Buyer Financed Construction in South Florida – How will it Impact Litigation?

By September 7, 2012

By Abbey Kaplan
Earlier this week, the Miami Herald reported that developers in South Florida are relying on buyer financing to finance residential construction projects. 
In the last few years, I have seen a number of lawsuits by banks against developers, suing the individuals on their personal guarantees when the projects failed.  I have also worked with several brokers who were forced to sue developers to obtain commissions that they were never paid because the projects were not completed.  I predict that buyer financing will minimize these types of cases.

With respect to developers, if buyers are putting almost 80% of the unit price down as a deposit, developers will have to borrow less money from the banks in order to fund the project.  This will likely minimize commercial foreclosures because the construction financing will be relatively small compared to the overall cost of the project.  Fewer foreclosures will likely lead to fewer suits on personal guarantees and fewer bankruptcies by the guarantors.  It is clear that this type of financing will minimize developer dependence on bank financing, which often comes with non-monetary covenants that can trigger foreclosure.  This will lead to greater autonomy by the developers to act as they see prudent to complete the project, with less of a focus on bank requirements.
With respect to brokers, generally they get paid a percentage of their commission at various stages of the project.  For example, a broker may get paid one-third of the commission after the first deposit, one-third of the commission after the second deposits and the final third of the commission after closing.  When real estate projects were failing all over South Florida, I saw a lot of litigation by brokers who did not receive earned and due commissions because the developers were struggling to finish the project and sell the units and did not have available funds to pay commissions.  With 80% of the money already paid by the buyer to help fund the project, I expect to see less of this litigation because the broker and developer’s interests will be aligned – to sell the units and bring in the large deposits, which will in turn pay for the project and fund commissions.
I am very supportive of this type of financing and think it will help minimize litigation for lenders, developers and brokers.  However, developers need to be cautious that their units are properly priced so that the sales remain consistent and they can sell out a project within an appropriate timeframe.  I am optimistic that these types of creative financing programs will help to grow South Florida’s real estate business as we emerge from the economic tsunami that has plagued our community since 2008.