Asked and AnsweredWe are considering a condo purchase in a new development that is only 25 percent sold. There is a bank that has approved the project and will make the loan, but should we be concerned about the number of units that the sponsor still has to sell?
Yes. Sponsors are burdened with excessive inventory these days. High inventory means low owner-occupancy ratios. In many cases, banks are reluctant to lend in developments with owner-occupancy ratios under 50 percent (that is, where less than 50 percent of the total number of units have been sold). Even if you have a lender that has approved the project, notwithstanding the low owner-occupancy, you must consider what your circumstances might be when you need to sell your apartment at some point in the future. If there are numerous units still available for sale, it will greatly impact the resale value of the apartment and you will be competing against many other sellers, including the sponsor. Bank financing may be limited or might only be available on unfavorable terms. High inventory is driving prices down and that makes apartments more affordable. Buyers must weigh the benefit of a low purchase price against the sponsor’s ability to carry a high number of unsold units and keep its construction loan current while it slowly sells off the remaining apartments. As the world continues to de-leverage, real estate prices are falling to realistic levels. That being said, buyers must approach new construction with caution. Crunch the numbers, then crunch them again.