Why Pre-Selling Is Bad For The Customer

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!

16 thoughts on “Why Pre-Selling Is Bad For The Customer”

  1. Paul, Your column, as usual, has the ring of truth to it. If the truth is considered nasty or negative, then so be it. Last year, I was involved in remodeling a very expensive unit at Sunstone (behind Juniper Springs), and I can see how unsuspecting investors might be shocked at the really cheap fixtures and finish materials used. Some of the products would look right at home in mobile homes, but not in overpriced and overhyped condo projects.

    Keep up the good work.

  2. Thank you for an honest appraisal of the real market for real estate in MM.

    You should cover what the real economics are of being on the rental programs offered by IW assuming 90% mortgages on the properties.

    Great deal for IW in that they get all their money off the top (gross deal), no liability (owners have to carry insurance and repair/upgrade their units at their cost), free rentals of consumer units when they want them (promotional rentals), and the best part is that the owners don’t control the price their units go out at. Finally, after their units are completely threadbare, furniture broken, walls marked up, appliances worn out, the owner has to refurbish the unit at their cost.

    Given that at best only 50% of the mortage/taxes/HOA/insurance costs would be covered by the rentals (probably more like 10-20%), the owners fatten up IW and take a bath.

    Am I missing something here…why do people pay these crazy prices and put their units on the rental programs? Even on VRBO you are still guarenteed to lose a LOT of money in IW properties.

    Rentals might work at $125 sq ft construction cost, but at $1000 sq ft in the Westin, how does this work out.

  3. “Censored”. Another badge of honor for Mr. Oster. I do hope the Oster voice of reason will reappear in the Mammoth Real-Estate Times soon.

    If the Holiday Inn Express reality of Juniper Springs vs the hype of Juniper Springs being the next Ahwahnee did not retard the pre-sale frenzy, the presale frenzy wave was unstoppable. A few “early”, fast flipping, true speculators that responded more like day traders than real-estate investors made fast money. The Westin pre-sale buyers had Juniper Springs and the IW/Village units screaming WARNING. The crowds of unhappy or financially troubled owners left, in the wash of pre-sale mania, were blind to the flashing warning signs and naïve, at best.

    Given the low unit quality and size of the IW units, it is hard to see future high end buyers being attracted to the IW units, at any price. Given the low quality and high price paid for the IW units, it is not hard to see these units selling at upside-down discounts to comfortable middle class, Mammoth loyalists looking for 1980s type Mammoth bargains.

    Where is Sternlicht’s Hotel “1” or Hotel “1.7” project or is he too smart to build in Mammoth? Baby boomer wealth and investment in second homes is projected to peak and significantly drop off between 2010 and 2014. What’s next? What is the Starbauch/Ritz Group thinking? Will Mammoth get a Bachelor Gulch Ritz or a Ritz Cracker Box? What is the spark and fuel for the next Mammoth boom?

  4. What is the spark and fuel for the next Mammoth boom?

    There won’t be one. Look at Japan. Wall street analysts are now calling this housing crash, the biggest in U.S. history.

    Soon everyone will know this is true.

    Even the bloggers that will now write the same economic illiterate comments will know. How you may ask? Not because they will become more intelligent. They are Americans. Because it will be reiterated time and time again, over and over. Everywhere, you will. This is not a dis to all you people who are praying that things will turn around. This is just the truth. The best quote I have read, and I can’t take credit for…Is in two or three years, people won’t even be writing about the crash or realestate, and that is when yu know there is a bottom. Why will they stop writing about the real estate price crash. Because it will be plain as day. In two years it will be like talking about the sky being blue, or the earth being round. Everyone will know about it, because it will be in front of their face, and there will no longer be people to say, there is value in real estate, so there will not be a debate to keep it going

  5. I am not in real estate so I have no motivation for what I’m about to write… NOBODY can see into the future. Nobody.

    You can make predictions, yes, it certainly appears that housing will drop further, but to be so definite that we’re all going to be living in old jalopies with whatever belongings we can carry and a bunch of dirty kids, through the American dust bowl – voids your comment of any merit. And I’d like you to replace the 30 seconds of my life it took to read it.

  6. Why would anyone “prebuy” anything-especially something as pricey as a piece of real estate? Probably because they thought they would miss the boat if they didn’t act.

    To buy before the units were completed seems foolish now, but just a couple of years ago it didn’t seem so odd. Optimism had reached a point that many couldn’t even grasp the idea that values -and the attending euphoria, could deminish.

    Many pushed retirement back years by borrowing, and then spending, perceived equity. Cars, vacations, second homes, and kitchen remodels were purchased with equity instead of savings.

    There were those that were quiet during the party bantor though. You probably don’t remember them because they didn’t have much to contribute, or if they did, it was not fun to hear.

    They are the types you might see in the morning, peacefully strolling through a car lot prior to the arrival of the sales team.

  7. I was one of the individuals that was quiet. It was so painful to hear about people who bought obviously over inflated prices, thinking they were so successful for signing on the dotted line.

