Investors find profit
February, 08, 2008
David Dweck loves desperate sellers. As a real estate agent and founder of the Boca Real Estate Investment Club, he's out there every day, making deals and capitalizing on opportunities.
Dweck recently picked up a three-bedroom house in Deerfield Beach by putting down just $500. His profit on the re-sale: $8,000, a whopping 1,600 percent return on his investment.
But individual investors like Dweck aren't the only ones looking for bargains in South Florida's ailing real estate market. High-net-worth individuals, pension funds, developers, hedge funds and institutions from around the world are all sniffing about the local market, trying to snap up deals. With some properties trading for just pennies on the dollar, the opportunities abound.
"The days of the games of Easy Money and Monopoly are over," says Michael Y. Cannon, executive director of Integra Realty Resources in Miami. "There are major opportunities for prudent people—in conducting workouts of infeasible developments or projects that were over-financed by inexperienced developers, or by lenders that were imprudent or lazy and didn't do proper due diligence."
Wondering where the best bargains are?
Here are a few sectors in which savvy investors are active—or are about to be.
Land
With the new-home market looking grim, some developers are trying to cut overhead by unloading their land holdings. Others are leaving the market entirely, either voluntarily or due to bankruptcy.
"Pretty much all developers and homebuilders are evaluating their asset positions," says Jim Harvey, president of the Eastern Division of Kolter Land Partners in St. Petersburg.
Kolter recently paid MI Homes $45 million to acquire its portfolio of residential lots and inventory homes in Southeast Florida. The portfolio consisted of about 500 developed residential lots and inventory homes in four communities in Palm Beach and Martin Counties.
"It's a big overhead commitment to keep an operation going, and MI opted to reduce that overhead and take the dollars they received to pay down debt and survive another day," Harvey says. "We're very comfortable that it was a great financial deal for us, and it gives us the flexibility to be patient and wait for the market to return."
Continuing its aggressive acquisition strategy, Kolter recently purchased Vizcaya Falls, a project with over 500 developed homesites and single-family homes, from Centerline Homes for $20 million.
According to Peter Zalewski, founder of Condo Vultures LLC, a market analysis firm in Bal Harbour, entitled land can be purchased from developers for at least 50 percent less than its market value. And bankers—anxious because of the amount of land they're starting to hold in inventory due to foreclosures and deeds-inlieu—are receiving offers from potential land purchasers for 20 cents on the dollar, Zalewski says.
"The banks are willing to let it go at 40 cents on the dollar now," he says. "The price will probably end up somewhere in the high 20s or low 30s."
Blocks of condominiums
Industry experts have been saying for years that South Florida's overheated condominium market was not sustainable. And they were right. Due to the oversupply of condos here and the vast numbers of speculators, the condominium market is floundering. While some experts feel it's premature to jump into that market at this point, many are eyeing the 20,000 or so unsold condominiums presently under construction in the tri-county area.
"You're just starting to see the tip of the iceberg," says Jay Massirman, president of Massirman Group LLC in Miami. "The fallout is yet to come."
Massirman recently went to New York to meet with institutions, pension funds and affluent individuals interested in buying everything from "loans to broken, fractured condominium projects, to new construction, blocks of condominiums or an unfinished construction project." He says investors are looking to acquire assets at 50 percent of the retail price or less and planning to hold them for three to five years in hopes that the market will turn by then.
"It's a risky proposition," he says. "But a lot of very smart people are working to get themselves in a good position when the dam breaks."
One of those people is Jorge M. Perez, chairman and CEO of the Related Group in Miami. "We're pretty well advanced in creating a very large fund with some Wall Street people," he says. "The over $1 billion fund will buy distressed assets."
Perez, who refers to his fund as an "opportunity fund," rather than a "vulture fund," is looking at purchasing mortgages, land, condominiums under construction and unsold blocks of condominiums, many of which can be purchased for less than their replacement cost.
"We're looking to manage, rent them, and then move them as the economy changes," he says.
Perez was careful to point out that his fund will not purchase units from the Related Group. "We believe our units are highly, highly valuable, and we want to keep them in house," he says.
Distressed multifamily projects
Dormant for a while during the condominium boom, the local apartment market is again starting to sizzle. And that's bringing apartment developers to South Florida in search of land or distressed projects that can be converted to rentals.
"We've seen many situations where for-sale housing builders are looking to sell properties because of the downturn," says Mike Ging, managing director of Alliance Residential, a Phoenix-based apartment developer that is active in the Florida market. "Some of them are wellsuited for apartments."
Alliance is under contract to buy four sites – one in Broward County and three in Tampa, Ging says. The Broward project was originally slated for townhouses, but Alliance plans to modify the site plan to convert it to a three-story apartment development.
"Developers are dropping prices," he says. "We are buying these, in many cases, at or below the seller's cost basis."
That's because a for-sale developer would have purchased the land at a price based upon its value as a condominium, Ging explains. But land for apartments is priced less.
"Townhome sites were selling last year for $60,000 to $80,000 a unit," he says. "Multifamily rental land today is $30,000 to $50,000 a unit."
Other opportunities
Integra's Cannon predicts that property managers and yes, even brokers, will do well as a result of the market downturn. And Zalewski, of Condo Vultures, says he believes an emerging market exists in making hard money loans to condominium associations facing shortfalls due to units in foreclosure.
No matter what opportunity an investor seeks, prudence should dictate. Says Cannon: "People weren't prudent during the go-go years. You've got to determine the amount you want to spend, determine your risk tolerance and provide good oversight."