The great condo collapse
Owners advised to wait out downturn, not walk away
June 26, 2009
By Steve Bergsman
Inman News®
In early May, Opus West Corp. filed for Chapter 11 reorganization for one of its developments. The Phoenix-based commercial developer, according to press reports, owed $160 million to a group of banks on a shopping center development in Texas. The news was of interest to a close friend of mine who lived in a condominium complex in Irvine, Calif.; his development is owned by Opus West.
When I talked to him about the bankruptcy, he didn't appear concerned. With the average condo price in his building at $1.4 million, this was a fairly upscale development and all the glorious amenities that were an inducement to move there were still intact, all services operational and there had been no additional calls for reassessments of condo fees.
The worrisome point was that his mid-rise building totaled 105 units, but only 42 condos had been sold and another six were in escrow. My friend did speak to the management of his condo about the bankruptcy filing and was assured the building was under a separate ownership agreement and wasn't in financial danger.
Mi amigo could be one of those blessed with "buena suerte" (in Spanish, "good luck"). Condominium projects -- where sales never crossed the 40 percent mark, where buyers have been walking away from presale contracts, and where foreclosures run rampant -- have been going bust faster than Mine That Bird took the Kentucky Derby.
Cities such as San Diego, Las Vegas, Phoenix and Sacramento have all experienced condo overbuilding, but other than falling valuations the damage has been contained. Not so in Florida, and particularly in South Florida, where "ghost towers in the sky" have brought nothing but hardship for everyone involved.
"We have hundreds of busted condos," exclaims Jack McCabe, whose company, Deerfield Beach, Fla.-based McCabe Research & Consulting LLC, performs real estate research for the South Florida region. "There are 130-unit buildings with just 10 or 15 condos filled. For the buildings that have been finished since the start of 2008, we are seeing huge cancellations. Most everyone is walking away or suing, trying to recoup their 15-20 percent down."
If Florida was hurricane central for condo development in this decade, it has now become the epicenter of condo lawsuits. As early as spring 2008, a couple of Florida attorneys were predicting the rising tide of condo lawsuits would swamp the local real estate market.
"There have been hundreds and hundreds of cases, including class-action lawsuits," says McCabe. Many of the lawsuits were investors trying to recoup down payments and, unfortunately for those investors, most have been dismissed, and some of the lawsuits have even been deemed frivolous.
This is an important trend line to consider, because if you are living in a condominium you bought in 2007 and the building is only 25 percent occupied, you are in a very difficult situation with limited options. If things end up going truly bad, a lawsuit is always a last-chance maneuver, but, so far, court cases aren't playing out well for condo investors.
At this juncture in this column, I usually like to point out possible solutions, but this time it would be difficult. Real estate professionals with whom I spoke with basically said that for busted condos it's almost a no-win situation for everyone involved.
So, you are nervously walking the floor in one of the 25 condos that are occupied in a 100-unit building when you receive a notice that the developer, who hasn't been able to sell any units in the past 12 months, decides his only option to save his investment is to turn the units into rentals -- a very common solution for owner-developers.
This maybe a temporary solution to the developer's revenue problems, but as a condo owner you now find yourself sharing the building with renters who don't have the same stake in maintaining the property as you do.
About the best option as a condominium owner is to go back through the condo documents, which should spell out whether individual condo units can be rented, and if so, under what conditions.
And there are bigger problems for you, the isolated condo owner! If your development hasn't made a go of it, you are likely to face a decreased provision of services and/or a healthy reassessment of dues and fees that have to be paid.
"The big issue is whether the condo association can live up to its financial obligations and provide the services that were promised to you as a buyer in that building," says Richard Swerdlow, founder and CEO of Condo.com in Coconut Grove, Fla. "If the condo association doesn't have enough renters contributing their pro-rata percentage, the association is going to cut services or reassess existing residents with higher bills to make up the shortfall."
How bad can things get? In April, a condominium complex in northwest Miami had its water shut off by the Miami-Dade Water and Sewer Department because it wasn't paying its bills. The problem at the development was that about one-third of its units were in foreclosure or bank-owned, so those individual condo investors were gone or if still around not paying their bills. Another condo project in South Florida had its electricity cut to the common areas.
Not to make things appear more difficult, but if you are in that condo and need to refinance -- perhaps, you have one of those toxic adjustable-rate mortgages -- considering what the current value of many condo units are compared to the original buy-in prices, no lender will refinance that loan.
Want an FHA loan? If 15 percent or more of the unit owners in your complex are behind on homeowners association dues, no loan; if 10 percent of the units are owned by one entity, no loan; and if 30 percent or more of the units are rented, no loan.
"That's almost all buildings in South Florida," says McCabe.
Short of walking away from your investment and tossing the keys into the valet stand, vacated by the now-unemployed valet, what can one do?
"The only hope," says McCabe, "is plan on staying in that condo for the next five to seven years.
"Unfortunately, in some areas of the country, even after five to seven years, condo prices won't get back to 2005 levels."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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