We made a passing mention of Olive8 pre-sale buyers walking away from their deposits in the condo sales status project post (which is still being compiled, by the way), and a week or so ago the Seattle Times posted a story about buyers at Olive8 and elsewhere walking away.
On Saturday local entrepreneur Andy Liu posted his personal story of walking away from Olive8: My $23,750 Mistake at Olive 8
A couple years back in 2006, I made the decision to put down a deposit pre-sale for one of the new condo projects in Seattle. In retrospect, it turned out to be a big mistake. Although I haven’t yet walked away from the deal yet since the closing date is still a few weeks away, it is almost certain that I will walk and lose my earnest money in the deal which totals $23,750. Although I’ve read about folks who are trying to get some of their earnest money back, in my mind, a deal is a deal, and I lost so I won’t be pursuing any of the earnest money. It’s a bummer, but I’m here to share my lessons learned.
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Part of me just wants to go ahead with the purchase because I had already committed $23,750 to it, but it makes no logical sense. I’m only amplifying the mistake and hoping to hit a homerun to recover that mistake. Instead of amplifying the mistake, I need to let it go. Once you’ve realized you made a mistake, learn from it and move on, there are plenty of opportunities tomorrow.
This is a great writeup by Andy. I really appreciate him sharing his story. If you’re interested in getting a look at what’s going on inside the head of people that are making the tough decisions in the market right now, you should definitely read the whole thing.
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How will lenders curb walkaways in the future?
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RE: S-Crow @ 1 –
Like this.
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By S-Crow @ 1:
there is no lender in the mix in this case. this is just a deposit. From what I have seen, the reason many people are walking away from this building is because they cannot qualify for financing any longer. – so I guess it is preventative walking away!
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RE: deejayoh @ 3 – The standard NWMLS has a clause allowing the parties to proceed with the sale at the lower valuation if the property doesn’t appraise at the contract price. You would think that they would use that mechanism. That might be a win/win type situation because the buyer could get the lower price without losing their earnest money, and the developer would still get the sale.
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I have had to learn this lesson many times in life: See things for what they are. Not what you want them to be. Looks like this guy is doing that.
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I don’t know the specifics of Andy’s purchase situation or the others at Olive8 that are deciding between walking away or purchasing, but here’s the hypothetical situation I’m imagining:
An old post on Seattle Condos and Lofts put the 2006 prices on these things from “$500,000 to well over $2,000,000.” Let’s say you had a pre-sale agreement on a $750,000 unit. You put down 5% in earnest money, that’s $37,500. But in today’s market, the condo is only worth $600,000 (optimistically).
So your choice is between going forward and instantly losing $150,000 in equity (possibly much more), or walking away and losing just $37,500 in cash. When Andy talks about “amplifying the mistake,” that’s what I think he’s referring to.
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RE: Kary L. Krismer @ 4 – Sounds like the P&S agreement for these condos is not the standard NWMLS version – at least that is what I got from reading the olive8 buyers blog a few weeks back. It seemed like most people thought they were pretty locked down as to price.
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I like the way he thinks. (1) A deal is a deal, and (2) don’t throw good money after bad. As an entrepreneur those beliefs should serve him well, provided the economy isn’t first cratered beyond repair by those who believe otherwise.
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Anyone know if RAL ever sold his condo?
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I like his hairdresser paragraph. That’s exactly the reason I got out of the stock market bubble in the internet days, because my hairdresser was telling me what tech stocks to buy.
My similar moment in this bubble was listening to a guy in Wells Fargo depositing the $200K he just made flipping some property. He was making his deposit in a very loud manner, so that people would know he was the sh*t. Unfortunately I didn’t go with my gut this time and waited too long to sell, and in less than ideal circumstances.
Got our just in time though but a year earlier and for $500K more would have been nice.
