Expectations are growing that the fourth quarter will be the start of the long-anticipated sell off of troubled Florida residential complexes in bulk at attractive discounts.
Sellers increasingly see the last three months of 2007 as the opportune time to unload product as bulk buyer appetite is deep, tax advantages can be immediate, and reputation damage would be limited.
The consensus among analysts, investors, and regulators alike is that 2007 was a disappointing year for real estate.
Given the general sentiment, it would be hard to criticize a seller for dumping a portfolio at a discount in a market where the Federal Reserve Board was forced to cut interest rate to try to stabilize the market, the subprime lending industry experienced a dramatic consolidation, and the nation’s largest independent residential lender, Countrywide Home Loans, has had to maneuver to avoid bankruptcy.
Adding to a seller’s defense, Lennar Corp., the largest Florida-based homebuilder, announced plans to cut 35 percent of its workforce and absorb a $514 million loss in the third quarter alone.
“We anticipate a number of sellers will look to unload in the fourth quarter,” said Peter Zalewski, a licensed Florida real estate broker with the Bal Harbour-based Condo Vultures™ Realty LLC.
Developers and lenders in the last 30 days have discreetly started to shop bulk residential projects to the dozens of domestic and international funds that have been circling Florida since the second quarter.
Earlier this summer, bulk sellers had tried unsuccessfully to unload smaller portions (25 units at a time) of complexes to out-of-state buyers, especially Western European groups with strong currencies.
Sellers were forced to look to international purchasers since most domestic bulk buyers would only pay a price that produced a 7 percent annual cap rate based on a complex’s rental income. At the time, owners were valuing their complexes based on a price that would be realized when and if units were sold as condominiums.
Often times, the difference in pricing approaches for condominiums and rentals was about 40 percent so few bulk deals occurred earlier this year.
In September a change in seller mentality began to emerge, especially with lenders. Banks are discreetly marketing their soon-to-be troubled loans to investors who are willing assume the risk and potential litigation costs to collect on the paper or better yet take control of the project.
Florida developers and banks have brought more than 10 bulk projects to Condo Vultures™ Realty to be unloaded. These projects range from a developer’s proposed and approved condominium community on eight acres in greater Tampa being offered for $8 million to a bank’s 168 units in a failed West Palm Beach condo conversion being offered at $13.3 million.
The asking price of these bulk projects represents as much as a 45 percent discount from the retail price.
“There has been a gradual shift in seller mentality,” Zalewski said. “Buyers are ready, willing, and able to pounce on opportunities. Until now though the sales process has stalled as developers and banks were not willing to negotiate down to prices that made sense from a rental perspective. We are seeing that stance soften.”
Miami condo tower developers are also more willing to talk as many projects are scheduled to close in the first half of 2008, and no one knows how many contracted-buyers are going to walk away from 20 percent deposits.
Given the failure of the Platinum Condominium auction in which only nine of 20 units in the new Miami tower sold to bidders, many developers are shifting their attention to creating a contingency plan to quickly and quietly unload all surplus units resulting from walkaways to a single buyer.
Peter Zalewski is a principal with the consulting firm Condo Vultures™ and the qualifying licensed Florida real estate broker of Condo Vultures™ Realty LLC. Peter can be reached at 800-750-0517 or by email at peter@condovultures.com.
Copyright © 2007, Condo Vultures™ LLC
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