Should Developers Actively Default Buyers?
Developers of at least three new Miami condo towers at or near closing are actively defaulting speculators in hopes of accumulating units that had been previously under contract.
The maneuver, which occurred during the run up in the real estate market in 2004-05, permits developers to keep the buyer's 20 percent deposit (10 percent used for construction / 10 percent in an escrow account) plus take back control of the unit.
During the real estate boom, developers wanted units back so the condos could be resold at a higher price.
Developers today are quickly realizing that many of today's buyers from private equity funds to hedge funds are looking for large quantities and percentages of units in a building. It is not uncommon to hear requests for a minimum of 100 units and 60 percent of a project. The discount on the retail price is typically the next requirement.
It is only under these conditions would a fund - whether based in Connecticut, United Kingdom, Singapore or Florida - be able to realize the economies of scale costs savings plus have some predictability in dealing with a condominium association.
This is creating a dilemma for many developers, especially in Miami. Many projects were just successful enough to get financing for construction but failed to sell out. Typically, construction financing could be obtained once 50 percent of the units in a project were placed under contract.
With credit a challenge today for most individual buyers who are trying to close on newly completed units and auctions proving not to be a viable option for bulk sales, developers are increasingly looking to funds as the most effective exit strategy to survive this downturn even with the discounts.
This strategy can only be executed with a sizable quantity of units. That is where the defaults become a tool for the developer.
One Miami developer is returning a flat $5,000 of a 20 percent deposit to any one of his buyers who submits a letter from an attorney threatening to sue.
For the partial refund, the buyer relinquishes any claim to the contract, many times being relieved just to get something back. For the developer, the strategy creates goodwill with the buyer, reduces the developer's expenses, and allows the builder to move closer to the threshold necessary to attract the funds.
Critics will argue that no developer wants to take back units in a market like this. What these critics fail to realize is the vast amount of capital circling the market looking for discounts and the opportunity created by the weak U.S. dollar, which most expect to strengthen. Combined with these factors is a change in operating strategy being adopted by some developers.
A growing number of developers are restructuring their businesses to move from construction to interior build out of raw units, rentals, and property management. Funds that are willing to hire a condo's developer for the post-purchase services could stand a better chance of buying a said property in what is becoming a competitive market for bulk product.
This appetite for bulk product is what leads some to think that there may not be enough quantity in South Florida to meet the demand, especially with the weak U.S. Dollar and the international media spotlight on Miami.
Complements of Condo Vultures market report
 
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