The Fallout of a condo conversion

Reflections on a case study.

Just two or three years ago, some of the hot products that we could offer as affordable housing were these condo conversion communities, so popular in Miami and Broward counties. There seemed the best deals available; the developers provided assistance by offering office space to loan officers from mortgage companies and banks, so they could directly assist their buyers in securing the loans.

These were the happy times of the 100% financing, with developers assuming all closing costs, countless “incentives” such as paying off the first six months or the first year of condo maintenance fees, “upgrading” the converted condos with stainless steel appliances, redoing the floors, the cabinets, you name it.

The condo conversions are basically rental properties with a few or hundreds of apartments, which are bought by a developer. Going through legal procedures, making some required physical work on the property, would allow the investors to change the legal status of the rental community from one property to many independently owned “condominium units”.

Starting around 2000/2001, this was one of the hottest markets for builders and real estate investors. Properties bought at an average of $ 60,000 or $70,000 per unit, (this is just an example), would be sold at prices hovering in the $ 200,’s to $250’s and even more. Commissions paid to real estate agents were attractive and everybody seemed quite happy with the situation. Key elements were the organizations put together by the developers to market and sell their products, as well as the surprising complacency of the lenders.

Buyers seemed happy. Buyers signed the developers’ contracts with small deposits, which often left no room for mortgage contingency after 30 days. But in general, everything moved smoothly and new homeowners were happily occupying these units by the thousands. Everybody thought that it was a wonderful way of “accomplishing the American dream of homeownership”. This went on till about the end of 2006, dragging through the first months of 2007.

Fast forward to November 2008. I get a call from a prospective client who wants to be shown a condo she located on my website. I review the listing and find out that it is situated in a well-known condo conversion in Pembroke Pines , which name I remembered from the height of the “bubble”. In 2006, a two-bedroom unit at this community was selling at around $ 250,000.

The prospective buyer pointed out three more listings in the same complex.
All four units are short sales or bank-owned foreclosures.
I set up the showings and meet my client at the place.
I notice immediately a profusion of signs on many units: mainly AUCTIONS posters, foreclosure notices, real estate “for sale” signs. It looked like almost everything there was for sale.
I show the condos and in many of them, close to the back doors, small ant’s mounds were the sign of blight and abandon. Some of the units hadn’t been occupied for months, as evidenced by the state of carpets and bathrooms.

The area is convenient; the general condition of the buildings is good. So what’s wrong?

The actual asking prices varied between around $ 90,000 to $ 110,000. After talking to the listing agents, I have the impression that they hadn’t received too many offers and my feeling is that these places could go for as low or even less than $ 80,000.

That’s about a third of what they were selling a little more than two years ago. Unbelievable? Not quite. That’s the point.

Who can afford these modest $ 80,000 homes? Traditionally, and as per the criteria of Fannie Mae, somebody whose family income hovers in the monthly gross $3,000. (No more than 28% of the gross income can be dedicated to pay for the monthly mortgage, insurance, taxes)
When they were valued at $ 250,000, this monthly income should have been in the $7,000. Otherwise, buyers could have been in trouble sooner or later. But nobody was paying attention, apparently

And this is the real problem.

People who can only afford $80,000 homes, living in $80,000 homes, but having to pay $250,000 mortgages.

Consequences? Many choose to run away. Not only because they feel cheated, but because they make just enough money to pay for an $80,000 home.

Did you get it yet?

Weird? As in most business transactions, when somebody loses, somebody else wins. Let’s analyze this.

The real winners:

- Investors, who purchased large rental properties and converted them to condos at the beginning of the “boom”, sold them very quickly, with high profits. Often after some basic improvements, and large amounts of paperwork, they would convert rentals previously valued at 60 or 80,000 dollars, into units that sold at $ 200,000 and more. These apartments were giving a fair return on their investments to their previous owners, who grabbed the chance to cash on the valuation of their property after many stagnant years.

- Other winners: Mortgage brokers, mortgage bankers, appraisers, who got fat fees and commissions.

In the second and third round of this “bubble”, things gradually changed. Developers started to increase their commissions to attract realtors, frantically arrange easy loans, and put together all kind of creative “incentives.”

Those developers who moved fast managed to sell out. The rest was stuck with a large percentage of their condos, and then their financing banks started to worry.
The last phase was fairly recent: banks foreclosing on developers of dozens of properties, or at least on the high percentage of unsold units.

Of course that due to many different situations I cannot generalize and simplify. Many appraisers, realtors, mortgage brokers, banks were the beneficiaries while it lasted. They had cooperated with these savvy developers who made most of the profit.

The big losers?

