Buying pre-construction in California

No sale before the public report

California’s Subdivided Lands Act treats a building of five or more condominiums as a subdivision, and under section 11018.2 of the Business and Professions Code (opens in a new tab) none may be sold until the Department of Real Estate has issued a public report. The developer, called the subdivider, files its documents with the department, and the report sets out what a buyer should know: the association’s proposed budget and assessments, the restrictions on use, how deposits are held and any special risks.

Three reports, three steps

1. Preliminary reportReservations onlyEither side can cancel at any time, and the whole deposit, held in escrow, comes back.
2. Conditional reportContract and escrowA purchase contract may be signed and escrow opened, but the sale cannot yet close.
3. Final reportCopy and receiptEach buyer receives the final report and signs a receipt. Sales may now close.
4. CompletionClosingThe deposit applies to the price, and the escrow closes.

With a preliminary report, a developer may advertise and take reservations, but no one may sign a purchase contract. A reservation binds no one: either side can cancel at any time, and the deposit, held in a neutral escrow, comes back in full.

A conditional report is issued when the developer’s application is complete but one step remains, such as recording the map or approval of the budget. It allows purchase contracts and opens escrow, but the sale cannot close until the final report is issued, and if it never is, the deposit is returned.

The final report allows sales to close. Under section 11018.1 (opens in a new tab), every buyer must receive a copy before signing a binding contract and sign a receipt, which the developer keeps. The department’s guide for buyers (PDF, opens in a new tab) explains each report.

Where your deposit sits

Where a project carries a construction loan or another lien over the whole building, section 11013.2 (opens in a new tab) requires the buyer’s money to stay in an escrow the department accepts until the unit is released from that lien, unless the developer posts a bond or another protection the department approves. Ask which applies to your building.

If you default, what the developer may keep is limited. Under Civil Code section 1675 (opens in a new tab), when a buyer intends to live in the home, a liquidated damages clause that keeps no more than 3 percent of the price is valid unless the buyer shows it is unreasonable. Above that, the seller must justify the amount. The clause must be initialed separately, and large new condominium projects have had a rule of their own, so read it with your attorney.

Questions to ask before you sign

1. Which public report has been issued: preliminary, conditional or final?
2. Who holds my deposit, and is there a lien over the whole project?
3. What does the liquidated damages clause say, and how much could I lose?
4. What will my monthly assessment be, and what does the budget hold in reserve?
5. When does the developer expect to close, and what happens if it runs late?
6. Is the project in a Mello-Roos district, and what is the special tax?
7. Has the developer completed buildings like this one before? Can I see them?

Our guide to buying new construction in California covers transfer taxes, property tax and the builder’s warranty.

Why an advisor helps

A public report tells you what the department has reviewed. It does not tell you whether the price is right. A buyer’s advisor adds what the report leaves out: how this building compares with the ones around it, which lines sell first and what the assessments are likely to become. If you are weighing a new building in Los Angeles, San Francisco or Orange County, we are glad to talk it through. 

General information only, not legal or tax advice. California’s rules change, and every contract is different. Review your documents with a California real estate attorney before you sign.