Microcosm of the condo boom-and-bust cycle.
The Icon Bay, a 299-unit condominium tower in the Edgewater area of Miami, was completed in July 2015 near the peak of Miami’s most recent condo boom. It was a big play for preconstruction condo flippers. The first sellers made some money. But in early 2016, the market curdled. And since May, preconstruction condo flippers at the tower – and there are many of them – have been getting mauled.
A couple of days ago, I reported about the dismal condo market that these folks are now facing in Miami-Dade: ballooning but understated inventories, sagging sales, plunging dollar volume of sales, and developers that are unable to sell recently completed units in their projects and are just sitting on them, even as a flood of new big projects is coming on the market. And so preconstruction condo flipping has turned from easy profit-maker into a bloodbath.
Preconstruction condo flippers buy the condo directly from a developer during the planning or construction phases, hoping for quick and big returns. The initial deposit is small. Additional payments need to be made as construction progresses, but lenders are eager to lend as long as condo prices soar. So no problem.
Until condo prices begin to sag.
To what extent this bet is now collapsing can be seen in granular detail at the Icon Bay, a microcosm of what has afflicted the Miami condo market. By now, the developer has sold all 299 units and is off the hook. But a number of units were bought by preconstruction condo flippers who are now trying to unload them.
According to an analysis by Andrew Stearns, CEO of StatFunding, so far 18 resale transactions at the Icon Bay have closed, and another 68 units are listed for sale – in a 299-unit building!
Initially, it all worked according to plan, and the first nine condo flippers out the gate made money. But by May 2016, it was over. And from that point forward the losses ranged from 8% to 28%.
“The wheels fell off in May 2016 – really, the wheels were already wobbling in early 2016, but real estate transactions usually take a few months to close,” said Stearns, in explaining the table below that lists the details of the resale transactions by original purchasers after purchase from the developer (click to enlarge):
Gains and losses (superscript 2) include 6% sales commission but do not include developer fees and other costs paid by preconstruction condo buyers. The unit that sold on May 19, 2016 (superscript 3) was an off MLS transaction.
The inflection point
Stearns puts it this way:
In early 2016 some condo flippers in Icon Bay began lowering asking prices to loss-making levels. The resale data indicates that the inflection point in the pricing of the Icon Bay project was in May 2016. Since May 19, 2016, every resale transaction in Icon Bay has resulted in a loss for the seller.
Going forward, it doesn’t look any better. There are another 68 units listed for sale. Of them 17 units are listed with an asking price after sales commission (but not including developer fees and other costs paid by preconstruction buyers) that is below the preconstruction price that these sellers paid the developer. These losses embedded in the asking prices average $41,000, ranging from minimal to $119,500. And these are just the asking prices. Potential buyers have plenty of incentives to negotiate.
Preconstruction flips tend to be highly leveraged. If a company is behind them, they might be leveraged at the institutional level. Flippers may own multiple units, and these losses can put a serious squeeze on them.
5.5 Years’ of Supply
But only 12 units at Icon Bay sold in 2016. With 68 units currently listed for sale, at this sales pace, there is, as Stearns notes, 5.5 years’ of supply.
With so many units in the condo tower having already sold at a loss, “comparable sales” prices are trending down. This is a key measure that the industry uses to support asking prices. It’s designed to push up prices, as the higher prices of closed sales are used to rationalize even higher asking prices of “comparable” homes coming on the market in the area. But it also works in reverse when prices are heading south. And it starts a cycle where lower selling prices are putting downward pressure on asking prices.
This is the granular detail of bets made during a boom that has now popped. Boom-and-bust cycles have defined condo markets around the country, precisely because condo flippers who have no intention of becoming the end user drive up prices during the boom with artificial demand, and this artificial demand itself creates hype and speculation, and the whole thing feeds on itself. But when the boom turns into bust, which it inevitably does, condo flippers drive down prices as they’re desperately trying to get out, or as their stiffed lenders force them to out.
It’s going to get worse in Miami-Dade. A flood of new condos will be completed in 2017 and 2018, all subject to the same dynamics, at a time when even the developers are getting stuck with unsold units. Read… Condo Speculation Collapses in Miami-Dade’s Condo Glut
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Its Like Yogi Berra said…”its Deja Vu” all over again….lolol
Yogi also reminded us, “You can observe a lot by watching.”
Evidently, some people weren’t watching too closely in 2007 to 2009.
