Florida Home Loan Lenders Take Cautious Stance on Condo Conversions
The spread of condominum conversions around the state has caused problems for potential owners seeking an affordable Florida home loan. Now, lenders in Central Florida are also concerned about too many units going up for sale at once.
These loan officers are tightening some requirements, while being more selective about borrowers and projects. They also are hoping that borrowers on conversion loans in the last two years will be able to meet construction schedules and generate unit sales revenue, which would enable them to avoid problems on loan payments.
Lenders and real estate observers say they are not yet seeing a major increase in problems with those condo-conversion loans, including defaults, but note that other factors may come into play before too long.
With the cost of materials rising and construction and permitting delays mounting, they are concerned that some borrowers might find that sales of units at originally planned prices won’t provide enough cash to pay contractors, repay the loan and still produce a profit.
“We have seen some folks pulling back,” says Joe Losch, executive vice president, commercial banking, SunTrust Bank, Central Florida region. “Some lenders got in and may be getting out. There may be a time when there’s a lot of supply in the market.”
A leading real estate expert, meanwhile, warns that South Florida is already seeing a fallout from the condo-conversion craze, and the Orlando area could be headed down the same road before year’s end or in early 2007.
“Those that rise fastest experience corrections long-term,” says Jack McCabe, president of Deerfield Beach-based McCabe Research & Consulting, which monitors the Central Florida condo market for investors and developers.
Orlando: A strong market
In the past two years, Orlando rapidly rose to one of the top five condo-conversion markets in the country.
McCabe’s research shows 23,800 conversions were announced during the last 18 months - seven times the amount for the previous 18-month period. The trend is not unique to Orlando. South Florida’s condo market rose in a similar fashion and now is saturated.
Speculators looking to quickly flip their investments artificially inflated the market. Now they are getting out of South Florida, where condos that once sold out at grand openings are taking several months to sell and the inventory is swelling.
Investors and developers instead turned toward Orlando, which has a lower cost of living, not as many investors, more buyers of the units to live in, strong job growth and a significant need for affordable home loans.
Shelton Granade, director of operations for CB Richard Ellis‘ Multihousing Group for Orlando, sees some changes now taking place locally.
“It’s slowed down a little bit but it’s still active,” he says. “We closed a few deals within the last 10 days.”
Results of Federal Reserve regulations
Concerned about borrowers not being able to pay their loans - especially during a housing boom - federal regulators in the meantime are reviewing lenders’ condo-conversion portfolios in Central Florida, South Florida and other parts of the country, McCabe says.
In addition, they are telling lenders to tighten requirements, and want not just pre-sales but stringent, firm contracts, he says.
Florida mortgage brokers Robert Dockerty and Shannon Rex at Dockerty Romer & Co. in Delray Beach expect some lenders might have to turn to investors to buy large numbers of units, which they would rent out.
Those investors would include “vultures” who buy a bulk of condo units at discounted prices. Their goal is to sell the units within three to five years, when condo prices are rebounding during a period of slower construction. They could then turn a profit off the subsequent Florida home loans.
Dockerty says some condo converters and developers turned to that investor option during previous condo cycles. “I have not seen it yet this time, but that doesn’t mean it is not going to happen,” he says.
Mortgage brokers and Florida home loan lenders such as Wachovia and Regions Bank have been requiring converters to have equity of at least 15 percent to 20 percent in projects, says Dockerty. Some are raising that requirement to between 20 percent and 30 percent this year, he adds.
Some lenders are raising the percentage of owner-buyers required in projects and are lending only to companies that have done conversions during the past year.
“For a while, if you had a 300-unit building and a Web site, you might have had a chance,” Rex said.
Ignoring the entire condo-to-apartment field
Meanwhile, some lenders are protecting themselves with sound lending practices. SunTrust, for example, simply chose not to chase the conversion trend.
“We really haven’t changed our policy or how we look at those types of projects,” says Losch.
Ocean Bank, which provides condo conversion and construction loans in the Orlando area, avoids loans on apartment buildings and complexes more than 12 years old. The bank lends only to companies that have done other conversion deals and have the savvy that can help them avoid delays, says Walter de Villiers, executive vice president and head of real estate lending.
The bank also focuses on converters selling units in the $150,000 to $180,000 range, de Villiers says. “We feel that is an affordable range that can sustain any market shifts,” he says.
McCabe, the real estate analyst, says if too many apartment buildings convert to condos, Orlando could see project delays of nine months or more, foreclosures, and even developers and unit buyers suing lenders.
If delays lead to problems with unit sales and cash flow for a converter, economic fundamentals make it unfeasible to turn a project back to a rental community and convert the development loan to an operating loan, he adds.
As a result, McCabe predicts foreclosures will rise.
It’s not an ideal time for those loooking to make money in the condominum market. This should mean, however, fewer conversions in the future and more room for a Florida home loan you actually can afford.