- Those homeowners who had bought and walked away, leaving the bank to foreclose on their mortgages, experienced an irreparable damage to their credit that will compromise for a long time their ability to purchase again a home.
- Real estate investors, who bought properties, hoping to get rich by “flipping” in the short term. Many of them let the banks foreclose. They have paid for some time the mortgage, the taxes, and the maintenance fees. At a certain point, they have given up.
- The banks and mortgage lenders, of course, who will recover only a small percentage of their loans.
- Fannie Mae, Freddie Mac and other GSE’s who bought these mortgages.
- The buyers of all the bonds and other real-estate-related financial instruments; which could be foreign banks, a hedge fund, a sovereign-fund from an oil-rich country, or a Singapore investor.

Who is guilty?

A key element was the acceptance by lending institutions of unreasonable increases in appraisal values, which had no basis other than speculation.
Nothing can explain that a home built 30 years ago increases 300% in value in a two-or-three-years period. Nothing can validate it.

Of course that the process fed on itself, causing inflationary building costs, but this was not at all sufficient to justify the incredible raise in the appraisals. Banks took the word of appraisers for granted, ignoring common sense. It was enough that two properties in the same neighborhood had sold at unusually and speculative high prices to allow an appraiser to use them in his “comparative analysis”. And from then on, every house in the area could automatically be the beneficiary of a new value based on this “analysis”, and so forth.

Banks would not object on the evident fallacy, and loans kept originating at a maddening pace. Buyers who had never saved a penny for a down payment, were granted homes they couldn’t afford, thanks to negative-amortization loans that would let them live in their new homes for a couple of years, until the inevitable happened. Naturally, mortgage brokers, lenders agents, everybody, would go along and perhaps encourage these appraisals. What about these “no-income-verification” loans? Did anybody doubt that they could sometime become the perfect instrument of deceit, fraud, and misrepresentation? Complicity? Collusion?

How many objections did we hear from Fannie and Freddie, the most expert institutions in the US on mortgage matter? How many voices of reason from Wachovia, Countrywide or Bank of America? Their executives were perhaps too busy showing their shareholders their prodigious short-term balance-sheet results, and cashing their even more prodigious bonuses, while ignoring the fundamentals.

It was a vicious and unending circle of madness, which results we are living now.

Henry B. Nathan is a Florida Real Estate Professional. Please visit my website to search for

Florida Condos, Hallandale Condos, Aventura Condos, Hollywood Condos, Sunny Isles Condos

More about foreclosure and short sales

October 12, 2008 By Henry B. Nathan

For the last couple of years or so, the new terms “short-sale”, “pre-foreclosure”, “bank-owned” have become very familiar to any active realtor.

Yes, there are courses and classes and conferences to make us aware of the opportunities of this new sector in real estate. And I am continuously receiving emails offering leads on foreclosures and short sales and “BPO’s”.

I have been involved in a few short sales and I even lend occasionally advice to people who ask me what I know about the subject. The fact is that there is not so much to explain about it. It’s just a logical way that a lender can use to handle bad or problem-loans and cut its losses.

So far so good. However, every time I get involved in a short sale or “pre-foreclosure” deal, the bizarre takes over the rational, and weirdness supersedes common sense. Let me explain why I think so:

1) There are some conventions in how we usually handle a real estate sale in the US. Usually we list a property when a seller designates us as his “listing agent” and we place it on the MLS. There are some requisites to do that. He must give us an exclusive right of sale; otherwise we wouldn’t put it on the system.

2) If we have a buyer looking for a property, we will search on the MLS system and establish a relationship with its “listing agent” by asking to show it to our buyer, or requesting additional information.

3) Once an offer is made, an answer is received within a short term, usually 2 or 3 days. It can be an acceptance, a counteroffer, or a rejection. A non-reply within the given term is considered a negative answer.
Now let’s compare this to what a bank involved in a short sale, or foreclosure sale usually does:

A) After talking to his bank, the seller of the troubled property agrees with a real estate agent to list his condo for sale in the MLS. The agent will place a special clause in the listing, stating its special status as a short sale and its contingency to a bank’s approval.

B) When an offer is received, the bank sometimes requires that it must be accompanied by a loan approval or a proof of funding if it’s a cash offer.

C) The buyer’s agent will often find a clause in the listing, stating that no commission is guaranteed. It is known that banks do not like to pay co-operating brokers more than a 2.5% compared to the usual 3%, but even this is not guaranteed. You must accept whatever the bank will definitely wants to pay you. No discussion.

