Bulk Buying Begins As Developers Try To Unload 'Quickly and Quietly'

Vulture investors have been anxiously circling the residential real estate market waiting for an opportunity to strike but hesitant to be the first to move out of concerns about overpaying.

Morgan Stanley’s acquisition of 11,000 lots from the nation’s largest homebuilder Lennar Corp. at 40 cents on the dollar is sure to change that widespread fear among funds from a concern about overpaying to an anxiety about being locked out from the discount currently being peddled by desperate sellers.

“We have been predicting since September that the bulk buys were being negotiated and were likely to begin occurring in the fourth quarter,” said Peter Zalewski, a principal with the Bal Harbour-based consulting firm Condo Vultures® LLC. “Don’t be surprised if a number of other bulk deals are done – many not announced – in the last days of the month. More deals are sure to follow in the first half of 2008.

“Don’t blink it is going to be faster than you think.”

The Morgan Stanley-Lennar transaction is important in that it spells out how developers are likely to deal with their oversupply of product in the future. Lennar decided to discount the lots by 60 percent of book value only because it was given a 20 percent stake in the Morgan Stanley entity making the purchase. In the end, the deal works out to a purchase price of nearly 50 cents on the dollar – for land.

This scenario of a seller taking a loss on the front end but having a chance to make money on the backend is actively being shopped in today’s South Florida condo market.

Several developers have approached Condo Vultures® Realty LLC, a sister company of the consulting firm Condo Vultures® LLC, about bringing in funds to purchase any and all default units that arise in newly constructed buildings when buyers, i.e. speculators, walk on their 20 percent deposits rather than close on the properties.

In return for the steep discounts, the developers/sellers want a contract from the fund/buyer to handle the build out the raw condo units, rent the places, and then manage the apartments for the next five to seven years.

This deal structure is likely to help places like Miami’s Downtown and Brickell Avenue areas to stabilize quicker than most pundits envision. If a developer can quickly and quietly dump the product to one fund at a significant enough discount, the fund will have the financial wherewithal to carry the units, which will operated as rentals, until the market turns.

Evidence of this is the number of projects developers are bringing directly to Condo Vultures® Realty in hopes of unloading quickly and quietly before ever having to go to market with a formal listing. Condo Vultures® has presented 45 projects to bulk buyers, including four in the last 10 days.

An entire Miami condo tower with nearly 200 units that is scheduled to be completed early next year will be the 46th project when it is offered on Tuesday.

Peter Zalewski is a principal with the consulting company Condo Vultures® LLC and a licensed real estate broker with Condo Vultures® Realty LLC. Peter can be reached at 305-865-5629 or by email at peter@condovultures.com. Be sure to sign up for Peter’s weekly Market Intelligence Report.