Condo Troubles Further Squeeze Property Lenders (Those with deposits can't get mortgages)

Wall Street Journal ^ | 8.25.07 | ALEX FRANGOS

[BurbankKarl]

For the nation's real-estate lenders, the other shoe may be about to drop: condominiums.

Already plagued by rising home-loan defaults and foreclosures among overstretched consumers, major markets across the country -- including parts of Florida, California and Washington, D.C. -- are seeing rising foreclosures and bankruptcies of entire condo projects.

The problems are emerging as some buyers who signed contracts to buy new condos two to three years ago, when construction was just starting, seek ways to back out as they encounter trouble getting financing in the suddenly dicey mortgage market. Falling prices are forcing appraisals down, so banks aren't willing to lend the full amounts that people committed to in the sales contract.

"Closings that are scheduled to take place are not taking place," says Marvin Moss, a North Miami Beach real-estate attorney. He is suing several developers to help clients get out of contracts.

The condo market, while tied to the housing market overall, behaves differently under stress. While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk. So while the speculative overhang of newly constructed single-family homes may have peaked in many markets across the country, the full force of the condo glut is starting to hit now.

With single-family homes, "you put up a couple of model homes and build the rest as you get sales contracts." says James Haughey, director of research at Reed Construction Data in Norcross, Ga. "But you have to build the entire...building before you can sell a single condo."

[bruinbirdman]

"(Those with deposits can't get mortgages)"

And they won't get their deposits back, either.

yitbos

[ClaireSolt]

Hold the sympathy. They are speculators.

[Flavius]

what a wonderful opportunity to buy 30-40c on a dollar

[Orange1998]

That is the truth. They commit to buy with the thought of reselling once its built. Consider it like an IPO. Pure Speculating.

[RockinRight]

And we know they’re all speculators because??? Lemme see your crystal ball.

[TopoGigio]

Exactly!

[VanShuyten]

Mr. Zohouri, who goes by "Fred," says he is "an honest person" who is working hard to get his investors' money back. He says because of possible legal actions, he can't explain exactly what went wrong.

You're right. They're not all speculators.

[Dianna]

While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk.

Buying in two or three years ago...things change. Sorry.

[elpadre]

Is there such a thing as saturating an area?

I visit the Outer Banks where the developers are in control, and it sure looks like they have completely saturated the market. Individuals who own rental properties a block from the beach are now having difficulty renting, and without a decent summer of rentals, they can’t afford to keep the place.

[goodnesswins]

"The problems are emerging as some buyers who signed contracts to buy new condos two to three years ago, when construction was just starting,...."

WHAT? It does NOT take 2-3 years to build a Condo....this is pure bull.....

[jch10]

Yes, the condo market here on Panama City Beach is saturated. Hundreds are empty and unsold. Some were not even finished.

[ClaireSolt]

Do you know what projection is? In this case, you assume I don’t know what’s going on, because you do not. That is a characteristic of poorly educated people. However, I live her in Florida and I watch and listen. I am sharing what I know, imagine that.

[PAR35]

It does NOT take 2-3 years to build a Condo....this is pure bull.....

I think you pegged it. My guess is that the lender required the developer to pre-sell a certain percentage, and now that the market has softened, some of purchase contracts aren't looking too good.

[ClaireSolt]

That depends on what the building is like. They permitted one here about five years ago and then said it sold out in two and a half weeks. I am not sure it is finished, yet. The ones in Miami I have seen going up are fancy high rises.

[BurbankKarl]

Miami has 25000 condos being built

[ClaireSolt]

I am wondering if thee contracts to buy later are a type of deritive. I hear them discussing them on Cavuto. I have sold contracts for future revenues and I have experienced that risk. These people want their money back. Maybe they bought a whole floor for pennies on the dollar. The developer sold the paper to raise capital, and now someone is holding a worthless promise. I am guessing. Do you know?

My daughter lives in Miami and she says that there are still lots of New Yorkers who will buy those condos.

[free me]

Deposits are held in a trust account, by law.

[Freedom4US]

Hopefully not a trust account that has exposure to subprime mortgage backed CDOs, though. What a mess.

[BurbankKarl]

Well, a lot of people that bought were speculators, and when the prices were skyrocketing, they sold their spots to other people, who then sold them to other people.

Since the prices of the condos are falling, people who are locked in to by the unit at a higher price are balking. In fact, the banks will only lend what they feel the unit is worth, 70 or 80 percent of the flipper prices.

San Diego is also getting hit bad....the houses at auction are fetching 70% of their peak “price” from 18 months ago....and it is just the start of the foreclosures. Condos usually fare worse. And apartment conversions to condos fare worse worse.