When Will the Miami Condominium Market Recover? Follow the Land, Man

Real Estate Issues, Spring 2009 by Langhorne, Richard, Blazejack, John

In the triple bypass, everything that comes from the heart of a sturdy real estate model was abandoned for artificial and insider trading on land and development schemes, coupled with the ultimate artificial element, "the Buyers Club." Buyers Clubs were predominately groups of speculators who executed preconstruction purchase contracts that were fully assignable and were subsequently flipped to other speculators after the developer closed on construction loans.12 Essentially, this was a fraud perpetrated on the lender, but the model allowed lenders to abandon prudence and discipline without prying into the number of contracts that each speculator held. In previous eras, purchasers were not allowed to have a half-dozen contracts in the same building. In the recent cycle, the only prudent actors in the game were the mezzanine lenders, who studied the credit scores of unit buyers and scanned buyer lists for active flippers.13

COMES NOW THE INTERNET

No one ever imagined that there would be trading of purchase and sale agreements for luxury condominiums across continents by virtue of the Internet and powerful Web sites. But, marketing Web sites of developers and real estate brokers have created an artificial perception of the depth, strength and durability of the condominium market.

This perception was enhanced through actual sales initiatives by developers in overseas markets. The result was implied demand that is irrational when compared to actual, fundamental demand.

IMPACTS FROM SEIZURE IN CREDIT MARKETS

Conventional lending for luxury condominium purchasers has become more stringent, with higher equity requirements and substantiation of income. The requirement for a higher equity contribution on the purchase of individual condominiums puts further downward pressure on price points and elongates the recovery timeframe.

NEW GUIDELINES FOR FANNIE MAE LOANS: A NEW BARRIER TO RECOVERY

Fannie Mae has issued new guidelines that Florida condos and condo conversions, and, in some cases, older condos, must meet before it will fund loans:

* At least 70 percent of the units in new condos must be presold.

* No more than 10 percent of units can be owned by a single entity.

* No more than 15 percent of units in all condos can be more than 30 days past due on association fees.

* No more than 20 percent of a condo can be devoted to commercial use.

* All condos, new and old, must have fidelity insurance, which protects association funds from fraud.

* The seller is not allowed to help with down payments or offer other perks, like deductions of association fees, unless they are disclosed.

* Condos must have hazard insurance.

* When investors buy in established projects, at least 51 percent of units must be owner-occupied.14

These are the sort of restrictions a successful project would require. People who are buying today should want these restrictions and, in some cases, even more restrictions. For instance, there is a growing consensus that renters do not "work" in luxury buildings for a variety of reasons, such as unit size, approval processes from associations and maintenance issues with non-resident owners, to name a few.