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| April 23, 2008 |
By: Polyana da Costa |
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elling condos in South Florida has become such a difficult task that some sellers are actually paying buyers to acquire their units.
The Villas at Emerald Dunes, a recently finished condo development in West Palm Beach, is offering buyers a deal where the seller would pay buyers monthly, the equivalent of an annual return of 8 percent of the purchase price for two years after the closing. For instance, investors paying $325,000 for a unit would receive an income of $2,167 per month. The seller also would pay property taxes, association fees, maintenance and property and management fees.
The guaranteed return strategy was used in the early 1990s by commercial real estate owners who tried to cope with an oversupply in the commercial market, said David Dabby, president of Coral Gables-based real estate research firm Dabby Group.
“It was expectable that somebody would be creative and do that now that we have an oversupply in the condo market,” Dabby said.
Jules Reich, an owner and partner in the remaining unsold units at the Emerald Dunes, says his strategy is not a sign of desperation but a sign of flexibility to deal with a down market.
“It’s unique,” Reich said. “You see a lot of rent-to-own, but everyone is doing that. A guaranteed return is appealing to investors.”
However, Dabby questioned whether the strategy makes economic sense for the seller and potential investors.
In June 2007, Reich paid $18.22 million, or an average of about $148,000, for 123 units at the Emerald Dunes, according to Palm Beach County property records. Those were the units that remained unsold after Miami developer Allen Greenwald had completed the 486-unit project in 2006. Pre-sold units were closing at prices between $200,000 and $300,000.
Reich, a real estate investor and converter who until recently operated mainly in New York, has only been able to sell about five or six of those units — ranging in the $270s. He has leased the rest.
In an effort to unload the other 118 units, he started promoting the incentive program to investors about a month and a half ago.
“There is a considerable amount of interest from smaller investors who would like to get into the market after prices have corrected but don’t want to take the risk and don’t want to be concerned about managing the units,” said Gary Smith, the director of operations at the Dunes at WPB LLLP, the company managed by Reich.
Smith said he has received dozens of inquiries and expects to close at least 30 units in June. About half of the potential buyers so far are Canadians, he said.
“It’s guaranteed, hands-off management so it’s very appealing to them,” Smith said.
Most investors are interested in buying one or two units at the most, he said, except for one potential buyer who called from London interested in acquiring about 30 units, he said.
The condominium, which sits inside the 500-acre Vista Center Corporate Park, features units ranging from about 815 square feet for a one-bedroom, to 1,500 square feet for a three-bedroom.
The project’s Web site promotes prices that range from $175,600 to $325,000. But Smith said units scheduled to close in June are being given discounts of up to 15 percent, which would lower the price range to $150,000 and about $276,000.
From the buyers’ standpoint, it might seem very attractive, but further price devaluation needs to be taken into consideration, Dabby said.
“It sounds like a reasonable deal for the investor,” he said. “But the downside is the retail price offered to the investor is still subject to further depreciation so if you are getting an eight percent return but prices depreciate five percent, then you really had a three percent return.”
Dabby believes South Florida still has at least one or two years before residential real estate hits the bottom.
Reich sees it differently.
“If the market comes back and increases 6 percent for example, you’ll have that plus the eight percent return. Now, can I guarantee you in blood and stone the market will be better? No, but I can guarantee you those eight percent.”
Smith said part of the funding to provide buyers with the guaranteed income would come from the rentals. The units are rented with prices ranging from $975 to $1,550. Reich would subsidize the difference.
At the time of the sale, 16 percent of the sale price would be set aside in an escrow account and transferred to the unit owner on a monthly basis.
Smith estimated the subsidies would cost them about 10 percent of what they paid for the 123 units. According to figures in public records, that would be about $1.82 million.
Reich, who owns New York based Somerset Financial Corp., and has converted nearly 3,000 units in the Northeast, mainly New York and New Jersey, said he expects a “20 percent net internal return,” if he sells all units in the investor program.
He did not disclose details such as operating expenses but according to property records, he invested about $5.5 million in cash in the purchase of the units and financed $12.70 million through Emigrant Realty Finance.
Dabby said that profit margin might not be realistic since Reich bought the units last year, which was considered a premature time for bulk buyers.
“In my opinion, he is just trying to get out in a smart way,” Dabby said. “I give him credit for being creative and trying to get out of a substandard investment. Guarantee return is a good gimmick. A combined guaranteed return and discounted prices is the best way to get out now, but that depends on your cost basis.”
Reich said he is confident about his strategy, which he said he has used at many of his New York properties. He wants to sell the Dunes units to reinvest the money. He is looking at three other properties in that area.
“When I first came [to South Florida] to buy property, at the boom, if they were asking $20 million for a rental complex and I offered $19 million, they wouldn’t call me back,” he said. “Then I offered $20 million, they still wouldn’t call me back. Now I get four phone calls a day. They have realized they are better off having their leg amputated than being buried alive.”
Polyana da Costa can be reached at pdacosta@alm.com or at (561) 820-2065.
Gary Smith photo by Melanie Bell
Reader's comments
rachel corrie said:Just don't let michael hamaway or his partner, ex-judge jay spechler handle the deal. April 23 at 1:53 p.m. |
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