It was bound to happen. It now appears I am censored. This Q&A written for the Christmas/New Year’s issue of the Mammoth Real Estate Times was rejected.
“It seems more than a column, acidic and rather negative…with a kind of nasty, whining tone.”
Personally, I think this is one of the most important columns I have written for the benefit of protecting buyer’s interests in this resort marketplace.
Q: We recently finalized the purchase of a Westin Monache unit and although we are pleased with our purchase the whole process left us with an uncomfortable feeling. From the original sales process, to the deposits, to the finalizing the sale prior to actually seeing the unit. The whole thing seems to be so one-sided, favoring the developer. Is this normal in Mammoth and what do you think?
A: The art of pre-selling condo hotel units reached its pinnacle in the past few years. The pre-selling methodology has been used here in Mammoth and in resorts all over the world. Intrawest proved to be masters of the process and many developers and brands attempted to replicate the process. In retrospect, the era created a whole new language of real estate terminology and made mini PT Barnums out of otherwise harmless real estate salespersons. The continued believers will just call me cynical, but this whole process, in my opinion, violates some real estate fundamentals.
Pre-selling evolved significantly in Mammoth at Juniper Springs Lodge in the late 90’s. Intrawest’s consulting sales firm arrived in town with the slickest of marketing materials (anybody have a copy of the video “On the Shoulders of Giants”?), finely polished and persistent sales training, great promises of forthcoming amenities and services, and techniques with catchy names like “mail drops” and “launches.” A really big show, to say the least.
The success and momentum carried into the Village and has recently culminated at the Intrawest built Westin Monache project. Over the years the cast of characters and cheerleading team changed repeatedly. (We discovered the value in not having continuum of thought.) And the attorneys went about refining the contracts to comply with California Department of Real Estate requirements while incessantly weighting the provisions toward their client, the developer. Some buyers walked away disgusted and others gleefully kept consuming the divinity. One of the primary sales strategies was to build a core group of repeat buyers with “priority” status––getting first pick at the choicest units in the next offering as well as other sycophancy. All of it perfectly delivered with superfluous but flowery “sales language.” Another strategy was that the sales team members were prolific buyers too.
Once the buyer had the “privilege” of selecting a unit (oh sorry, I always forget, they’re “suites”) at the sales event, the buyer was required to place 10 percent into the escrow. Sometime shortly thereafter, at some trigger point like the completion of framing, the buyer was required to place another 10 percent into the transaction. Then there was a 2-year or more wait for the completed product. The projects were craftily phased to rush the closing as the buildings and amenities were still under construction (just go visit the Westin for confirmation.) Many buyers closed without ever seeing the completed real estate. Of course, that was okay because many were buying on speculation because they were promised an increase in value along with great rental income (shhh…don’t tell anybody.) In fact, at the beginning of the game many units were double-escrowed by the time they were completed.
Ultimately, many of the buyers became disenchanted with their purchase because it didn’t live up to the promise. Granted, there were many obstacles in delivering the vision. We can all imagine a wider profit margin for the developer was the primary one. But early-on nobody really cared because the units had appreciated in value. (You could have bought the worst properties in Mammoth during that era and made the same profit margin, if not more.) And the sales team members and “customer satisfaction representatives” of the developer were so polished at handling the objections. The bulk of the commissions had already flowed to the sales team to live on so they were especially incentive-ized to see the successful closings.
But as the escalation of values has slowed and even moved backwards, the cracks in the walls are becoming more evident (no pun intended.) And is it surprising that the Intrawest tents are nearly folded and all but vanished from town? Resale values in the last Village project are back down to their original pricing, if not heading lower. Based on the calls and emails I’ve received, many Westin buyers are/were looking for “outs” in their purchase contracts. Unfortunately, they’ve already handed over 20%. And just ask anybody who has a profit, commission interest, or employment in these deals and “Paul is crazy!” And yes, I am. Thanks for noticing.
So why do I have such a problem with pre-selling? After all, it worked great for so many (while the market was going up.) Well, here is why. The basis of a normal real estate transaction in California is the DUE DILIGENCE allowed the buyer. It is absolutely fundamental. A buyer needs to have the right to perform inspections of the property including an inspection of the physical plant and site, the finances of any associations, the matters effecting title, etc. Not only is it their right, it is their obligation. And the completion of the sale is contingent upon that due diligence and what is discovered. Now maybe buying something off Ebay is okay, but when buyers are plunking down a lot of money AND taking on substantial liabilities (like large, growing common area fees) they deserve to touch it, feel it, examine it, and let their advisors do so too if they choose. When a transaction has “seller reserves the right to change, modify…blah, blah, blah” plastered all over it, and you have to wait 2 to 3 years for the finished product, it spells RUN! to me. Many things can change in 2 to 3 years.
For example, I attended a recent new owner’s walk-through at the Westin (I didn’t sell them the unit.) They had already closed escrow. I think they were a little shocked at how small the unit was, and that the furniture barely fit, and that the refrigerator was hardly big enough for a six-pack, and that there was no garbage disposal in the kitchen sink, and on and on. And they couldn’t even stay in the unit because “the building isn’t finished.” (They did get an incentive/credit for closing early.) I got the distinct impression that if they didn’t already own the unit that they would not be all that excited about ponying up the money to buy it. They probably would have turned around and walked right out––like I’ve seen many potential buyers do at a property they don’t like. And it wasn’t about feng-shui.
Beyond what the physical plant has to offer, these buyers were marketed a professionally managed rental program (“front desk”) and common area management––including a financially sound and well-budgeted association. Promises, promises. (Meeting and maintaining the “Westin standards” is probably their best ally.) These projects are heavily dependent on propane gas––boilers, gas fireplaces, protecting plumbing from freezing, heat traced walkways, etc. How do pre-sold buyers get to know where these expenses will escalate to? Are the proposed budgets grossly underestimated? The past decade and personal experience has shown it costs a lot more to operate and maintain the common area than originally projected by the developer and their consultants. Imagine that.
In the daily real estate practice in California the buyer’s deposit is protected by the DUE DILIGENCE allowed for in the agreement. And most often that deposit is a small fraction of the purchase price––usually 3 percent or less. As I said before, in these pre-selling arrangements the buyer has 20 percent already tied up. The developer’s contracts differ, but for non-performance by the buyer the first 10 percent is likely to be lost and the second 10 percent will be tied up in some sort of legal quagmire. Some privilege. Some recent buyers have seriously considered walking away from the 10 percent but are concerned about what will happen to the second 10 percent. Outside of some mythical, guaranteed escalating real estate market, this is no way to be a buyer, in my opinion.
In this next era of real estate, I think waiting to experience the finished product, waiting to see how the property is managed––from hospitality, to services, to finances, will be the way of prudent buyers. And by-the-way, the speculation days are over. Now you’ll be able to book the unit and be a guest long before you’re an owner. That will be refreshing.
Happy New Year!