Miami Condo Vultures: A Fool's Game

by: Michael Steinberg
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.