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RE: db @ 10 – My defining moment was in late 2005, standing in line at Happy Teriyaki downtown (the one on 5th, next to the cigar shop). I had to endure a 22-year old office worker tell her other 22-year old friend that getting a home inspection is a terrible idea, since someone else will come in with a no-inspection offer and steal the place from you. She then went on with the escalation clause advice. (if you don’t have one, don’t even bother making an offer) When common sense flies the coop, the fat lady sings.
It happened with Tulips, The South Sea, high-tech stocks, and homes. If only Kindleberger were still alive to see how good his predictions were.
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Standard Pre-Sale agreements with most larger developers include a clause that earnest money is not refundable 30 days post MA. Thus even if you are not qualifying for financing 32 days later, earnest money is theirs. Which is the way it should be.
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RE: mukoh @ 12 – On a related topic, I’ve seen bank owned properties have an addendum that gives the bank election of remedies rather than forfeiture of the earnest money.
I’m not sure why you think that being non-refundable after 30 days is the way it should be. I’m sure that’s the way the developer wants it, but there’s no reason that’s the way it should be, especially where the reason financing is unavailable is the appraisal of the property, as opposed to say loss of employment or something else the buyer might have a bit more control over.
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Why don’t the developers or the underlying banks holding the construction loans offer to reduce the sale price down to today’s current market value.
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NATIONAL BANKS
Most people handing the keys to the bank or changing their mind on ernest money either lose their credit rating or their ernest money. The problem I see here isn’t the suckered buyers, its the banksters that agreed to the Olive deal in the first the place, just like that Las Vegas Casino fiasco. Pure organised crime [or complete idiocy] banking practice in my humble opinion.
If we do the unthinkable and nationalize the banks [I'd do it with cars too]; we’d have the dumb managed banks that made these loans in the first place simply crash and the nationalized federal banks would be buying up the pieces without the toxic mix in their port folio. Sure, prices of homes would crash or seek a normal price they should have been. I see interest rates possibly going up sooner too, but that’s bound to happen sooner or later?
With cars, the same logic. Build $12-14K 40 mpg gas car that seats 5 with 150 hp with a nationalized company and make the contract bids for managment, engineering, development, factory labor and materials buy American only. The income tax alone we’d bring in would mean we could give the cars away free and still break even [or sell 'em and pay down the $12 Trillion federal debt]…LOL….but Europe, China, Japan, South Korea, etc would call us Protectionist Pigs. Get Obama to smooth talk ‘em, tell ‘em its stimulus factory utilization for green development, something like that, our President does have an excellent gift of gab.
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RE: Jillayne @ 14 – I suspect they balance giving in on some to ending up having to give up money on all, some of which would have still paid full price.
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software engineer,
I wonder if the banks are going to hold their REOs as long as possible, hopefully waiting for a new Resolution Trust Corp II to be formed, so they can offload these condos and/or the toxic loans and begin rebuilding.
There has to be a number of banks now that are holding onto entire projects like this one.
I’m patiently waiting for the stress test results.
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I respect Andy’s decision to forefit the earnest money. He made an investment mistake that he’s taking full responsiblity for and now he’s moving on. Lesson learned.
“I should have realized is that when my hairdresser is giving me real estate investment advice, we are in the final stages of a bubble.”
This quote reminds me of what Peter Lynch said in one of his books. In Peter’s book it was cab drivers not hair dressers.
I had a hairdresser that was also an aspiring RE mogul. A few years ago, I remember her getting a new porche suv and saying that she made some “amazing” investments in condos downtown. I ran into her six months later, at no surprise, the porche was for-sale to pay off her debt. No mention of the “amazing” condo investments. It makes me wonder if his hairdresser and mine are the same person….
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I have no idea where he got it, but my 2 year-old has, when vexed with me, taken to saying:
“Just walk AWAY, daddy. Walk away.”
If we really do have 80% drops from the peak in front of us, I may take his advice.
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Excellent post by Andy.
Interesting to see all the people trying to “unload” their contracts on CL.
Even more interesting is the number of agents that will be walking away.
Their actions speak louder than their words.
Every time I see an agent try to “talk up” the downtown condo market all I have to do is a records search (of either them or their broker) and see how many units they are currently holding.
