What if developer goes bankrupt?
I'm thinking about buying a condo in a new construction 180-plus unit building now complete. Only 43% of the condos are sold, according to published reports, it is unlikely the homebuilder will be able to pay off construction loans for the development. If the developer goes bankrupt, how would that affect unit owners?
March 29, 2009
If the developer goes bankrupt, those who already own may be affected in several ways. If the unit is still under the builder's warranty, there may be no one to turn to to perform the warranty work. Also, if the builder controls the condo board, issues may develop regarding governance of the association. Do the governing documents provide that the existing homeowner's can take control of the board in that event? If the vendors providing services to the condo association are subsidiaries of the builder or otherwise connected with the builder, how are they affected by the bankruptrcy and, in turn, how will that affect the condo association and unit owners? Since only 43% of the units have been sold, you should investigate whether the builder's bankruptcy will affect the mortgages of the existing unit owners. What assurances will the unit owners have as to whether the condo association will be able to pay its taxes, pay for maintenance and pay for the condo amenities. If I had a contract to purchase a unit in the condominium and gave the developer a deposit, I would take all of my paperwork to an attorney to have it reviewed to see whether I could get my deposit back or what other recourse I might have if the builder files bankrupcy. Bottom line, I would be very cautious about purchasing in the scenario you outlined and if I were a unit owner I would be consulting an attorney who specializes in real estate, especially condominium law and bankruptcy as to my rights and liabilities. I am not an attorney in the state where I practice real estate so this should not be considered legal advice about the situation.