Return of the Sight-Unseen Market

Spurred by tight inventory, developers in cities like New York and Miami are demanding, and getting, millions for homes that have yet to be built

By STEFANOS CHEN

Wall Street Journal – Thursday, July 11, 2013

Presales of luxury condos all but disappeared after the housing market went bust, but now many luxury developments are selling out just months after putting a spade in the ground.  To persuade people to buy a home sight unseen, developers are getting creative.

One real estate developer hired a drone; another displayed life-size sculptures of polar bears.  A third charged potential buyers $100,000 just to take a peek at the floor plans. The common goal: selling something that doesn’t exist.

Spurred by tight inventory and plenty of interest from foreign buyers, real-estate developers in cities such as New York and Miami are reviving the boom-era practice of pitching new buildings months—and even years—ahead of completion.  Miami’s Faena House, a planned 18-story tower, is still pouring concrete at the condo’s basement level.  Yet the project, part of a newly developed strip that will include a five-star hotel and an arts center by Rem Koolhaas’s OMA design firm, already has 50% of its 47 units under contract, according to Alicia Goldstein of Faena Group.  Buyers are required to put down a 50% cash deposit on the apartments, which range from $2.5 million for a one-bedroom to $50 million for the full-floor duplex penthouse.

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Marketers of the Porsche Design Tower in Miami, which is scheduled to open in early 2016, created an aura of secrecy. There was so much interest in the building’s planned car elevator, which lifts tenants’ cars directly to their units, that Dezer Development charged interested parties a $100,000 refundable deposit just to see the floor plans. (The ploy got them about 33 buyer commitments before the presale office even opened, says owner Gil Dezer.)

One of the mini models of an apartment unit in the sales center for the Porsche Design Tower in Miami. The combined cost of the miniatures was $250,000, according to the developer.

Once the off-site sales office opened, though, the company felt it needed a better way to help buyers visualize their apartments, which range from $4.8 million for a 4,800-square-foot unit to $32.5 million for a 17,000-square-foot penthouse. “When you start showing duplexes on floor plans, people get confused,” Mr. Dezer says. So they made four replicas of different apartments and the lobby encased in four-by-six-foot glass boxes at a cost of $250,000. The décor and furniture was designed by Michael Wolk Design Associates and was crafted in miniature by MYP Maquetas, a Mexico-based model-making company. Currently 89 of the building’s 132 units have been sold for a total of $535 million, Mr. Dezer says.

The Porsche Design Tower required a 30% down payment, which is lower than usual for Miami. This is because the developer plans to secure lender financing, taking some of the onus off buyers. While buyers can usually finance the balance of their purchase once their unit is completed, veterans say the vast majority of luxury presale buyers pay for their units in cash. The stiff cash requirements means buyers are betting, heavily, that their units will be completed to their liking—and that the development will be a success.

According to Jack McCabe, CEO of McCabe Research & Consulting, an independent real-estate analysis company in South Florida, buyers are only entitled to a fraction of their down payment if the project sours. Litigation can be onerous; many lawsuits from the last housing bust are still pending. The vast majority of new condo buildings after the bust saw individual or class action lawsuits from contract holders trying to recoup their losses, Mr. McCabe says.

Peter Zalewski, founder of the real-estate consultancy Condo Vultures, notes that foreign investors are more used to large cash deposits than U.S. buyers, so the large down-payment requirements are better tolerated. “Right now, it feels like 2003 in South Florida,” he says, recalling the boom years.

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