September 26, 2006
The Aftermath Of Condo Fever
How To Cope With a Condo-Investment Hangover
By Amy Hoak
CHICAGO (MarketWatch) -- People camped out for the chance to buy a unit in Radius, a condominium development in Hollywood, Fla. The building's 285 units sold out in just over 10 hours -- half a year before construction was even set to start.
But that was in the summer of 2004, when the red-hot condo market was peaking and money could be made by investing in condos expected to quickly appreciate. Units were often on the market for resale as soon as they were completed. It's a much riskier proposition to flip a condo in some of today's cooling markets.
"You see some of these communities that investors purchased ... there are no lights on at night," said Bill Donges, chief executive officer of Lane Company, developer of Radius, which is scheduled for completion in the spring.
The lack of post-dusk illumination in some South Florida condo communities is a sign that many buyers never planned to move into the units they bought, he said. Their plans now: sweat.
According to the National Association of Realtors, inventory of existing condos and co-op homes rose to about an 8.6-month supply in August. The national median sales price for the housing type settled at $223,200 in August, down 2.4% from $228,800 a year ago.
"The market is clearly oversupplied in many places," said David Seiders, chief economist for the National Association of Home Builders. "The key symptom of that has been on the price front. Prices have taken a hit."
Not wonderful news for those who have invested in condominium units with the intent to sell them quickly -- and are still holding them. According to NAR data, 31% of investment purchases made between 2002 and 2005 were condos.
But it may not be time to jump off the condo's balcony just yet. There still are investors entering some markets with the intent of purchasing one or more units and holding them for a few years. Some are encouraged by increased demand for rentals in certain areas and betting that long-term appreciation won't skip a beat.
Seiders put it this way: "If you're in it for the (short-term) price appreciation then you want to get out," he said. "If you're an investor wanting to rent them over time, you don't necessarily want to get out of the investment."
Get out while the getting is good
Patience is a virtue not all condo investors have in abundance. The National Association of Home Builders is noticing increased reports of sale cancellations, meaning buyers are backing out before closing, Seiders said. "In that case, all you're losing is the deposit," he said.
In South Florida, Mark Zilbert has another way to help condo speculators in their hour of distress. Zilbert owns a real estate brokerage and also helps link up condo buyers and sellers through the Web site CondoFlip.com.
A new feature on the site is a slate of panic buttons for investors worried that they won't be able to unload their properties: One button for those who aim to sell their condos for a profit, another for those who are willing to break even and another for those who are willing to lose money in order to get out of the deal.
After sellers decide which camp they fit into, they can be connected with buyers interested in relieving them of their burdensome investment.
Of course, another highly publicized way of generating buyer interest without cutting the actual asking price is to offer incentives to sweeten the deal. Incentives can include in-unit amenities or the covering of closing costs.
Adjust your thinking -- and your financing
Investors who can afford to wait out the storm, however, could benefit in the long run.
"There are a lot of unique proprieties that would be a shame to sell out," Donges said. "In the long run, a lot of these properties are going to have value."
It's also important to note that conditions vary from market to market. For example, while the South Florida condo market may be iffy, conditions in some Texas markets are going strong, said Jim Fite, president of Century 21 Judge Fite Co., based in Dallas.
"We have a very robust environment for investors right now in all segments of the market," he said. Investors have shifted focus from places such as Phoenix and Las Vegas to some parts of Texas, where rental values are more attractive, he said.
Chicago has a "normal to healthy" investor market, said Chris Kenny, chief financial officer for Palladian Development. "The difference in this market -- it's not a flipping market," he said. Instead, investors will typically hold on to a property for about three years.
Those who do change their course to incorporate a hold strategy also might want to rethink their financing, said Lucy Duni, director of consumer education for TransUnion's credit-information site, TrueCredit.com. In the recent past, condo investors often took out 1-, 3- or 5-year adjustable rate mortgages because the intent was to make a big profit in the short term.
If the adjustable loan is about to reset, investors might want to think about locking down a fixed rate. "If they're in an ARM, it might be time to think about refinancing," Duni said.
Becoming a landlord
Investors going into hold mode may decide to rent their units as a way to cover costs. In markets with low apartment vacancies and increasing rents, the move is an especially attractive way to bide time.
"Because of the fact that the market is softening, a lot more people are making decisions to rent because they don't see themselves getting what they anticipated for the sale," said Patrick Roberts, a real estate agent with 773 Realty Inc. in Chicago.
Even some builders are taking note of the current rental fundamentals; Donges said Lane Company's focus is shifting back from condo building to apartment building.
But there's some work involved in being a landlord. The first hurdle: setting the rent.
A fair amount of owners know how to set an acceptable price, Roberts said, but others ask for a couple hundred dollars more than comparable properties in the area. Incorrect pricing causes the rental to sit vacant for months, resulting in lost cash flow.
Condo owners have to accept that they won't get all their mortgage payments, taxes and assessments covered in the rent, Roberts said.
There's also some effort required to find the best tenants, he said. Credit checks on potential tenants are wise, he said, and sometimes condo associations will require criminal background checks as well. Some associations will also have restrictions on how many renters can occupy a building; owners should make sure they can rent the unit before proceeding.
Or, in some cases, it's possible to hire a firm to do the landlord work.
In Chicago, a new business was created to manage condo owners' property for them, performing such tasks as finding tenants and collecting rents.
The service, CRS, helps the owners of condos converted by American Invsco, said Michael Zink, one of CRS' developers. Its success is prompting it to expand.
In some situations, condo owners who use CRS are guaranteed a rent check every month -- even if the unit is unoccupied, he said. CRS' cut is a 10% commission based on the lease value from the rental transaction. If the condo owner chooses its rental guarantee program, CRS is paid a fee instead, Zink said.
"At this point in the market, what we really are is more of a safety valve or a way for people to weather the current situation," Zink said. "We can mitigate loss in this period of recovery."