    And to the guy who wants his 30 seconds back…You are one of the idiots that caused this bubble. You don’t want to hear any bad news. And how could you not be to gain or lose. You either own or you don’t. Your post atleast has to have information or ideas. But to any who doesn’t believe this will be the biggest price decline in U.S. housing prices…even though you don’t have counter points to say why it won’t other than BS give me my 30 seconds back…Here are youtube links to explian what happened in IRON CLAD reasons…There will be no arguement after




  8. Wow, great information. Blogging is so underrated. It is going to change so many things in the future. It will give true freedom of the press to all. It will create information access never before seen in history, exponentially. Especially with being able to speak annonymously. The future will be changed.

  9. How does Paul Oster’s conservative blog attract such extreme responders? Maybe it is Paul’s colorful, entertaining and sometimes irreverent way of presenting his conservative or wise investor viewpoint.

    To those that say there will never be another Mammoth boom, you must think that their will never be another robust economic period in America and that humans have lost their proclivity to be attracted to Mammoth’s unique beauty and recreation.

    I challenge the isolated statistics selected by the press to say that this is or will be the worst real-estate down cycle “ever”. If the job market tanks, it could become one of the worst. If some world events happen, that we cannot predict, it could be the worst, but to say the party is over and will “never” return belies all past experience and analysis of the US economy by the Fed and foreign governments.

    The real-estate bust that began in the mid 80s and continued into the mid 90s was the worst I have ever experienced and the worst since WW2. Corporate America reinvented its antiquated middle management structure and hundreds of thousands of well paid middle management career people lost their jobs. SoCal houses that sold for $600k in 1984 were selling for $350k in 1990. SoCal home prices did not return to their mid 80s high until the late 90s. The bottom lasted 5-6 years and only the .com stock market boom, that lasted three years longer than any sane investor expected, brought us out of that real-estate bust.

    I stand by my questions. Where is Sternlicht and the Starwood Captial Group impact? Will a true Ritz be built in Mammoth? What demographic will drive Mammoth’s next hot market? What will spark and fuel the next Mammoth hot or warm market?

  10. I have to agree with the downside of real estate prices. And to one of the bloggers, this isn’t really that hard to predict with certainty. It will take 10 years for prices to reach the recently realized peak. Then I would expect housing prices to increase at 4% a year after that for another 40 years atleast. Society won’t be tricked into thinking housing should increase at a higher rate than 4%, never mind double or triple in 3 years. There will be to many horrer stories and stories of mocking about people believing that prices were justifiable at such year over year increases. Never mind how cheap credit becomes again. It will be ingrained in the psychie that realestate should only go up 3-4% a year. The last 5 years will be looked upon as a lack of rationality on one of the simplest debates.

  11. Thanks again Paul, for sharing your insight with readers. Now I see why I could not find your column in the Mammoth Real-Estate Times.

    With the The Westin joining the “parade” started by Juniper Springs, I have been wondering if The “Ritz” would be next to wear the costume of the “Emperor’s New Clothes”.


  12. Some good questions here. Where is the “1” hotel? RG has said that they are looking at new locations for the snazzy hotel. Is this a real effort, or is the hotel on the back burner or off the stove completely?

    The Ritz says they want to get 2 million for condos at this hotel. Is this realistic? Is there a large enough supply of rich people out there? How much of the project’s funding depends on getting this seemingly steep price?


    Anyway, thanks to Paul for being frank about the pre-buy.

  13. Dear previous blogger about questioning the possibility of the million dollar ritz condo’s. DON’T BE SO NEGATIVE. You can not tell the future. Just because cnbc has wall street analysts and economists predicting this the worst housing crash in history, doesn’t mean that the ritz and other firms are not going to risk multiple millions of dollars on a resort town that alreaady has dropping prices and over supply. It is like all you hear about is the recession that we are in. And the high oil price. But so what, this is mammoth, and mammoth is special and is different from all the other ski resort towns in the country going through the exact same rapid decline.

  14. In reading many blogs, I believe that this housing bubble was good for noone, with the exception of the random few who sold at the top and now rent…I do not know why it was allowed to happen. Show me one person anywhere in the country that bought in the last FIVE years that wishes they didn’t buy. And this is everywhere in the COUNTRY. And to those who were smart enough to know there is no way real estate should ever increase the way it did, well, they lose too. These logically thinking individuals, had to pay rent for FIVE years, when they could have been paying into their equity. Yes, they will pay less for real estate for every six more months they rent. But that means three more years of spending money on rent and not equity to get the absolute bottom. Then, they can’t sell for 4 years after that, because the market supply will still be to loose. and as far as price appreciation, forget about price appreciation in real estate, anywhere. So We all lose. yes those who bought in the past 4 years lose by far the biggest. Those who bought before lose the opportunity to sell at a very high price. And those who were smart enough to know that buying in the past four years would have been a mistake of huge proportions, lost because they rented for 6 more years than they should have. PLUS, guess what this is going to do the the economy…RECESSION, is all but guaranteed at this point.

  15. Hi Paul,
    Enjoyed reading your column. You have clarified for me the current real estate climate in Mammoth Lakes. Look forward to reading your next installment.

  16. Superb work. Thank you.

    I’ve been amazed that the real estate times ran your honest and insightful column as long as it did.

    As someone pointed out, your blog seems to simply value a conservative, analytical approach to understanding the market- it’s not speculative or partisan. It’s great to have a public voice clearly speaking the truth, when the market and public debate has been so dominated by PR. Viva!


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