Some own more than a half dozen.
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RE: db @ 10 – The hairdresser market-indicator does appear to be very good. Do not trust your gut except as a big signal to look closer.
In 1998 a co-worker put in a deposit on a new Seattle condo project as an investment. My gut wrenched and I knew I would NEVER do anything so risky and out-there, and I never even investigated. He made a lot of money on that condo.
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RE: Kary L. Krismer @ 13 – Kary look at it this way, a person got an option on a purchase for % of the purchase price. Had the prices gone up the person would have had equity. Too bad they didn’t work that way. The developer lets a person hold that option thus taking a risk. Risk is rewarded by either a closing or keeping the money.
I had a bank put forward on the MLS forms election of remedies on a deal about a month ago. Regardless of what they wanted it got accepted as Sole Remedy.
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RE: Jillayne @ 17 – Jill in case of RTC the banks aren’t going to give their REOs up. They will assign their DOTs to the new corp on the dragging assets that have not gone back yet.
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By kfhoz @ 21:
That was then…this is now.
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By Jillayne @ 14:
RE: Jillayne @ 14 –
In many, if not most cases acknowledging the true current market value would cause the developer to go under. So they have every incentive to string out the process and hope for a miracle. At a different level, the same is true for the lenders. If lenders started writing down all their non-performing CRE loans, the bank would soon be out of business. So they are playing the pretend game as well. When reality = going out of business, there are some strong incentives on all sides to deny reality.
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By EconE @ 24:
Actually, depending upon the size of the deposit this might be a high reward, low risk strategy. A deposit is essentially a call option. So imaging putting $10k down on a $1 million condo. If the price goes up 10% you make $90k. If the price goes down 10% you only lose $10k. The asymmetry favors the buyer, and the lender takes it in the shorts. The solution for the lender, of course, is to require a much larger down payment… making the speculator take most of the risk.
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I don’t know how you would get 10% profit out of it after you pay real estate fees, carrying costs, taxes etc. That $100k shrinks quickly making it a risky -EV situation. Pretty much all 10% gets you is that you can say your condo is worth $1.1 million instead of $1.0 mill and pay more taxes on it.
I’d like to walk with 10% profit, but you would need much more than 10% gain to make the gamble worthwhile.
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Racket its not the condo that is sold it is the option to buy it. Thus making the $90k an actual fee, for assigning the transaction. This has been done soooo many times
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By Groundhogday @ 26:
Let me clarify.
That was then = 1998 = the start of the bubble IMO
This is now = Bubble has popped.
End of story.
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If it were me, I’d be thanking my lucky stars I put down earnest money as opposed to having completed a purchase. That’s small consolation, but it could have been worse. Don’t go through with the purchase; otherwise, you’ll end up taking the full hit.
If you keep waiting and continue to save a downpayment, you’ll wind up with very little losses in the long run. IMO, you were lucky to get out with relatively little skin in the game. The best way forward is to maximize profit from this day forward, and that starts by saving your arse off and keeping an eye out for the bottom.
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The Times article quotes Tom Parsons the VP of Opus Northwest as saying:
“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.”
Is anyone else as amazed at that sales record as I am. They’ve closed 75 units since November without making any price concessions? Most at over 1 mil? Only 37 have walked away, and they continue to sell one per week? Maybe as Kary suggested, their contract preserves the right to sue for damages rather than electing forfeiture of the Earnest Money. But this still surprises me. I would have suspected that at least some buyers would have negotiated substantial price reductions by threatening to walk. Is Opus really going to make money on Fifteen Twenty-One in this market? I guess all the drugs I did as a kid have finally caught up to me because I think I’m hallucinating.
Maybe part of my problem is that I’m not that fond of urban condo’s. With apologies to those who enjoy living in glass covered high rise urban condos, they remind me of an ant farm.
