Should Condo Developers Actively Default Buyers?

Developers of at least three new Miami condo towers at or near closing are actively defaulting speculators in hopes of accumulating units that had been previously under contract.

The maneuver, which occurred during the run up in the real estate market in 2004-05, permits developers to keep the buyer's 20 percent deposit (10 percent used for construction / 10 percent in an escrow account) plus take back control of the unit.

During the real estate run up, developers wanted back units so the condos could be resold at a higher price.

Developers today are quickly realizing that many of the funds (private equity to hedge) are looking for large quantities and percentages of units in a building. Many of the largest funds circling the Florida market want a minimum of 100 units and 60 percent of a project.

It is only under these conditions can an out-of-town fund - whether it is based Connecticut, United Kingdom, or Singapore - realize the economies of scale costs savings plus have some predictability in dealing with a condominium association.

For many developers, their projects were just successful enough to get financing for construction. Typically, that means a project sold at least 50 percent of the product.

With financing a challenge today for most individual buyers trying to close and auctions not really an option based on recent performances, developers increasingly see bulk sales as the most effective exit strategy to survive this market.

A strategy like this can only be executed with a sizeable quantity of units. That is where the defaults become a tool for the developer.

One Miami developer is returning a flat $5,000 of a buyer's 20 percent deposit to anyone with a contract who submits a letter from an attorney threatening to sue.

For the partial refund, the buyer terminates any claim to the contract, many times being relieved just to get something back. For the developer, the strategy creates goodwill with the buyer while allowing the builder to move closer to the threshold necessary to attract the funds.

Critics will argue that no developer wants to take back units in a market like this. The thing many of these critics fail to realize is the amount of capital circling the market looking for discounts combined with the change in strategy being adopted by developers.

Many developers are restructuring their businesses to move from construction to interior build out of raw units, rentals, and property management. Funds who are willing to hire a condo's developer for the post-purchase services usually stand a better chance of buying the property in what is becoming a competitive market.

This appetite for bulk product is what leads some to think that there may not be enough quantity in South Florida to meet the demand, especially with the weak U.S. Dollar and the international media spotlight on Miami.

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.