MIAMI—The Related Group, among others, are tapping into the Latin American market with a financing model they are comfortable with: making large deposits up front on new condo construction. But could it backfire on everybody involved?
We caught up with attorney Andrew C. Hall, founding partner of law firm Hall Lamb and Hall, to get his thoughts on the topic. Click here to read part one of this exclusive interview, in which Hall discusses the degree to which buyer-financed construction is playing a role in the condo development comeback and related issues.
GlobeSt.com: Can you expand upon the benefits of this form of financing? Is it purely a developer-driven model or are there benefits for buyers as well?
Hall: The model is beneficial to developers but it can be very risky for the buyer. This form of financing reduces the developers' risks of financial loss and results in greater profits by avoiding interest expenses, substantial bank fees and internal costs associated with the construction draw process.
GlobeSt.com: Buyer-financed development places substantial risk on the buyer. What do buyers need to look for in a contract prior to signing it? What can they do to best protect themselves in case of developer default?
Hall: A buyer should look for any security available to them outside of the unit they are buying. For example, security in the form of a bond or a guarantee by someone who is credit worthy. Otherwise the risk of developer failure is measured against the benefit of the price—essentially the buyer is investing in the developer's business without sharing in his profit.
GlobeSt.com: Conversely, what recourse does a developer have should committed buyers default on their payments? Could this potentially impact the project's viability or construction timeline? If so, who is then liable?
Hall: Typically, a developer can declare default and resell the unit, keeping the entire funds as damages. They could sue for more damages as well, but a developer with an active sales office will likely keep the deposit and resell. This has been the fundamental core of the land sales business since it's inception.
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