Miami Condo Vultures: A Fool's Game 19 comments
February 29, 2008
Michael Steinberg
About this author:
-
Font Size:
-
Print
- TweetThis
The Wall Street Journal’s “Florida Bust Spawns Vulture Culture”
talks about a series of amateur real estate investors ready to pounce
on Miami’s weak condo market. I call them amateurs because none of them
speaks about the negative cash flow that they will incur until their
units appreciate to their targets. None of the investors cited live in
the Miami area and they don’t appear to be knowledgeable on the Miami
neighborhoods, the rental market, or the additional costs exaggerated
to the South Florida market.
The realtors have done an outstanding job of focusing investors on the square foot cost, anchored to the peak. The article cites a buyer bragging that he paid $290 per square foot compared to an asking price of $400 in September. If he was focused on the previous trough rather than the peak, he would realize the prices were under $200 prior to the boom for high quality buildings. Improper anchoring leads to most investment mistakes.
The latest crop of buildings in Miami and Miami Beach do not lend themselves to investments. The Miami area job market does not support rents high enough to even cover operating costs, without even considering the cost of capital. The newer buildings contain a high level of costly amenities. Insurance costs are very high (due to hurricanes) and might not even be available for non-owner-occupied units. Banks don’t pay maintenance on foreclosed units, so other owners will receive special assessment to cover the difference.
Older buildings have their own set of problems. While they might have more stable associations, older buildings require costly updates, repairs and maintenance. Pre-hurricane Andrew buildings were built to a lower standard. Windows usually need replacement after 25 to 30 years. The caustic salt air causes concrete decay and the rebar rusts under the surface after about 20 years. Elevators usually need a major rebuild after 30 years.
Counting on appreciation is a fools’ game. The net present value of any gain would never be greater than the net present value of the expense (including the cost of capital). Owning a condo for pleasure is an entirely different story. The pleasure owner would be happy to increase costs for a better maintained building with better amenities. This is the opposite of investors.
The realtors have done an outstanding job of focusing investors on the square foot cost, anchored to the peak. The article cites a buyer bragging that he paid $290 per square foot compared to an asking price of $400 in September. If he was focused on the previous trough rather than the peak, he would realize the prices were under $200 prior to the boom for high quality buildings. Improper anchoring leads to most investment mistakes.
The latest crop of buildings in Miami and Miami Beach do not lend themselves to investments. The Miami area job market does not support rents high enough to even cover operating costs, without even considering the cost of capital. The newer buildings contain a high level of costly amenities. Insurance costs are very high (due to hurricanes) and might not even be available for non-owner-occupied units. Banks don’t pay maintenance on foreclosed units, so other owners will receive special assessment to cover the difference.
Older buildings have their own set of problems. While they might have more stable associations, older buildings require costly updates, repairs and maintenance. Pre-hurricane Andrew buildings were built to a lower standard. Windows usually need replacement after 25 to 30 years. The caustic salt air causes concrete decay and the rebar rusts under the surface after about 20 years. Elevators usually need a major rebuild after 30 years.
Counting on appreciation is a fools’ game. The net present value of any gain would never be greater than the net present value of the expense (including the cost of capital). Owning a condo for pleasure is an entirely different story. The pleasure owner would be happy to increase costs for a better maintained building with better amenities. This is the opposite of investors.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
Top
StockTalkers.-
1
David Fry
-
2
Cliff Wachtel
-
3
Mike Havrilla
-
4
David White
-
5
Hedged In
Top StockTalkers » -
1
This article has 19 comments:
The beach, especially high end units on South Beach are probably more protected on the downside like a Manhattan vs. other parts of NY. On the Ocean, the Setai and the new W seem to be doing just fine at getting almost $2,000/ sq. ft.
Also, I enjoyed this articles look at the internals of this market vs the usual realtors bull.
As to your other point about wanting to control the building and the association board, I would like to tell the other readers about rental restriction. The condo board has the right to “approve” all leases and can take up to 30 days to do so. Boards can also restrict rentals entirely, or restrict renting during the first year or two of ownership. Some boards are now requiring tenants pay a refundable building deposit of up to one month’s rent. Buildings that allow rentals might restrict owners to one lease per year and impose minimum and maximum lease terms. All these restrictions make it difficult to keep the unit rented continuously.
Again to your point of controlling the board, the other readers should realize how quickly expenses can get out of control with a runaway board.
And while I also am typically a contrarian, and would agree with the basic premise of your article that the condos do not work for rentals, regardless of the discounts from previous retail, the long-term potential for appreciation is undeniable considering the historical preference for Miami, Florida properties among South American and European investors. Yes there may well be a few tough years but the market will return and we will again see prices hitting $500/square foot.
So if you pick a prime location (and some of the properties on the market today have locational problems), and can hold these bargains for a few years, there should be some decent upside potential.
Now to the second nail. There are those “investors” who go after condominiums and condo hotels in an awesomely clever, clench-move fashion: they also go after the control of the condominium association. That is an even bigger price than buying a unit for 40 cents on the dollar. He who controls the vote of the condo’s board of directors controls the purse strings of ALL unit owners, the members of the condominium association. Isn’t that a most clever mutation of a milk cow? Examples abound at my website, GrandLifestyle.com, and in particular focus on the subject at the media center, GrandLifestyle.com/med.... You may wish to contact Pierre Heafey (pheafey@groupeheafey.... the scheme’s architect and Gino Falsetto (gino@ariesdevelopment... the executioner (contact Nathalie Heafey at The Grand & Associates Realty, Inc.; 305-530-0609) for their thoughts on how they gained absolute control over the unit owners at The Grand in Miami, the Grove Garden Residences in Coconut Grove, and the South Beach condo-hotels, The Bentley and Hilton Bentley Miami/South Beach.
Can someone confirm if that is a possibility? Is it conceivable to get such a deal in the Lauderdale area either just North or South of that area?
Historically, Miami has always gotten overbuilt with greedy speculators(who mistakenly believe that they're investors) left holding the bag. Florida has seen this cyclical trend since the 1920's.
What was that about history repeating itself?
Regarding the insurance, it seems to me (I work in commercial real estate, especially multi-family) that this is finally coming down. There haven't been damaging hurricanes in Florida the last two years, and the price for insurance was hyper-inflated.
My opinion here is anecdotal, influenced by a deal I was working on recently in Leon County (North/Central Florida). I welcome any feedback.
P.S. I agree with the central premise: it is too soon to think of buying condos in South Florida. But I am interested in any other opinions/experiences regarding the insurance.
~
I will pick up one of these condos when the rate of return on my investment approaches high single digits. This has occured during 1995 - 1997, and it will happen again.