Yip and I don’t feel sorry for any of them .those gready get rich free money ideas supposed by artificially low interest rates which made it impossible for genuine people. Now pay the price for stupidity same for the stockmarket get ready to take your medicine .Obama with the help of the fed Have screwed people into believing there is free money and the sky’s the limit .well there’s all ways a price and the gready stupid ones will pay
more likely, most of the greedy stupid ones will not pay the bill again this time … it’s much easier and politically more attractive to stick it to savers and taxpayers.
Unlike the Trump condo Tower in Tampa in 2005-6, at least Icon Bay was actually built and the flippers have a condo to sell.
Had to google …
So, it sounds like some developers had a condo tower planned, licensed Trump’s name/brand, who then proceeded to implode due to market conditions (i.e. the 2007 crash) and the property was never built (as it wasn’t economic to do so). Lawsuits went in all directions. Property was sold and sounds like the new owners plan to open a new development in 2018.
Did I miss something?
Florida Real Estate Bubble
Call them condos — whatever you want.
What’s new ? A Florida Real Estate Bubble ? Nope, not really.
Just a couple of points on the Miami condo flippers, many of them are real estate agents speculating in the market, not big money types. If they have to sell at a loss, it might cascade to other buildings as well as their own homes. They don’t ever pay the full 6% commission when they sell, 3% tops.
The chart also does not indicate how many of the units are rented out, and at what prices. Most of the condo buildings in Florida are full of renters, many renting at less than cost, because the units are not selling.
Many of the foreclosures are also purchased by the condo boards to avoid further price declines showing up in the comps. It’s a mess.
Petunia, How does a HOA (board) come up with enough funds to pay off the banks when buying a (pre-) foreclosure condo? Is there something special about Florida law that makes it easier for a HOA to do this?
The banks holding the mortgage negotiate a better price with the board than what they would normally get at auction and provide financing as well. The boards usually rent these places out waiting for the prices to come up. The shortfalls in revenue are usually made up by the other owners in special assessments. These special assessments are a BIG problem in Florida, usually pushing more owners into foreclosure. The board members are usually owners and they are highly incentivized to keep the prices up. Buyer beware.
Bingo, with the poor construction many buildings suffered from water intrusion, mold, and leakage leading to rot. Here’s just one recent example with a $20k special assessment per unit.
Thank you for replying. That sounds about right.
Here’s my guess: The HOA “overpays” for the unit by paying more than what is owed to the bank, and have that amount recorded as sales price, but often gets money back for the amount the HOA itself is owed in delinquent (very common) dues.
That could be one way to goose the recorded price without paying the full amount. Note that in such a scenario, the HOA isn’t really getting the delinquent dues covered, because the dues payment is coming from the HOA itself. So it is not a zero-cost method to window dress the market price. However, if the HOA has managed to inflate the judgement on the delinquent dues by applying unrealistic penalties and interest that do not reflect actual losses, the HOA may actually achieve both inflating the sales price AND getting some or all of their REAL losses covered. I think all kinds of creditors play games by inflating their losses this way.
Additionally: A HOA purchase is not an arms-length transaction, so any competent appraiser ought to exclude the transaction from their analysis. Not sure whether that happens in practice.
wow petunia , we all are getting a lesson
on condo ownership/investment , but what i can glean from your post is that the HOA can take title to a distressed unit under their administration . if the state is a judicial foreclosure state , in your scenario, the HOA would have to bid for the unit at the foreclosure sale and pay cash. i can’t believe the bank would finance this purchase .
I have heard of boards that bid cash at the auctions and buy that way, and I have heard of boards who approach the banks when no offers come in. Usually the boards go to the auctions of lower priced units and compete, but they know that the higher priced units are bought back by the banks, so they don’t bother to bid up front, they negotiate after the fact.
I would go as far as to suggest to anybody who is interested in a particular condo building, not look at the MLS but to approach the board for resales.
If I can get alloidial title, I might consider buying land/property – or if it was a positive cash flow investment (i.e. business/capital). At the rate muni’s are blowing up their tax bases (e.g. Dallas, Chigaco, etc) and the rate at which demographics in the US are greying, I highly value the ability to pack my s**t and head down the road to the same job, same salary, same rent – minus the taxes and stupidity.
What will be interesting to see – is how many younger folks figure this out – and who all the old folks sell their property too. And rates have no direction to go but up.
Most of the people who lost their homes have kids. These kids have gone thru the wringer and know that they will have to follow the opportunities where ever they are. I’m betting they will pick mobility. I’m telling my son not to bother and he says I didn’t have to bother to say it.
