Question: We are purchasing a newly created condominium unit in an upscale project. When the developer presented us with the sales contract, there was a document entitled "Repurchase Addendum." As best as I can understand the legalize, it states that should we sell or rent the unit within one year after going to settlement, we must give the developer the right to buy back the unit. Although the developer will pay all closing and recording costs, the repurchase price is the same price that we will pay for the unit. Is this a legal document?

Answer: This appears to be a growing trend among condominium developers. Basically, the document that I have seen provides a representation by the potential purchasers that they are buying the unit as their primary, year round residence, and that they do not plan to sell or rent the unit for at least one year after closing takes place.

Furthermore, should the purchaser decide to sell or rent within that one year period, the developer must be given a right of first refusal. As you have indicated, the re-purchase price is what the purchasers paid for the property.

While I personally do not like this concept, it appears to be a valid, legal document. No one is forcing you to buy the unit or sign the repurchase agreement. Under the condominium laws in the Washington metropolitan area (and indeed in many states throughout the nation), developers are legally required to provide a potential purchaser with a Public Offering Statement (POS) which spells out the important aspects of the condominium purchase -- such as the budget, the rules and regulations of the association, and the rights and responsibilities of the unit owners. As a potential purchaser, you have a fixed number of days (usually 15) from the time you get the POS in which to opt out of the deal, at no expense to you.

Thus, if you really want to buy this condominium unit, you sign the repurchase agreement at your peril. After all, you are representing -- both to your lender and to the seller -- that you plan to live in the unit as your personal residence.

Why this apparent trend toward repurchase agreements?

I can understand the rationale regarding renting. The secondary mortgage market (FNMA and Freddie Mac) as well as HUD and the Veterans Administration, impose restrictions on the percentage of investor owners that can own units in a condominium project. If the percentage gets too high (it ranges from 40 to 60 percent), potential purchasers may have difficulty obtaining good loans from their lenders.

Thus, the developer want to make sure that its purchasers will be able to get loans at reasonable rates, so that all of the units in the project will sell out quickly. This repurchase agreement will also provide a level of comfort for the condominium owners that the building will not be overrun by investors who will rent out their units.

However, the sale aspect of this agreement is disturbing. Why should the developer have the right to buy back the unit should the owner -- within one year of purchase -- decide to sell? Clearly, unit owners are entitled to the same measure of profit as the developer, and yet the Repurchase Agreement allows the developer to pay only the initial purchase price.

It is interesting to note that the Repurchase Agreement I have seen gives the developer the right -- but not the obligation -- to repurchase. As we all know, if the unit has gone up in price, there is no doubt that the developer will want to grab it back. On the other hand, I strongly suspect that if the value of the unit declines, the developer will exercise its option not to repurchase.

The only logical reason for such a repurchase agreement, in my opinion, is that the developer believes that the unit may have been underpriced in the first place. But that's the developer's problem. It set the initial price in the first place.

Nevertheless, such an agreement appears to be legal, and will be binding on you should you decide to buy this unit.

However, you should try to get the following additional language inserted into the Agreement:

Notwithstanding anything to the contrary, should the Purchaser have an emergency -- such as a health problem -- which requires the relocation of the purchaser, or should the Purchaser be obligated to move to another location as a result of employment conditions or hardship, this repurchase agreement shall be null and void.

This is a fair compromise. You will represent that you plan to live in the unit as your principal residence for at least one year, and you should be bound by this representation. However, should circumstances arise which are out of your control -- such as health or employment conditions -- you should be permitted to either sell or rent your own property, and make the profit instead of passing it back to your developer.

If the developer agrees to this additional language, make sure that it is reduced to writing in the Repurchase Agreement. Verbal representations will not bind the developer and are generally unenforceable in a Court of law.

Published: December 29, 2003

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