Miami Real Estate Boom Fool’s Gold?

Image: Quantum on the Bay. The backdrop for last evening’s Nightline piece

According to Nightline, which aired an expose concerning the real estate boom in Miami, what we have here is fool’s gold. The piece centered around condo investor-owners that want to pull out of contracts due to drops in unit value caused by over-supply. Quantum on the Bay and 500 Brickell were cited as an example of such a situation.

Example One:

“Rosa Blanco paid $465,000 for a one bedroom at Quantum on the Bay. Today, however, Blanco estimates the property is worth $100,000 less than what she agreed to pay.”

Example Two:

Retired businessman Tom Leon knows a bad deal when he sees it. He bought two condo units two years ago for $500,000 each, hoping to flip them for quick profit.

Today, as the buildings near completion, Leon is certain he couldn’t he even get $400,000 for each of the units — so he’s decided to cut his losses and walk away from $200,000 in deposits rather than pay the $800,000 balance he now thinks is a bad investment.

The report stated that the Miami skyline has transformed, but at the cost of many speculative buyers suffering financial loss. It referenced Miami’s history of boom and bust. They are right but to a certain extent. This boom will go down as one of the most important and positive events in Miami’s history.

The Boom’s Effects

Because of the boom:

  • Miami surpassed NYC for the first time in new construction–at least momentarily elevating us to the great pantheon of famed cities.
  • Miami is developing a sense of real and broad urbanism–breathing life to the center of the City.
  • Neighborhoods once derelict will have emerged from obscurity–adding depth to the social fabric of our City.
  • Miami is closer than ever before to being a truly world class metropolis–so that the world can know.
  • The city’s vast skyline will actually reflect the ambitious and adaptive nature of its inhabitants–enhancing civic pride.

One can go on and on. Yet, apparently the real news is these short sighted investors who planned poorly and bit off more than they can chew.

Disgruntled Investors Going Out With a Bang

It’s unfortunate that there are some flippers/investors crying foul and doing whatever they possibly can to garner attention, discredit developers, and tarnish the market. These people are at the root of the foreclosure spike, units for sale over supply, and contract pullout craze. Since they can’t afford to remain in place they’re going out in a blaze of glory. The very essence of this report, I think, is positive: Flippers and investors are getting flushed out.

In the Long run

The price downturn will continue and probably worsen as thousands more units come into the market, and frankly, one cannot ponder a recovery when one hasn’t seen the bottom yet, but there will be a recovery, and the buildings aren’t going to be swept away as the flipper/investors will. After the market bottoms out and begins to recover, we will be left with a much greater city than we had before. End buyers will remain as the beneficiaries. They planned longterm, committed themselves to the vision, and did not place themselves at the mercy of a highly volatile and unpredictable market. They will benefit from long term value gains.

Despite the downturn, the boom will have served to set an already exotic Miami further apart from most other major U.S. real estate markets. My guess is that the long term (5 year minimum) gains are going to make even today’s high purchase prices seem like peanuts.

Housing Price Index since 1975 for the Miami-Kendall-Beaches Metropolitan Statistical Area-as defined by the U.S.Census Bureau (right click to view full image):

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10 Comments

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10 responses to “Miami Real Estate Boom Fool’s Gold?

  1. Brad

    From the article by an attorney who represents developers:

    “I can’t think of any other area of investing,” said Landy, “whether it be investing in the stock market or putting your money on a particular horse…where if it doesn’t go your way… you say, oops, it didn’t work out, now I want my money back.”

    How insightful–these buyers took an investment risk and now are seeking ways to back out when things turned sour. Do you think these buyers would be looking for an exit strategy (by finding substantial changes to their unit or the condo docs) if they could flip or were assured that the value has appreciated? Of course not. It brings into question the very nature of pre-construction condo speculation and how it relates to other forms of investment/gambles, and whether in fact it is “fool’s gold”.

    I think the key here is to identify what in fact a “substantial change” is— will a 30sf difference in unit size constitute rescission, or what about a 1yr delay in completion, or maybe a change from assigned parking to valet parking? It will be very interesting to see how the courts interpret these cases. I tend to feel that in most instances the developers will prevail, or else risk a serious banking crisis with regard to defaulted construction loans.

  2. If values were appreciating, they would be excited as all hell to sell. Personally, I think it is fool’s gold when you tie up a bunch of your money on something that is not tangible and expect, once it becomes tangible, for everything to be 100% as planned and market conditions to be ideal. That’s plain foolish.

