With once-hot condominium markets across the country in sharp decline and many real-estate professionals predicting a further weakening, some developers are facing more than a glut of unsold inventory. Angry condo buyers from Boca Raton, Fla., to San Diego are taking them to court, alleging everything from breach of contract to fraud.
Some of the lawsuits claim that the amenities featured in glossy marketing brochures and model apartments never made it into the final product. Others involve much-hyped projects that went bust, leaving hundreds of buyers with contracts for condos that will never materialize.
In Florida, 2,557 individual complaints against developers were filed in fiscal year 2006, ended June 30, up from 1,825 two years ago, according to the state's Department of Business and Professional Regulation. In Colorado, at least 18 lawsuits have been filed by attorneys representing condominium-owners' associations in the last two years. Most involve complaints of shoddy construction or faulty repairs in recently completed developments, according to research compiled by Denver property appraiser Steven Miller. And in Las Vegas, the Clark County District Court is hearing cases against more than a dozen developers. That includes one suit brought by more than 50 plaintiffs against the builders of Icon Las Vegas, a two-tower project that was scrapped in January, according to Will Kemp, the attorney representing the plaintiffs.
Legal professionals say that the increase in litigation isn't surprising, given the furious pace of new construction in the past few years, and that some suits may rely on dubious legal strategies that have little chance of prevailing in court. Several states, including California, Colorado and Nevada, have tightened construction-defect laws to help stem the tide. The laws, a result of intense lobbying by the building industry, make it tougher for homeowners to sue or require mediators to settle disputes out of court.
"These types of laws help weed out many complaints that, frankly, never should have ended up in court in the first place," says Chicago attorney Howard Swibel, president of the National Conference of Commissioners on Uniform State Laws, a nonpartisan advisory group.
Still, industry analysts say, the increase in litigation is shedding light on the problems facing many people who got caught up in the rush to buy during the recent run-up, particularly in the condo market, where record numbers purchased properties sight unseen.
In California, developer Crescent Heights is being sued by condo owners in three of its projects, including the Metropolitan, a recently completed 342-unit development in San Francisco's Rincon Hill district. That lawsuit, filed in state Superior Court in August, claims the developer misrepresented the size of the units and failed to repair various construction defects after the building was completed.
Ben Bedi, who filed the suit, says he put down a 5 percent deposit on a $1.7 million condo during preconstruction in 2004. He says floor plans, marketing materials and a partial model apartment led him to believe that his two-bedroom unit would look like a penthouse, with huge windows, hardwood floors, two large balconies and a view of San Francisco Bay.
In his complaint, the 41-year-old attorney alleges that when he moved in at the end of 2004, he found defects such as screen doors installed backwards and water pipes that leaked. The complaint also alleges that the developer misrepresented the size of the apartment. Mr. Bedi says an architect he hired found it to be about 220 square feet smaller than the approximately 1,684 square feet advertised in the offering plan.
"I paid a lot of money for what I thought would be a brand-new home," Mr. Bedi says. Instead, he says, he has spent thousands of dollars just on repairs and other labor.
Patrick E. Breen, an attorney representing the Metropolitan's developer, denies the claims in the lawsuit and says the square-footage figures, presented in purchasing agreements as approximates, were accurate. "We hired the proper outside engineers to measure units and are confident that our sales and square-footage representations were handled appropriately," he says. Mr. Breen also says that the developer looked at Mr. Bedi's other complaints and found them to be invalid. For example, the screen doors cited were installed correctly, Mr. Breen says.
Homeowners have long taken developers to court for leaky faucets and faulty construction. But real-estate professionals attribute this latest wave of legal actions to the surge in preconstruction purchases during the recent market surge. In Las Vegas, one hub of the condo boom, about 4,500 condos and townhouses, priced at $500,000 and above, were sold in preconstruction last year -- a fourfold increase over 2004, according to Hanley Wood Market Intelligence, a research firm in Costa Mesa, Calif.
Another new wrinkle is the number of high-end buildings currently involved in court actions -- a rarity in the past, industry analysts say.
"You've got buyers out there who paid one and two million dollars or more for a condominium and are now dealing with everyday construction defects," says Ross Feinberg, a California attorney who specializes in construction litigation.
The rise in litigation comes as the market for condos is slumping. Nationwide, sales of existing condominiums and cooperatives fell 16 percent in September compared with the same period a year earlier, one of the sharpest year-on-year declines in years, according to the National Association of Realtors.
The declines in some areas have been even more precipitous. Sales of existing condominiums in Miami fell 45 percent in September compared with the same 2005 period, the Florida Association of Realtors says. In San Diego, year-on-year sales of existing condos were down 41 percent in September, according to La Jolla, Calif.-based real-estate research firm DataQuick. A similar story is unfolding in Las Vegas, where condo and townhouse sales were off 45 percent in October compared with a year earlier, according to the Greater Las Vegas Association of Realtors.
"Right now, the condo market is a disaster," says Lewis Goodkin, a Miami economist and real-estate analyst. The crash in some areas was inevitable, he adds. "These markets were essentially propped up by speculators." Indeed, investors accounted for as much as 80 percent of the preconstruction purchases of luxury condos in Miami, according to a 2004 study by Esslinger-Wooten-Maxwell Realtors.
Dried-up demand and rising construction costs have forced many developers to stall or cancel projects, particularly in formerly hot markets that are now overbuilt. In Las Vegas, an estimated 6,900 condo units have been suspended in the sales process, while another 1,900 have been canceled officially, according to real-estate research firm Applied Analysis. Among those scrapped were projects co-developed by George Clooney and Ivana Trump.
As the number of scrapped projects increases, so too do the complaints. In Florida, many condo suits involve severely delayed, cancelled or recently completed projects in the southern part of the state, where more than 100 residential developments are in some stage of planning, from the permit stage to breaking ground, according to real-estate analysts.
Maritza Pena, a 33-year-old attorney in Miami, says she was surprised when she got a letter in February advising her that the development where she had agreed to purchase a two-bedroom apartment in 2004 for $579,980 had been cancelled. The developers of the proposed 49-story tower near Miami's Brickell Avenue had only seven months earlier hosted a cocktail party to celebrate the condominium's groundbreaking.
"They never hinted that something was wrong," says Ms. Pena, a first-time home buyer. "When I read the letter, it felt like I got punched in the stomach." Ms. Pena says the two-story unit she agreed to purchase on the 42nd floor was to have stainless-steel kitchen appliances, a marble bathtub and views of Biscayne Bay.
So she joined 58 fellow buyers who filed a lawsuit in April against the developer, South Bayshore Tower, in Miami-Dade Circuit Court, claiming breach of contract. The lawsuit seeks the gain they would have realized if the condos had been built plus the unconditional return of deposits with interest.
Lee Stapleton Milford, an attorney representing the developer, says it denies all of the claims cited in the lawsuit and says hurricane-related delays and rising construction costs led to the cancellation of the project, called 1390 Brickell Bay.
Some experts say the case may be tough to prove. Indeed, two of the three original claims in the lawsuit have been dismissed or withdrawn. And, as required in the purchasing agreement in the event that the project was canceled, the company has already returned buyers' deposits, in most cases 20 percent of the purchase price, with interest, according to Ms. Milford. The plaintiffs may also find it difficult proving future financial losses, because the condo wasn't built.
"The court looks for hard-and-fast evidence that you were harmed," says Georgette Chapman Phillips, chair of the real-estate department at the Wharton School of the University of Pennsylvania. "Lost profits are always hard to prove because they are speculative."