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One Eyed Man sueing for election of remedies has ever if rarely has come to light as an option. In our state you can only sue for actual damages. I highly doubt buyers entered into contracts with Opus on those terms. Kary was referring to bank contracts when buying property from the bank. The nature of $1m+ market is a bit different then the usual $500k-$600k. The market is mainly financially sound individuals who are not necessarily dying when the market implodes.
I don’t get the attraction of ant farms especially the ones that are done by developers in Seattle. Vancouver by far the greatest styled condos, flats on the West Coast.
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Maybe they can find an asian to buy it http://www.youtube.com/watch?v=0YM9Ereg2Zo
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I was just at an open house on sunday and the agent kept telling me how jealous she was that I was a renter, and that she wishes she were out from under her 2 condos, obviously she was being honest, but it was surreal.
Part of me agrees with Andy about “a deal is a deal” and not going after his deposit, but part of me ( the part loosing 25K) is having a little trouble. Im not an investor so its a little tough for me to come to terms with, but Im almost there… I wont be pursuing my deposit either, I knew the risks from day one.
I also think the developer is very reluctant to drop prices on any olive8 units as it will lower the comps for the floors closing above.
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By voight-kampff @ 34:
Yep, this is a big issue. I’ve been negotiating with developers to purchase a lot. Despite ZERO sales over the past year and empty developments, they are extremely reluctant to negotiate on one lot because then the entire development drops in book value.
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RE: Jillayne @ 17 –
THE BANK STRESS TESTS ARE PHONY TOO
Just more lipstick on the economy pig per Dr.Roubini. See the proof:
http://finance.yahoo.com/tech-ticker/article/241266/Roubini-Don't-Believe-the-Stress-Tests-or-the-Bank-Rally?tickers=xlf,c,bac,wfc,jpm,gs
I hear from the Roubini bloggers they’re secretly inputting low unemployment and toxic loan values into the software [its purposely non-transparent, like everything to do with the banksters], especially for the Citi and BOA big boys, to get them phony good results this Thursday. The bank profits are phony too, they came from you and I, Jillian. Its the bailout billions we gave to their bank sponge to prop up their like zero cash reserves and make future home loans almost impossible to get anyway.
I do see a few sheeples heading for the Seattle RE buzz-saw this Summer, if they play up phony bank stress test results as real, with like inheritance cash from grandma, but investors in the know are biding their time, unless they just got to buy and don’t care. I imagine there aren’t many of them.
The stocks should go up with the phony stress tests, short-term too. Suckers rally market per Roubini and watch for quick profit taking selling after the pitch up, like today.
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The candor is good but does anyone think that this fellow is an official and voluntary dope? buying while high on ego and irrational thoughts of consumerism? Seeking vision after having juiced-up on delusion, and do I detect conceit even in failure? somehow more smart-er than a hairdresser (very tired line) or anyone else when indeed, the guy is maybe a punkass who doped-out on his own narcissism and ego-juice? (blinding stuff even for the super clever). Story lacks integrity and smarts. Furthermore, this victim has no ethical problem with the developer, but is curious how the lawsuit will turn out for others. I read shallow.
These are just the observations of an unassuming (and o-so quiet) numbers type who couldn’t have purchased such a sucker hole as olive8. Financial Facebook stuff.
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RE: truthtold @ 37 –
“Sucker hole” “financial facebook” “ego-Juice” do you write for the stranger or take creative writing classes for blog posting, these are just the observations of a college drop out.
though you may still have some points under all that metaphor.
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Re: voight-kampff @38
Guess I’m not willing to suggest that my post was intended to dazzle (or impress) you…intent of the writing reflects narcissism of the buyer/victim in this case and lack of good numbers which situation implies. Need not be a college grad to comprehend either emphasis with slick metaphor. Regret any trouble this may have caused you.
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Voight,
You end up closing on your condo?
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RE: Matthew @ 40 –
Nope,
I walked away and made a 26k donation to hedreen and company ;-)
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[...] the Twitter news wire yesterday, but since the original story merited a full blog post back in May (Walking Away at Olive8), I thought that Andy’s thoughtful follow-up would be worth posting as well.As it turns out, [...]
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