When the credit crunch slammed into New York at the end of the summer, brokers immediately noticed fewer deals being made. But people who had already signed on the dotted line were the ones who really got scared, and since then, their lawyers are finding themselves plenty busy—breaking those deals. Real-estate attorney Michael Carmody says new purchases have “come to a screeching halt as of late September,” and clients with existing agreements are calling to back out. Lawyer Jerry Feeney says he used to get two new calls a day from people drawing up contracts; up to 40 percent of inquiries these days come from clients trying to abandon ship. Attorney Brian Tracz adds that until the summer, “no one wanted to back out”; according to the Streeteasy .com data shown above, the number of contracts broken in Manhattan per week spiked sharply in August, and is only now showing signs of declining. The tailing off in November and December merely reflects the fact that there are far fewer contracts being signed in the first place.
The problem is largely confined to new developments. In new buildings, the path from deal to sale is long, and clients are closing “during a real-estate market that is vastly different” from the one under which they bought, explains Carmody. There’s a real chance they could lose money, and they’re panicked. It doesn’t help when they see other units selling for less than what they paid, or with extras like closing costs thrown in, adds Tracz.
Asking to break a contract is easy, but making it happen isn’t. “You can’t blame a buyer for trying, but a contract is a contract,” says Gumley Haft Kleier’s Michele Kleier. Certain contingencies—if an appraisal comes in too low or a building doesn’t close when promised—could provide just cause, but only if they’re spelled out in the agreements. Otherwise, buyers lose their deposits. “The seller might say, ‘Look, if they’re going to drop $200,000, I’ll take that $200,000 and risk that the market may be better next year,’ ” says Kleier. “Basically, [buyers] are paying you to wait it out.” Prudential Douglas Elliman’s Leonard Steinberg had clients who were serious about canceling an $8 million deal, but it would’ve cost them their $1.65 million deposit, plus they’d have to pay rent while they looked for a new place. “It seemed like a reactionary thing to do”—they intended to put down roots, not just buy and flip—“and in the end they ended up buying,” says Steinberg.
What about those who legally have no reason except cold feet? They can always try pleading their case to developers, say experts. But they shouldn’t hold their breath. Says Feeney: “If you can find a sponsor in this city with a heart, I will make an appeal to them. And you can quote me on that.”