Different Rules Govern
Investment-Home Deals

Question: My wife and I are buying two apartments with hopes of using one as an investment property. The reservation agreements we received from the developer say that we have to provide 5% of the total sale price within 10 days and another 5% within 30 days. Despite these requirements, someone at the sales office told me we will need to make a 20% down payment on the second apartment because it will be used as an investment. We are concerned about this requirement because we didn't receive this information up front, and it isn't included in the reservation agreement. When do we need to hand over the money, and how much do buyers in such situations normally have to provide?

-- Mario, city not provided

Mario: Dealing with developers can be tricky because you really don't have anyone on your side. In an arm's length deal, you normally would have a broker watching out for your interests. But here you're dealing directly with the people who have all the knowledge and experience and often try to call all the shots.

I would be very hesitant to hand over a 5% deposit unless I was assured it was going directly into an escrow account that the developer couldn't touch until I got title to the property. After all, what if the developer goes bankrupt? Your money could be tied up for a very long time -- if you ever got it back. Sometimes you have to choose between being safe and walking away from a risky deal.

Buyers of investment property usually have to put more money down than those planning to use the home as a primary residence, so this portion of your deal sounds typical. A normal down payment on investment property is between 10% and 20%. The developer probably forgot to mention this initially because he or she is used to dealing strictly with owner occupants.

You may want to ask a good real-estate agent if he or she will look out for your interests in this deal for a set fee -- perhaps $500. It will be money well spent.

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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