Never underestimate the power of the capitalist system. While developers are looking to get out from a rapidly growing pile of failed condominium conversions, savvy bulk condo buyers are swooping in. REO funds, hedge funds and private equity are positioning to cherry pick from the current wreckage and create profitable positive cash flow opportunities. Understanding the reasons for the market evolution are key to profitable investing.
Here is some data that will give you a sense of the magnitude of the condo conversion over supply.
In 2002, only 39 apartment buildings nationwide were converted into condominiums at a price of $950 million. In 2005, that mushroomed to 823 projects at $30 billion!
In 2007, we’re back below 2002 levels to just 30 projects at $943 million.
Let’s look at the financing that was used by these condo conversions, a type of financing referred to as mezzanine financing. Mezzanine lenders typically made high rate loans ranging from 18% to 24% interest to the converter to help cover the project’s mortgage costs while the units were in flux. In many cases, the mezzanine loans were for short durations, most commonly 3 years.
Savvy investors are now betting that a lot of converters will realize their stake can’t be salvaged and will walk away, leaving the property in the hands of the mortgage lender. And lenders don’t want to be in the business of selling condos. In addition, the credit squeeze has eliminated refinancing as an option for many converters.
Going back to the 823 projects converted in 2005, a number of these converters are approaching the end of their mezzanine financing in the coming months. Some lenders have agreed to pour additional good money after bad, hoping that the condo market will turn around.
Our experience confirms the data. Over the past few weeks, the number of inquiries from developers interested in marketing their inventory has gone off the charts. We receive on average 4 to 5 inquiries a week from large and small developers interested in liquidating inventory.
Happily, we are also starting to receive inquiries from bulk unit purchasers. Most of our bulk buyer groups have been from California until the past few weeks, but now international interest is starting to pick up, our most recent inquiry being a cash buyer from Latin America looking for cash purchases at deep discounts.
We’ve also evidenced that there are serious buyers out there for the right opportunity. Our most recent success story is a 90 unit sale of a duplex project that offered deep discounts, tax incentives and positive cash flow, sold in 10 days.
Real estate investing has proven to be quite beneficial historically and very attractive opportunities are starting to present themselves. It is clear that savvy buyers are circling and value players have increased their appetite for attractive real estate investment opportunities.
Specialized companies have built their business around an online presence. Such a company is REIN Alliance, and we’re experienced advisors when it comes to managing bulk condo deals at attractive prices for our clients. In addition, developers wanting to establish an effective presence make their inventory known to us. REIN Alliance represents the bridge that connects developers and potential buyers through the Internet.
Many buyers today also approach us with the question of whether it is best to invest in condo conversions, foreclosures, or preconstruction blocks. The foreclosure market in our opinion carries the greatest risk currently. In addition, it is difficult to leverage economies of scale as your properties are likely to be spread out geographically and management becomes very problematic. Expect to put in a significant amount of money upgrading the foreclosed property and ongoing maintenance expenses maintaining the property.
In contrast, condo conversions and apartment buildings do not require the same level of maintenance expense and offer an easier more hassle free management opportunity. As far as preconstruction, the cost of construction and the pricing currently available makes it difficult for preconstruction purchases to cash flow, so the challenge is finding a property where the valuation makes sense. Condo conversions tend to be at much lower price points, thereby affording the investor good appreciation potential and positive cash flow.
We are entering the best market for real estate investment in the past 25 years. A simple rule of investment success is to be greedy when others are afraid, and afraid when others are greedy. Others are certainly afraid.
REIN Alliance is one of a few companies that specializes in investment condos and especially bulk condo investments. Real estate investment takes a lot of time and effort but the rewards can be enormous. Do not expect the road towards success to be easy. Work with a knowledgeable investment company and enlist a team of qualified and experienced partners. Do not be afraid to ask questions.
If you’re a developer, tell us about your needs. As you can see, we can satisfy all possible needs and preferences so just come and determine by yourself!