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Condo-mania by the sea


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By Robyn A. Friedman

Special Correspondent

June 6, 2004

Tom Milana likes to buy six-figure condominiums that he never lives in -- or even sees. Years before the first shovel breaks ground on the project, the 37-year-old "flips" the property, reselling his right-to-purchase to someone else.

Milana, the owner of Milana Real Estate Investment Group Inc. in Boca Raton, currently has contracts on three units. He plunked down $66,000 for the right to buy a two-bedroom condo on the eighth floor of Marina Village. The Boynton Beach project won't be completed for a year and a half, but Marina's looking forward to a fat profit.

He has a contract to buy the unit for $330,000 when it's finished in November 2005. But people have already offered him $475,000 -- and he's holding out for $500,000.

Milana is one of a growing number of condo speculators looking to capitalize on skyrocketing condo prices. In the Fort Lauderdale area alone, the average existing condominium sold for $164,702 in April, an increase of 27 percent over a year earlier, according to the Realtor Association of Greater Fort Lauderdale Inc.

And speculators have plenty of inventory with which to ply their trade: More than 35,000 condominium units are planned for South Florida over the next few years, according to Michael Cannon, managing director of Integra Realty Resources in Miami.

But some analysts are questioning whether the condo-building flurry and get-rich-quick mentality of speculators are pumping up a market bubble that could be pricked by rising interest rates. If mortgage rates rise, housing demand is expected to cool. If speculators and other sellers fail to unload their units, prices could soften in a cascading effect, leading to an outright crash, according to the most-dire scenario.

"I think there's much more potential for a housing bubble in South Florida right now than there's been for a long time," said Ingo Winzer, a Wellesley, Mass.-based analyst who has been covering housing markets for 15 years.

Winzer compares average housing prices to average household income. Based upon his analysis, the Fort Lauderdale and Miami housing markets are each overpriced by 28 percent, and the West Palm Beach market by 17 percent. "Anything over 10 or 15 percent is pretty significant," he said.

Others disagree that a bubble exists. "Thank God I don't listen to analysts," said Rosalia Picot, president of Picot & Co. Realty Advisors in Miami. "They've been saying that the market will collapse for the last 10 years, but it always balances itself out."

Taking a gamble

Several factors have fueled the rapid growth in condo speculators and investors. In some South Florida projects, half the buyers are investors, Picot said, in contrast to a norm for this area of 10 percent to 15 percent for high-rise condominium projects.

Greed -- the desire to take advantage of a hot market -- can be one factor. Feeding frenzies abound when new condominium projects open, as developers typically raise prices with each phase they open to sales.

When Boca Raton-based E.B. Developers Inc. began selling units to an apartment complex being converted to condos, sales associates arrived at 6 a.m. that morning to find hundreds of people already there. All 100 units in the first phase of The Belmont at North Lauderdale were gone by day's end.

When Milana went to purchase his unit at Marina Village, the salespeople were overwhelmed. "People were literally throwing checks at them and yelling, `I want this unit,'" he recalled. "It was absolutely nuts."

Another reason for speculation: the poor performance of the stock market over the past several years. While the Dow and Nasdaq are down slightly this year, the average existing single-family home in South Florida sold for between 24 percent and 27 percent more in April than the same month a year earlier.

And Latin American buyers play a role in the demand for condominiums as well, using the South Florida real estate market as a "safe" haven for their money.

Add to that low interest rates and aggressive bank-lending practices, and you have a perfect environment for speculators.

Developers love speculators, who buy units early in the sales process, helping developers achieve their sales goals and qualify for construction financing by meeting bank presale requirements. "Some developers have a following of investors," Picot said.

But a large number of speculators can put a condominium project at risk.

If interest rates start going up -- as they are expected to do as early as this month when the Fed meets again -- demand for housing may weaken, and that might present problems for speculators trying to resell their units.

