Downtown Seattle condo projects that started several years ago face some buyers who are backing out, even forfeiting big deposits, now that it's time for the sales to close.
For Olive 8 and Fifteen Twenty-one Second Avenue — a pair of glistening high-rise, high-end downtown Seattle condo towers — 2009 is a year of reckoning.
Both projects broke ground and began marketing unbuilt homes in 2006, just as the real-estate boom was cresting. Most of the units sold within months.
Now the 400-foot-tall buildings are nearly finished. Fifteen Twenty-one started closing deals with buyers in late November, Olive 8 earlier this month.
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But the real-estate bubble, of course, has burst. And some of those once-eager buyers from 2006 and 2007 are backing out, often at considerable expense to themselves and, perhaps, the projects’ developers
At Fifteen Twenty-one, developer Opus Northwest says more than one-quarter of the original buyers have walked away, some forfeiting deposits of $100,000 or more.
At Olive 8, at least 10 percent of the project’s buyers, who either can’t or don’t want to close, have retained lawyers in hopes of getting their earnest money back. “We’re talking $20,000 and up,” says Craig Blackmon, who represents five buyers.
It’s hard to gauge how many others are considering pulling out. On an Olive 8 buyers’ blog, however, some write — always anonymously — that they plan to just walk away from their contracts and deposits, usually because they don’t have the higher down payments lenders now require.
Some contend it makes more sense to forfeit their earnest money than to pay 2006 prices in 2009.
“There are some scared buyers out there,” says James Stroupe, a Windermere Real Estate agent who specializes in condo sales. “It’s a new dynamic in this market.”
Adjusting to new market
Tom Parsons, an Opus Northwest senior vice president, and David Thyer, president of Olive 8 developer R.C. Hedreen, both say they’re pleased with how closings are going so far.
Some buyers always drop out before sales close, they say, and the attrition rate now isn’t especially high.
But they also acknowledge the downtown real-estate landscape has changed dramatically since 2006. And they are not the only Seattle condo developers working to adapt to it.
Some with lots of unsold units already have converted their buildings to apartments. Others have cut prices across the board. Still more have auctioned condos to the highest bidder, often at deep discounts.
In South Lake Union, Vulcan Real Estate has pushed back the start of closings on its nearly finished Rollin Street Flats project, where only one-quarter of the units have been sold.
One complication, Vulcan admits, is a new guideline from giant mortgage underwriter Fannie Mae that says new condo projects should have at least 70 percent of units presold before it will buy the loans.
Kitty-corner from Rollin Street, Vulcan recently dropped prices on eight of the 133 units in its 19-story, almost-done Enso project, where about 60 percent of the condos are under contract.
The developer won’t discuss its strategy for either Enso or Rollin Street.
Some observers speculate Vulcan may be trying to sell enough units at Enso to hit Fannie Mae’s 70 percent threshold, then start closing the transactions.
Blackmon and Steve Crane, another Seattle attorney who represents Olive 8 buyers, say that over the past 18 months they also have been retained by dozens of people who bought early at Enso, Rollin Street and other projects but now want their deposits back.
“There’s very few new buildings in town where we haven’t represented someone in the past or aren’t representing someone now,” Crane says of his firm.
Blackmon says that at first his firm was successful in negotiating out-of-court settlements that returned at least some money to buyers. But lately, he says, developers have stiffened.
The lawyers say some of their clients intended to live in the units they bought.
Others purchased them strictly as investments — Crane says one of his clients put a total of $168,000 down on condos in three buildings.
Neither attorney would make clients available for interviews. Efforts to contact buyers by other means were not successful.
Cost of backing out
Jeff Bell, of Cobalt Mortgage, the designated “preferred lender” at several downtown projects, including Fifteen Twenty-one, says buyers most often walk away from contracts because they can’t sell their present homes.
“If your house was worth $600,000 and you had $150,000 of equity, but now you can only sell it for $500,000, there goes your equity,” he says.
“People just didn’t see it coming. In my time in the industry I haven’t seen anything like this.”
Fifteen Twenty-one presold 138 of its 143 units. Parsons says 37 of those buyers have backed out — not all for financial reasons. “We’ve had six divorces,” he says. “We’ve had one death.”
About 75 units already have closed, all but a handful for more than $1 million. Parsons says new buyers have been signing contracts at the rate of about one per week since January.
Every unit has sold for at or above its original contract price, he says.
At Olive 8, 180 of the 227 condos were presold, almost all by early 2007. Thyer says about 20 percent of those buyers have expressed concern about getting financing to close, and Hedreen is trying to help them.
But it doesn’t intend to refund earnest money to buyers who back out, he adds.
Hedreen tried to limit the number of investors — buyers who didn’t intend to live at Olive 8 — but Thyer says that, in retrospect, that effort wasn’t as successful as planned.
“A lot of the concern [about closing] and some of the fallout now is coming from speculators that were involved in 2006,” he says.
Thirteen Olive 8 units have closed so far. Thyer says closings should continue into July. “At this point, we’re still holding our prices,” he says. “But if the downturn continues, we may have to revisit that.”
A Hyatt hotel that opened in January occupies the building’s lower 17 floors.
Stroupe, the Windermere agent, says pre-sales in unfinished projects have fallen out of favor with prospective downtown condo buyers, who fear getting burned. Now they prefer to wait to see what they’re buying, he says.
Just 30 percent of the 270 condos have sold at Escala, a 31-story luxury tower under construction at Fourth Avenue and Virginia Street.
When the project celebrated its “topping out” earlier this month, principal John Midby, of developer Lexas Companies, said closings could start in October.
Midby said he hasn’t heard from any buyers who want to back out. And he maintains he’s not concerned about selling the remaining units.
Sales will pick up when prospective buyers see the finished product, he said. And the recession has put dozens of other planned downtown condo projects on hold; after Escala, there probably won’t be any new condo towers for years.
At some point, Midby said, demand again will outpace supply. In anticipation of that, he’s seeking permits for a new twin-tower project in the Denny Triangle.
“We’re either extremely smart,” he said, “or extremely stupid.”
Eric Pryne: 206-464-2231 or firstname.lastname@example.org