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from Local Attorney, Michael H. Wasserman

Wednesday, March 12, 2008

On Talking Clients Off the Ledge

It stands to reason that most all of the professionals involved in a real estate transaction have a vested interest in seeing the deal through to a closing. From a distance, we lawyers "could" be included in this camp, understandably so. My buyers hire me (and many real estate agents refer them to me) because they want to buy. Sellers hire me because they want to sell. No one wants the deal to collapse.

But the truth runs a bit deeper, as my first loyalties run to my client, and a large part of my job is to try to keep my clients out of trouble. From time to time, my review of a contract leads me to an unfortunate, but inevitable conclusion: the deal stinks. In those instances, I try hard to talk my clients out of going forward on their contracts; "off the ledge," if you will. Some listen, some don't. At least I try.

I was reminded of all this earlier this week while reading about the problems at the Sterling Private Residences. Turns out that there is a rampant problem with foreclosures at that property and the values of units there have declined by as much 175 over the last three years. 95 foreclosure lawsuits in that time frame in a building of only 389 units! YIKES!

During that same time frame, I successfully persuaded a number of clients out of buying into that project and others offered on similar terms by the same developer, American Invsco. Its not that Invsco is a bad company or that they were dishonest in their marketing. Its just that the deals they were offering three years ago were highly speculative. In my estimation, just "too good to be true."

Invsco sold units on a promise that they would pay buyer's property taxes, assessments and rental incomes for these units for the first two years. That come-on attracted many would-be investor/speculators. By using adjustable rate loans with teaser rates, woiuld-be buyers were enticed by notions of property value appreciation and an opportunity for easy "flips" as the incentive terms ended. Buyers tended to look past all possibility that market prices would not appreciate, or that mortgage payments could increase, or assessments, or that tenants might move out. Or for that matter, that they would all be competing with each other two years later when it came to sell. Those startling foreclosure numbers cited in the Crains piece seem to bear those miscalculations out.

I wish I could say that I am always this prescient in my contract evaluations, or that I was able to talk everyone I represented out of these schemes. But at least, my clients were given fair warning of the potential perils. The ones who went forward did so with that additional knowledge. I wonder how many of those others of the 95 foreclosures (or the others who are distressed, but not yet foreclosed) had legal counsel, or had anyone on their side trying to warn them of the risks they took on?