In response, some banks have tightened requirements for condominium financing over the years. In the past, developers got into trouble because they allowed buyers to put down small deposits on units -- some as low as $5,000. Some investors just walked away from deals, leaving developers with half-empty buildings.

Now, however, prudent banks require that a minimum of 20 percent be placed on a unit, said Marcia Snyder, executive vice president of Fort Lauderdale-based BankAtlantic. In addition, BankAtlantic scrutinizes the list of buyers under contract before it will provide construction financing, on the lookout for large numbers of speculators.

Condos everywhere

While speculators affect the condo market on one side, artificially pumping up demand, developers affect another critical piece of the equation, by controlling supply.

The condo market is "extremely vibrant right now," said Brad Hunter, director of consulting services for the Florida division of Metrostudy, a Boca Raton provider of market information to the housing industry. "But there's significant danger that that could turn south if too much supply hits the market over the next 12 to 18 months."

When it comes to supply, it's not clear how much is too much. But current levels of planned building are high by historical measures.

In Palm Beach County, about 3,000 new condominium units were sold from 2001 to 2003, according to Jack McCabe, chief executive officer of McCabe Research and Consulting LLC in Deerfield Beach. But more than twice that number are planned for the county over the next two to three years.

In Broward County, about 4,400 units were sold in the past three years, McCabe said; more than 10,000 are planned over the next few years.

In all of Miami-Dade County, 13,000 new condominium units were sold in the past three years. According to the Miami Downtown Development Authority, in the downtown area alone, more than 4,000 condominium units are under construction with another 9,800 planned for the next few years.

Now add in conversions. According to McCabe, more than 10,000 apartment units in South Florida are slated for conversion within the next 12 months. And that, he says, will push the market out of equilibrium, since in a typical "non-boom" year, less than half that number of units are converted to condos.

McCabe thinks the oversupply will have the most effect on speculators trying to sell units. "If they can't flip them, they're going to get killed much like the speculators in the stock market did," he said.

Still, condo converters are pushing full steam ahead. Converters claim that if interest rates go up, converted units will still offer good value to entry-level condominium purchasers, many of whom cannot afford brand-new units. "I think demand will remain high," said Jim Cauley, president of Tarragon South Development Corp., a Fort Lauderdale developer involved in two conversions in South Florida.

Also, Cauley said converters work with "pretty healthy margins" and can always discount units to buyers. And, if the market does take an unfavorable turn, the building could be retained as a rental property.

A pretty profit

For those who believe the condo market could collapse, the expected trigger is a rise in interest rates. Most industry analysts forecast that mortgage rates will hit 7 percent to 8 percent next year. While that is still historically low, it will dampen demand. Entry-level buyers, who tend to be more interest-rate sensitive, may drop out of the market.

McCabe predicts that by next year, South Florida will be in the midst of a condo glut not unlike that seen here in the 1980s. "Developers overbuilt, and then the interest rates went up and killed sales," he said. "There was a tremendous glut of condos and a two-year supply on the market."

Others disagree. Philip J. Spiegelman, president of Aventura-based International Sales Group Inc., feels that the market will remain balanced because not all of the condo projects proposed will actually be built.

"Anybody can put up a sign and go into business, but the ability to borrow money to build these complexes separates the men from the boys," he said. "All those projects will not ever come onto the market in any concentrated timeframe that would throw the overall market into an imbalance."

Still, the threat of rising interest rates and oversupply has failed to discourage condo speculators like Maria Fernandez, a Miami-based real estate agent who has invested in five units so far and expects to net between $60,000 and $200,000 per unit.

"You can't get that return in a savings account or even the stock market," she said. "If I had more money to invest, I would do even more."

Robyn A. Friedman is a freelance writer. She can be reached at [email protected].

link: http://www.sun-sentinel.com/business/local/sfl-sbbubble06jun06,0,2273328.story?coll=sfla-business-front ://http://www.sun-sentinel.com/busines...business-front ://http://www.sun-sentinel.com/busines...business-front

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