Walkaways threaten condo sales
Walkaways threaten condo sales
South Florida Business Journal - November 24, 2006by Susan Stabley and Julia Neyman
Skittish real estate investors have started seeking loopholes out of existing contacts for South Florida condos. Others are walking away from hundreds of thousands of dollars in deposits, rather than closing and carrying the property until the market rebounds.
Over the next six to 12 months, construction will finish on thousands of new and converted condo units, and developers will begin calling on purchasers to close.
If too many buyers fail to show up for closings, lenders will be forced to foreclose on projects, transforming the first big boom of the new millennium into a crash of catastrophic proportions, some attorneys warn.
"A developer that doesn't sell enough to get a construction loan is probably a pretty lucky guy, even if he doesn't think so, " said bankruptcy lawyer Arthur Rice, best known for representing SunCruz Casinos.
"With more inventory coming on line over the next two years, how can one think there will be anything other than continual pressure pushing prices downward?" he asked. "Better to be the guy who takes the first step to cut prices and clear out the inventory. The name of the game is to get this stuff sold."
Most of the problems may occur in Miami, where more than 6,000 new residential units were built in the last year and more than 22,000 are rising today. That's more than three times the number of homes and condos delivered from 1995 to 2005, not including apartments that were converted for sale as condos.
Estimates vary wildly on how many of those units - and others across South Florida - were bought by short-term investors. Some reports were as high as 80 percent for some towers.
"The people who bought these units have to be very nervous. They never planned on anything more than closing and flipping for sizable profits," said Charles Brecker, real estate attorney with Sterns Weaver Miller Weissler Alhadeff & Sitterson in Fort Lauderdale. "They're leveraged to the hilt."
Local lawyers are already starting to get calls from buyers trying to get out of units under construction across the region. Many purchasers who used no-interest loans or adjustable-rate loans have moved into panic mode.
"The borrowers were relying on property values continuing to increase, and if they aren't increasing, they are in a bind," said Paul Hancock, partner with Kirkpatrick & Lockhart Nicholson Graham in Miami. "If they aren't able to unload the property, they're going to foreclosure."
Risky investments, high expectations
Hancock, a litigator in the arena of mortgage banking, said the crisis comes out of a combination of risky investments, unsound loans and high expectations. Buyers that never planned on living in the unit are more likely to walk.
"The interest rates they're getting on their loans are so much higher than when they contracted, and now they can't afford it," added Jeff Ostrow, managing partner of The Hodkin Kopelowitz Ostrow Firm in Fort Lauderdale.
In the past two months, Ostrow has handled six clients eager to get out of purchase contracts. The buyers were from South Florida and had invested in condominiums and single-family homes in Broward and Palm Beach counties....
...For example, one of his clients tightened the rules restricting pets at a development. As required, a notice went out to all buyers and a pair backed out, citing a "material and adverse change."
Brecker said his clients didn't think it was worth the litigation and let the contracts go.
"But what happens when it's a 200-unit project and 120 want their money back? No one really knows the extent of it until closings are ready to begin," he said. "When the cranes leave the skyline, then we are going to know how bad it really is going to be."
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