From my experience as Real Estate Examiner, I have rarely, probably never seen an HOA purchase of condominium at auction (technically). I would have to re-check but I think it might be against Florida Statute.
What does happen, is such in Florida as a judicial foreclosure state:
The condo owner misses their assoc. dues and thereafter the condominum files and records a lien in the public records for however long that condo board chooses and then choose to begin foreclosure proceedings at the circuit court to foreclose out the condo owner and any inferior interests.
That property goes to auction and the public bids for the property starting at a price based upon either the amount the condominium declares on it’s Final Judgment as owed or some other arbitrary number not above what is owed.
If no one bids to the Association’s set amount of which they are owed, the condominum wins the auction. Certificate of Sale and Certificate of Title are filed in a couple of days and the condominum becomes the owner of the property.
SUBJECT to superior interests such as mortgages, tax liens, code,etc.
A lot of boards go on to rent the units until the mortgage lender finally forecloses on the Association and all other interests. The association only ever gets 1 year of old association dues or 1% of the mortgage amount after it is foreclosed by lender and rents if any from their renting the unit.
Hope that explains a bit.
The Russians are interested….
Yeah, it’s good to have a dream. Now, the real estate low lives are so desperate that they poststhe number of bots visiting their site from different including form Russia as the sign of Russians coming to the rescue.
If I had as many Russian bots visiting my site, or posting viag**ra and other weird drugs, and products on my site as customers, now, I’d be dining with Bill Gates. “What Bill? You want me to come over for dinner? Let me check with my calendar :).”
” And it starts a cycle where lower selling prices are putting downward pressure on asking prices.”
Someone needs to explain this to bankers. Obviously if they knew there was going to be a bust after the boom, they wouldn’t lend so much into the boom. Which, if taken to its logical conclusion, would mean there wouldn’t be a boom to start with.
If they could get this simple information, capitalism would actually work!
I wonder if the bankers don’t care because they have already packaged these and sold them off to other investors.
Sliced and diced just like before.
whomever bought unit 4101 will wish he stayed in the stock market. Condo’s have heavy carrying costs via HOA fees. Anyways I think a solution would be to get Blackstone to purchase units en mass and rent them out . Fannie and Freddie have tax payer money to help with guarantying the mortgage backed securities used as leverage in a new own to rent scheme.
Just like old times! I remember watching this madness back in Arizona.
This one hasn’t even started yet. There will be at least a couple of years of bloodbath around the globe to go through.
Many of the units were bought with South American money, and even with the prices down 35% they STILL did better being in $USD, losing money and then re-translating back into Real or Pesos or whatever.
– Ralph – same thought crossed my mind. I cross referenced a few of the units – original and resale dates. For the Brazilian real – not much gain. (If they would have purchased in 2014, another story.) Then again, they could have exchanged/deposited funds in 2013 and 2014, purchased in 2015. If that is the case, they could still be ahead in dollars if converted to reals. In the end though, they would have been better just leaving the dollars in the bank. if the buyers were Mexican, they did better.
Could someone with more knowledge of real estate and finance please provide me with an innocent explanation for the transactions for unit 4104?
A 40% increase in price, the two transactions taking place on the same day?
I’m not trying to be snarky, but that jumped out at me. Is there a potentially legitimate rationale for what otherwise looks like a sham transaction?
Then again, when it comes to Florida real estate, maybe snark is called for.
The Marx brothers first film, “The Cocoanuts,” was made in 1929, and it’s “plot” centered around the great Florida land and construction boom of the 1920’s, and which burst in ’26.
And, on “the more things change…” front: at one point in the film, Groucho is trying to unload some worthless Florida real estate on some rubes, and says, “You can have any kind of home you want. You can even have stucco! Boy, can you get stuck-o.”
I noticed that too, but it is not uncommon in FL to see flips have multiple transactions listed on the same day. During the last boom it went something like this:
Seller #1- Buyer #1: Sign papers at 10 AM.
Buyer#1 (now seller) – Buyer #2 – Move down the hallway and sign papers at 12 PM.
This did cause some issues where chain-of-titles didn’t get transferred correctly and some transactions were not recorded in the correct order, or simply not recorded at all.
Most of the foreclosed homes I looked it (and I bought one) had a Special Warranty, instead of Warranty Deed. A RE attorney can explain the difference.
“Most of the foreclosed homes I looked it (and I bought one) had a Special Warranty, instead of Warranty Deed. A RE attorney can explain the difference.”