    These disgruntled investors are looking to get out unscathed because their intention from the get go was not to retain the unit but to sell asap. These flips are what fuels the glut. Think about how irrational that is in the context of a boom in construction that is swamping the market with new units. Downturns almost always follow construction booms. The time to have bought for a flipper was in 2002 or 2003. Having bought anything after that, for the purpose of flipping, is questionable or downright bad judgment.

    In most instances, where there are no severe inequities and contract breaches, the developers are likely to be legally protected. Especially someone like Pedro Martin who has practiced law in Greenberg Traurig for years and knows the ins and outs of these contracts better than most.

  3. Brad

    As the Midtown class action attorney mentioned, some of the developer contracts are so tight that the buyers have no way out except to forfeit their deposit. Others contain loopholes that may allow for a buyer’s lawful rescission. Since the developer contracts are practically non-negotiable and since few if any buyers spend the time to read their 25-page contract, the developers should (and often do) protect themselves to the fullest as long as they are within their statutory limits.

  4. FD

    I think that those who want to buy now in Miami just to “flip” are unrealistic (to stay polite).

    You can buy some interesting properties right now, but you have to do your homework and be sure about what you are buying.

    I agree with the poster saying that insurance costs and property taxes are way too high. And it will stay like this until some citizens proposal come to the ballot in November 2008.

    But if you are willing to endure high property taxes for 2 years, I have plenty of excellent deals. Many would-be “investors” bought in pre-construction 4 years ago, and now will just be happy to sell for costs and get their money back.

    That means on the other side that you can buy a beautiful unit, with water views and very nice amenities, for the pre-construction price 4 years ago. This is truly an opportunity, for somebody who wants to live in, or for the very strong minded investor.

    But Miami is a city with great potential, and if finally our local government starts doing its job with les corruption, this will be a great city in a few years.

    Best regards.

    FD @ http://www.condhotel.com

  5. B,
    I agree. Most are chained down to the contract, but some buyers are arguing outright contract breaches and developer negligence as a way out. It’s a good time to be a real estate attorney.

    FD,
    Now is a good time for prospective buyers although many are considering waiting for a further price drop. It’ll be interesting to see how things pan out.

  6. Xavier – what I like about you is the way you can smell roses in a field of corn (I just made that up). You are right, we can cry all we want about the speculators, about the amount of inventory, we can sit here and discuss the ins and outs of these contracts, but the truth is that Miami’s skyline is forever changed.

    Some might argue for the better, others against it. We need to embrace the change and see our city for what it is to become.

    Now let’s see how all these flippers will cry by the end of 2008 when the condo inventory tripples…..OUCH!

  7. It’s all about what remains. What we have is more than change. It’s a dramatic departure from what was. Still, I know that we haven’t seen the brunt of the change. The people factor has yet to fully set in. When occupancy waves settle and investor numbers dissipate, there will be an entirely new social/urbanite environment in and around the urban core. The energy that will emanate from these areas will play an important role in shaping everyones perception of the market. But yea, there are big bumps in the road ahead.

  8. FD

    Xavier,

    I think that the right time to snatch a unit at a good price is now, because you will not have to pay the closing costs several times.

    If you wait until the “investor” close on his unit, and then sell it again, he will want to add to his costs his closing costs. And then you will have to add your. On a $300,000 unit it can be around $15,000 easily, or $12,000 at least.

    Then, an “investor” will also more probably take an interest only mortgage, coupled with an ARM (adjustable rate mortgage) just to lower his payments for at least the first 2 years.
    But this type of mortgage carry hefty pre-payment penalties. The “investor” will have to add that to his costs.

    Bottom line, just to recoup his costs, he will add something around $50,000 for a $300,000 unit.

    If you buy from him before closing, the only thing he is looking at is to get his deposit back, or at least a part of it. Then you save quite a few thousands dollars.

    This is why I do consider now as a good time for opportunities.

    Thanks. Best regards.

    FD @ http://www.condhotel.com (Real Estate, Pre-construction, Condominiums and Condo-hotels in Miami)

  9. FD

    And last point about Quantum on the Bay, I consider it actually as a very good project.

    I was impressed by the quality of the kitchen and bathrooms. They are really nice, very well designed, and of good quality.

    And I like this location next to Margaret Pace Park, because you don’t suffer from the traffic on Biscayne. You have a park at your feet, and you are close to I-95, the Airport, Downtown, South Beach and Miami Beach, etc.

    It is for me one of my favorites for somebody who wants to live close to Downtown.

    And also the architect oriented the units at 30° towards the Bay, so most of the units have an amazing view.

    Just my opinion, as a professional.

    Best regards.

    FD @ http://www.condhotel.com

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