as a condo owner in their development and foresaw many restrictions, continually rising condo and other dues and many unfriendly interactions. I bought elsewhere and have been satisfied with my buy as it suits us more than the original condo would have.

This is one “buying before construction mistake” I avoided.

Lesson learned:

• Know who you are dealing with and if you will have an ongoing relationship, make sure you can live with it.

My Whopper

The condo we did buy was lake shore and partly built. We lucked out on this buy because, although we did pay in full up front, the developer did complete our unit (although there were problems with some of the promised common area builds).

In addition to the condo units, at the time we bought, the developer was planning to build a new boat dock. An existing boat dock, belonging to the resort that had been torn down to provide the land to build the condos, remained in place.

Our realtor became very excited when she found that a slip in the the new boat dock could be had for the bargain price of $25K (really? a bargain?). She claimed that due to the Army Corps of Engineers tight management of the lake and shoreline that very few new boat docks were being built anymore and that this would be worth much more than the asking price in just a few years. Because of some Corp of Engineer experience we had on our own land a few years prior – I believed the agent.

Without research or investigation, I agreed to purchase a slip in an unbuilt boat dock. I assumed that the existing boat dock would substitute for the new one until the new one was built. Wrong!

Lessons learned:

• Review government (all levels) plans, codes, restrictions and zoning prior to committing to purchase. As it turned out later, the Corps of Engineers rescinded the permit given the developer when they found out that the condo units would be individually owned – as the permit they had issued was for a resort use, not individual owner use.
• Never, ever, assume. The company owing the boat dock was not in any way associated with the company doing the development and most definitely was NOT interested in having their valuable boat dock used in lieu of the new one.
• Always make sure you ask money paid for unbuilt structures be put into an escrow account until the build is complete.

The purchase went through and time went on. The condo buildings were completed and we started getting our unit ready for nightly rental and our own use. But no boat dock construction started.

Month after month I sent inquiries to the developer to find out about progress on the boat dock. Each time I was postponed. Something was ‘on the list’ to look at or ‘I have to consult so and so about that’. After a year, no boat dock was in evidence and I started asking for a full refund of my money. The feed back from the various developer partners was always: ‘Yes we should do that’, or ‘I’ve talked to so and so about that and am waiting to hear back’. As the developer sold units, I asked for my money from the proceeds of those sales and was told ‘oh, that money is already allocated to such and such for this and that’.

Lesson learned:

• Never buy pre-construction – or if you do, build protection into your contract and make sure the developer will have some pain if they don’t comply.

Over time, through gossip, I learned that two of the three developers had sucked money out of the proceeds and spent it on another development or on personal items.

At this point, I decided to go to court. There was only one developer owned unit left and I knew that if I had no legal court order telling the remaining developer to pay my money back that I would never get it.

The first lawyer I spoke with (a real estate specialist) was downright discouraging – saying that there was a 90% chance I would never get any money back at all.

The second one took the case. After the investigating, he found that the remaining unit already had two prior liens against it that would have to be paid before I got any money – even if I won a judgment to get paid. More time (and money) passed and eventually the case came to court and a judgment in our favor was awarded against the remaining unit for our full boat slip purchase price plus 9% interest for the time our money was tied up and all lawyer and court costs.

We were very lucky that we found a legal firm that knew the political ins and outs of real estate cases in that area. We were very lucky that there was real estate left to put a lien on. We were very lucky that there were only 2 other people ahead of us with liens on that property and we were very lucky that the remaining developer partner was honest enough to pay us when the property sold.

Lesson learned:

• Although not pleasant, sometimes it pays to take it to court.

Have you made mistakes with your real estate investments or purchases? Make me feel better about mine and write a comment about what you learned from your mistake.