That is more likely due to it not technically being a “foreclosure”, but an REO (Bank Owned / Real Estate Owned). Special Warranty Deed is what the bank normally gives to say that they will defend certain right from when they came to own the property and almost none before their ownership.
A foreclosure is a house bought at the courthouse steps and usually results in a Certificate of Title as your ownership document in Florida.
Great question. So I just got off the phone with Andrew Stearns, who provided the data. He said it was a “simultaneous closing,” which are not that uncommon in this environment.
There could have been several reasons for a “simultaneous closing,” among them most commonly:
1. Someone put down the deposit long before closing (could be a year earlier) and makes the additional payments as required. Throughout, that flipper markets the unit and eventually finds a buyer. Then – in this case in May 2015 – the preconstruction flipper schedules the two closings on the same day. The sale from the developer to the flipper closes first. And the sale from the flipper to the ultimate buyer closes second.
2. A party that has something to do with the building (the architect, a construction contractor, etc.) agrees to buy the unit earlier at a below-market price as part of their compensation, and then when the unit is completed, sells it to the ultimate buyer. The closings for both deals would also be scheduled for the same day. The fact that the profit margin was much bigger than on the other units (40% after sales commissions), and that it was an expensive unit (penthouse?) suggest that this might have been the case.
Probably not the right explanation here, but in Netherlands this happens frequently and it is a pretty sure sign of tax cheating.
For private speculators, gains from selling a home are totally tax-free; for companies, gains are taxed but losses can be booked against other profits of the company. If a private person sells to a company at a price that seems way too high, it is probably an attractive deal for both and the price is not based on realistic appraisal of the property. Especially around 10 years ago this even happened with complete office towers changing hands several times a day, with sometimes many millions in (private, untaxed) profit happening in a few minutes. I have seen the same with several canal houses in my area, changing hands within weeks with a couple 100K euro gain, sometimes going back and forth a few times between the same players.
As long as the property is sufficiently unique it is difficult for the tax office to prove malice; most of these cases are simply ignored, accepted as a privilege for the elites. Unfortunately, it’s no longer possible for ordinary citizens to watch for such transactions, because since +/- 2008 transaction details (like sales price or mortgage for the property) involving a ‘company’ are no longer publicly available. Much easier for the elites ;-)
2. Looks about right. Seller’s company “Now *company* is Worldwide leader dedicated on Safety Devices for jobsites and lifting appliances. They bottim off the business in more than 50 countries.”
This may be a dumb question, but I’ll ask it anyway. Back in 2008 there was a helluva mess involving MERS. Their records were so woefully inaccurate, that occasionally two banks tried to foreclose on the same property. Other banks tried to foreclose on properties that had NO mortgage at all.
The original title papers had disappeared or been destroyed and of course titles had never been recorded with town clerks. So do they have clean titles in Florida ?
I would say more often than not yes but that’s not to say that there was not a huge mess as you saw everywhere in the news.
When the banks had to go in to foreclose they had such a mess in terms of one Original Bank assigned to MERS, who then assigned to Bank 2 instead of Bank 1, then files Bank 1 to Bank 2 assignment then Bank 3 assigns back to MERS, crazy mix-ups and throw in some robo-signing.
The order and correct mortgage holder through the foreclosure process had to rectify the order of the assignment of mortgages so that the correct entity foreclosed the property and the property’s title would be cleaned up.
So from my experience in So. Florida a lot of title is clean after foreclosure and I have run into some issues but more so the exception than the norm.
i know someone who fought the foreclosure process until the statute of limitations occurred. the judge awarded him a million dollar canal home in the keys. he stayed in the home the duration of litigation (free rent) . the plaintiff paid the taxes . he has legal fees in arrears maybe 50K. His defense was what you stated MANNY . the paperwork trail was lost. Not a bad day at the tracks.
Wow. That is not a bad day at the tracks. Nice location. Down there in Monroe county, it’s a different game.
Lucky that is, since I think legislation passed against that statute of limitation of the banks taking too long. Now they can keep coming or something of the sort. They don’t take so long anymore either, law firms are fully stocked with lawyers now to move foreclosures along.
You think this is a bloodbath, just wait until the ocean starts to really rise from glacier melting. And Florida being about 5 feet above sea level with a Republican governor who denies Climate Change.
Buyers that purchase a property with the intent to flip, it but add nothing to the value except time, are sucking the air out of the room. That is the name of the game for stocks and commodities but it’s bad for everyone in real estate. . . except for one party.