The great condo collapse

Flickr photo by Carolyn Coles.

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. ...CONTINUED

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