A Miami-based institution and two out-of-state banks with a significant presence in Florida have each started to discount their land loans by as much as 70 percent in hopes of moving the improved and entitled dirt at a brisk pace, the banking experts said.
The strategy of the banks is to dump problem land loans in the second quarter (which ends on June 30) in an attempt to absorb their inevitable write-offs at the same time that their competitors are also expected to report disappointing financial results, the banking experts said.
In the first quarter of this year, banks had asked for about 70 cents on the dollar for this residential developable land with utility hookups, streetscape improvements, and landscaping. Now, this same land is being quietly marketed in bulk for as little as 30 cents on the dollar, the banking experts said.
Given the amount of time and the expenses necessary for investors to carry this land before being able to resell or justify building upon it, serious buyers are offering between 15 cents and 20 cents on the dollar. At least three banks are said to be actively considering these offers in return for quick and quiet closings, the banking experts said.
"The moment of capitulation appears to be near for lenders that control repossessed land," said Peter Zalewski, a principal in the Condo Vultures® LLC, a Bal Harbour, Fla.-based consultancy. "We expect that more time could be necessary before banks begin to accept comparable deep discounts in pricing on finished bulk residential product such as condos and single-family houses."
Failed condo conversions are likely to be the next product that lenders in possession of bulk Florida product are expected to dump at discounts of about 40 percent.
The discounts are expected to be much deeper for condo conversions built earlier than the 1990s as bulk buyers anticipate not being able to resell these units to individual buyers for at least five years. If that time range proves correct, any projects built in the 1970s and/or 1980s would be nearly four decades old when a bulk buyer could realistically look to exit such an investment.
During the period between buying and before selling, a bulk buyer must be able to absorb any difference between the rents generated at a project and the monthly expenses. Any discrepancy in the rent collected compared to carrying costs incurred depends almost entirely on the purchase price paid by the bulk buyers.
This difference in revenue versus expenses, not capital, is proving to be the biggest obstacle to completing a bulk condo deal in Florida, regardless of whether the product is old or new, experts said.
The caveat to this scenario is the international buyer with the rich foreign currency who fears that the U.S. dollar will strengthen later this year.
New residential condo units, especially the towers in Downtown Miami, Brickell Avenue, and the Biscayne Boulevard corridor, are expected to be the last bulk product to be discounted deeply for buyers as the bank-controlled release prices are too rich, experts said.
Still, that isn't stopping many investors both domestic and foreign from attempting to purchase blocks of condo units in the towers coming online in Greater Miami, experts said.
Developers and lenders almost on a tower-by-tower basis have different expectations as to the number of units and the discounts that will be available. Some towers are closing at a high rate while others are anticipating as many as 40 percent of contract holders to walk away from their deposits.
Since many of the large funds circling Miami want to buy a large quantity of units in a limited number of towers in hopes of realizing operational efficiencies, developers are increasingly considering defaulting out buyers who cannot obtaining financing to close on their units by the original deadline.
By taking back units and a large chunk of the original buyer's 20 percent deposit, developers are hoping to be able to amass enough inventory to fulfill the common fund requirement of a minimum of 100 units in a project and 60 percent of the association's voting power.
For the successful towers where buyers are closing on a majority of their contracts, the dilemma for the developer becomes whether to continue selling off the remaining units on an individual basis for an unknown period of time in hopes of maximizing profits or simply dumping the remaining units in bulk fast for a minimal return.
The advantage of selling fast with a limited return is that a developer would be able to move on to other opportunities, including buying discounted units in bulk from their competitors.
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 check out Peter’s blog at CondoDump.com. Don't forget to sign up for our weekly Market Intelligence Report .
Copyright © 2008, Condo Vultures® LLC
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