Coping With a Condo-Investment Hangover
People camped out for the chance to buy a unit in Radius, a development in Hollywood, Fla. The building’s 285 units sold out in just over 10 hours — half a year before construction was even set to start.
That was in the summer of 2004, when the South Florida housing market was peaking and money could be made by simply investing in condos expected to quickly appreciate.
Units were often on the market for resale as soon as they were completed. As you must have heard by now, it’s a much riskier idea to start flipping in some of today’s cooling markets.
“You see some of these communities that investors purchased … there are no lights on at night,” said Bill Donges, CEO of Lane Company, developer of Radius, which is scheduled for completion in the spring.
The lack of post-dusk illumination throughout the Florida real estate landscape is a sign that many buyers never once considered moving into the units they bought.
Their plans now: sweat.
According to the National Association of Realtors (NAR) inventory of existing condos rose to about an 8.6-month supply in August. The national median sales price for the housing type settled at $223,200 in August, down 2.4 percent from $228,800 a year ago.
“The market is clearly oversupplied in many places. The key symptom of that has been on the price front. Prices have taken a hit,” said David Seiders, chief economist for the National Association of Home Builders (NAHB).
Even with Florida mortgage costs coming back down a bit, this is far from wonderful news for those who have invested in condominium units with the intent to sell them quickly — and still hold them. According to the Realtors, 31 percent of investment purchases from 2002-2005 were condos.
But it may not be time to jump off the condo’s balcony just yet. There still are investors about to enter some markets with the intent of purchasing one or more units and holding them for a few years. Some are encouraged by increased demand for rentals in certain areas and betting that long-term appreciation won’t skip a beat.
GET OUT WHILE THE GETTING IS GOOD
Patience is a virtue not all condo investors have in abundance. The NAHB is noticing a trend of increased sale cancellations, meaning that buyers are backing out before closing. In that case, all you’re losing is the deposit.
In South Florida, Mark Zilbert has another way to help condo speculators in their hour of distress. Zilbert owns a real estate brokerage and also helps link up condo buyers and sellers through the website CondoFlip.com. A feature on the site is a slate of panic buttons for investors worried that they won’t be able to unload their properties:
- A button for those who aim to sell their condos for a profit
- Another for those who are willing to break even
- Another for those who are willing to lose money in order to get out of the deal.
After sellers decide which camp they fit into, they can be connected with buyers interested in relieving them of their burdensome investment. Of course, another highly publicized way of generating interest without cutting the actual listing price is to offer incentives to sweeten the deal. Incentives can include in-unit amenities or the covering of closing costs.
ADJUSTING YOUR THINKING… AND FINANCING
Investors who can afford to wait out the storm, however, could benefit in the long run. It’s also important to note that conditions vary from market to market. For example, while the South Florida condo market may be iffy, conditions in some Texas markets are going strong.
Investors have shifted focus from places such as Phoenix and Las Vegas to some parts of Texas, where rental values are more attractive. Chicago has a “normal to healthy” investor market, analysts say.
Those who change their course to incorporate a hold strategy also might want to rethink their financing. In the recent past, condo investors often took out 1-, 3- or 5-year adjustable-rate mortgages because the intent was to make a big profit in the short term.
Even with Florida home loan rates declining eight of the last nine weeks, if the adjustable loan you have is about to reset, you might want to think about locking down a fixed-rate mortgage and not having to worry about it. Ever.
BECOMING A LANDLORD
Investors going into hold mode may turn to the rental market as a way to cover costs on their units. In markets with low apartment vacancies and increasing rents, the move is an especially attractive way to bide time. Some builders are taking note of the current rental fundamentals for the first time, but there’s some work involved in being a landlord.
The first hurdle: setting the rent.
A fair amount of owners know how to set an acceptable price, but others ask for a couple of hundred dollars more than comparable properties in the area. Incorrect pricing causes the rental unit to sit vacant for months, which immediately results in lost cash flow.
Condo owners have to accept, first off, that they won’t get all their Florida mortgage loan payments, taxes and assessments covered in the rent. There’s also effort required to find the best tenants. Credit checks on potential tenants are wise, and sometimes condo associations will require criminal background checks as well. Be advised!
