Like a host of new couples bitten by the love bug, thousands throughout South Florida right now are entering into a very special courtship. They are getting to know their partners better before taking the plunge. Like with many whirlwind romances, these pairs soon plan to get their official papers to consummate their union.
It’s not Cupid, however, who has been tying up happy duos across Miami-Dade and Broward counties. A booming real estate development market and a revived pipeline of preconstruction condos means more potential South Florida homebuyers are “going steady” with the units they expect to eventually own, using a tool known as a reservation.
In condo buying, a reservation is generally a nonbinding, but still significant, agreement between the future buyer of a preconstruction condo and that property’s developer. In South Florida, most reservations ask for a fully refundable 10 percent deposit on the condo unit’s price. It’s seen as a token of commitment before a more sacred union — the signing of a purchase contract to buy the condo.
Because reservations are nonbinding commitments, they can be canceled at any time — for any reason — by either the potential buyer or the developer. Despite being nonbinding, reservations play an important role in the process of securing a residence.
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Reservations help developers and their salespeople understand if the preconstruction projects they are offering are appealing to the market. For example, if developers realize certain floor plans are more popular than others, the developers can then tweak the design of the project to offer more of what their buyers want. Undertaking such drastic changes would be much more difficult once legally binding purchase contracts are inked.
On the flip side of the relationship, buyers find reservations useful because they provide a hold on what could end up being a very sought-out product. Before putting down 50 to 70 percent of a condo’s price three years before it is delivered — as is now standard practice in South Florida — a reservation provides buyers with a period of time when they can learn more about their future purchase and feel out if “tying the knot” makes sense, i.e. before committing to a larger and nonrefundable deposit. Further, reservations are typically offered at the very beginning of a project, giving buyers the advantage of getting in while prices are at their lowest.
In a competitive market for preconstruction condos like the one we’re experiencing at the moment, the reservation model (which is employed by many, if not most, preconstruction projects on the market) has another benefit for buyers: it forces developers to provide them with the best possible value for their dollar. Developers know full well that buyers might easily cancel reservations if someone else makes them a substantially more attractive offer, and hence developers are unlikely to be skimpy with future condo owners.
But reservations sometimes don’t work out. We like to think that’s actually not a flaw in the process, but one of its most important features. The ability to make adjustments and to let people back out in the early stages without facing a penalty, is one of the main benefits of preceding a contract with a reservation. While any break-up can sting, it’s much easier to walk away from a nonbinding relationship with your money back in your pocket than to go through the lengthy legal “divorce” process that voiding a contract entails.
In any case, the buyers in the current cycle are generally more experienced, detail-oriented, and financially savvy than those in prior cycles. Undoubtedly a result of lessons learned in previous downturns, they are embracing the reservation process as a chance to do their research and get more comfortable with their future purchase.
We couldn’t be more smitten.
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