Vulture Buying = Bottom?

All excepts from Bloomberg:

Sept. 4 (Bloomberg) — Sales of distressed Miami properties have begun, signaling a bottom for south Florida’s real estate market and the end of waiting for vulture funds armed with about $30 billion to spend.

The sale of 120 condominiums last month to a Philadelphia private equity firm and Related Group of Florida, a development company led by Jorge Perez, “broke the logjam” for investors targeting the oversupply of condos in downtown Miami, said Peter Zalewski, owner of the Condo Vultures LLC consulting firm in Bal Harbour, Florida.

How exactly does a transaction or two signal the bottom? Just because some investment buyers are paying a certain price today doesn’t mean that that price can’t go lower next year.

“There’s a purging going on,” McCabe said. “It’s my belief that the vulture buyers would form the bottom of the real estate market, and we’re almost there. That bottom may last for three years as foreclosure sales go on.”

That’s right. Vulture’s, by definition, will be the one’s buying at the bottom, but just because they have started buying doesn’t mean the bottom is in.

McCabe estimates that at least $30 billion has been earmarked by funds to buy distressed Florida real estate. Some investors have been waiting almost three years to buy, he said.

And many will wait even longer if they see that the vultures can’t find buyers and just end up assuming maintenance costs and taxes. The true sign of stabilization will not be speculators buying, but speculators selling to people who intend to actually use the real estate. With the mortgage market practically frozen, a dearth of cash savings for down payments, and unemployment on the rise, we have a long ways to go. How could real estate possibly bottom before unemployment tops out and banks recover? That will be years from now.

Banks Start to Come Clean

At BankUnited Financial Corp., Florida’s largest bank, non- performing real estate loans jumped to 8.3 percent in the second quarter from 1.5 percent in the third quarter of 2007, according to a filing with the U.S. Securities and Exchange Commission.

Regulators told the Coral Gables, Florida-based bank it may lose its “well-capitalized” designation unless it attracts at least $400 million, the company said last week.

“Banks may be reluctant to make a deal because they want to preserve cash,” said Kenneth Thomas, an independent bank consultant and economist in Miami. “If they don’t make the deal they don’t have to write down their capital.”

The market needs for the banks to make write downs, but any recovery won’t happen until the banks recapitalize themselves. Many, if not most, will fail to recapitalize and go under. Banks will likely never be able to build assets back to anywhere near bubble levels, so a recovery will require all-cash and high-down-payment buyers.

Astounding Foreclosure Numbers

With 11,551 condo units in the 1,040-acre downtown Miami area expected to be completed this year, it would take five years to sell them off at the current sales pace, according to Brad Hunter, regional director at the MetroStudy real estate research firm in West Palm Beach.

In July, one in every 186 homeowners in Florida either had their home repossessed by a lender bank, received a notice of default or were issued a warning that their house was going on the auction block for failure to make monthly mortgage payments…

One in 186 homeowners in July alone is a rate of 6.45% per year. Continue like that for two or three years and you get well into the double digits. This is just a staggering number of foreclosures.

“The investors are not going to buy unless they get a bargain of 40 to 50 cents on the dollar,” Goodkin said. “In some cases, if you bought land for nothing it still might not work. The market is not going back to what it was in 2005.”

Even so, Goodkin said “the dam will break” and distressed sales will pick up in the first quarter of 2009 when loan delinquencies pile up.

“There’s no way for a bank to avoid these problems,” he said.

Bargain Prices?

The damn will break all right, but what will prices look like?

Perez and Lupert-Adler paid about $235 a square foot for the 120 units in 50 Biscayne, Zalewski said. That’s about half the $454 a square foot paid when three individual units in the building were sold in the fourth quarter of 2007, said MetroStudy’s Hunter.

It’s also comparable to the $175 to $240 a square foot it costs to build a new condo in downtown Miami, according to Ashley Bosch, president of Miami-based Block Urban Development LLC and president-elect of the Builders Association of South Florida.

Leah Witherspoon, a spokeswoman for Related Group in Miami, said Perez was traveling and couldn’t be reached for comment. Calls to Stuart Margulies, director of asset management for Lubert-Adler, were not returned.

Zalewski said he expects two bulk sales of new condos in the next few weeks, one of them for $190 a square foot and the other for $250 to $300 a square foot.

Buying condos in bulk could present legal problems, said Baldwin, the Miami attorney.

Florida law treats anyone who sells more than seven condos of a project with more than 70 units as the developer, making them responsible for construction defects or any lawsuits against the builder, Baldwin said.

“Bulk purchasers need to be wary,” Baldwin said. “They can really get spanked.”

Add legal risk to the list of costs of holding these apartments. But at least the prices are coming down. Sounds like a nice place, too:

Developed by Related Group, the 50 Biscayne condominiums, are scheduled for completion in 2007. The 54-story, downtown Miami property has studios, 1, 2, & 3 bedrooms for sale. Prices start at $400,000. The condos have water views and range from 750 – 2,000 square feet.

Property features

• Pool deck with infinity edge pool
• Tropical landscaping and cabanas
• Two-level club room with billiards
• Two-level spa & fitness center
• 15,000 s.f. of retail space
• 24-hour concierge & security
• 5 high speed elevators

Interior features

• 8′ 8″ ceilings
• Floor to ceiling laminated, energy efficient tinted windows
• High efficiency central A/C and heat
• Pre-wired for Smart building
• Spacious living room
• Stackable washer and dryer
• Italian teak cabinetry in kitchen and bath
• Imported black countertops
• Italian teak cabinetry
• Bosch oven, microwave, and dishwasher
• Imported porcelain tile floors in kitchen and master bath
• Granite or marble vanity in master bath
• Designer faucets
• Oversized jacuzzi tub

Just the facts

Categories: Related Group , High-Rise, Downtown, Miami
Height: 544 feet (169 meters)
Floors: 54
Number of units: 300
Square Footage: 750 to 2,000 sq. ft.
Price Range: $400,000 to $1,350,000
Opening Date: 2007

But look at the current asking price range on the MLS:

Assuming the $210,000 apartment is 567 square feet, and the $885,000 place is 2000 square feet, the sellers are asking $370 and per $443 square foot, respectively. So based on these asks, Perez got a good deal at $235. Can he sell his studios for more than $133,000 and his 3BRs for $470,000? Maybe a few for now, but what about next year, when banks disgorge a flood of these things? And remember, more are still under construction!

What will a recovery look like?

Ultimately, it will be about the end buyers. Whether they have jobs, and what those jobs pay. Miami will never be the same as in the early 2000s, but there will still be a Miami – - grungier, more dangerous, more like the city in Scarface than CSI. Here’s a street shot in front of 50 Biscayne – - looks pretty bleak to me: no cafes, no shops, just a parking lot and a highway overpass (Google street view):

Looks like you have to get in a car to go anywhere, and I wouldn’t want to go out for a stroll there late at night. And you don’t even have the beach, just a dirty bay – - this is downtown Miami, not Miami beach. This glamorous building might just end up a giant ghost tower.