Do you think that this is the perfect way for the banks to attract the best and most motivated realtors? Work double for less money?
Usually, in a buyers' market, a smart seller often increases the commission, so buyers’ agents are motivated to give him some priority. But apparently, banks have discovered that they can dictate their conditions, nickel-and-dime us so that they can save a few pennies after sinking billions of dollars in dubious transactions. Naming a listing agent who lives 200 miles away from the property isn't the smartest move either.
But let's not discuss their marketing skills.
They must know what they are doing.

D) When an offer is presented, the bank does not answer within any agreed period.

E) First difference: the listing agent does not remove the property from the MLS.

F) Second difference: the bank can take many months to reply. Meanwhile other offers are frequently received and presented to the bank by the listing agent. The process gradually resembles an auction and the higher bidder might get finally an answer. Or not.

G) Third difference. When a buyer’s agent contacts a bank-owned or foreclosure sale, and even some short sales, we often observe that the same agent or broker has his name on a lot of listings. This agent is sometimes based in a location that is distant from the property. I have seen brokers in Tampa handling listings in Miami. Do these guys have some special connection with the bank? What is the criteria of the banks when they choose their listing brokers?

Frankly, I don’t get any calls from any bank offering me listing business. And I have called a few of these “loss-mitigation” departments! I haven't seen many of the best agents in my area involved in this kind of transactions, either.

H) Fourth difference: Frequently, many of these listing agents don’t even bother to show the property. They designate a “showing company” to take the buyer’s agent call and arrange a showing, usually by means of a lock-box key.
The “showing company” does not usually provide information about the property.
So much for great sales techniques, indeed.

I) Fifth difference: these listing agents very often do not respond at all to phone calls or emails. Perhaps because of the sheer amount of listings they carry, or because they are just disgusted by the whole process. It was transparent to me in some of the cases where I was involved that these listing agents didn’t care too much. In all truth, it looked like nobody cared, except me and the buyer. Some business must result though, and I am not trying to mock or belittle those agents; it's just the whole system that looks so unprofessional.

K) In the case of a short sale, the listed price doesn’t mean too much. It can be very low to attract offers. The listing can sometimes falsely indicate that the price was “approved by the bank”. Correct me if I am wrong but It often bears the mark of “bait and switch”.

L) Now let us study the short-sale transaction from the seller’s point of view: he has possibly initiated the case providing the information required by the bank, often with the assistance of the real estate agent who will list it on the MLS.

M) The seller starts calling the bank. He will get all kind of conflictive information. A different employee will respond to his call every time and everybody looks completely disconnected from what has been done so far. They hang up promising him to call him back the next day, which of course never happens. In many cases, when the seller asks to know what is the exact pay-off of his mortgage, he can get different amounts every time.

N) The seller often gets simultaneous calls from the bank, threatening foreclosure. He sometimes tries to explain that there is a short sales procedure going on. But in spite of having spoken to dozens of bank employees, nobody seems to have any idea of what has been done the day before.

Does this look like a comedy? You bet.

Everybody chasing his own tail in a mad dance. That’s what it looks like.

My personal opinion: Complete disaster. Ridiculous. Tragic. Catastrophic.

A waste of my time, and everybody’s time.

They are the reason I lost a couple of possible sales, and gained the frustration of a few good buyers with cash in hand. I now try to discourage my clients of getting involved in this joke. Am I wrong? Maybe.

But if these banks expect to get out of this mess, they’d better get their act together.

Quickly...


Henry B. Nathan is a Florida Realtor at United Realty Group Inc.Visit my website: http://www.condo-southflorida.com/where you can search for Aventura Condos, Florida Condos,

Bailing out the idiots ...or is there something fishy?

It's amusing, but I don't feel like smiling.

It would be funny if it didn't look very suspicious. The background of the bank crisis makes this case quite eye-opening. It illustrates some of the incredible things that are happening in the real estate and mortgage markets, while our government is embarking on the largest bailout in history.

I am a licensed Florida realtor. In July 2008, one of my clients called me to place an offer on a condo listed in the MLS by another realtor. Located in Hollywood, it was listed for sale at $238,000.

I called the listing agent and he informed me that it was a SHORT SALE, which, as you know, means that the mortgage lender is willing to take a loss. Some time ago, the bank had refused an offer for $ 250,000 but, after a few months, the situation had deteriorated so much that they had lowered their price and would be very open to negotiations.

At the request of my customer, I put immediately presented an offer of $199,000 CASH, with no contingency, which was transmitted to the bank by the listing agent. As required, we provided the bank with the proof of liquid funds that my clients had ready to close.

I did not hear from the bank. I periodically checked with the listing agent who had the contact with the bank. He kept telling me that the bank was silent and had not replied yet.
He told me a couple of times that our offer was the only one and that he hoped that the deal would go through.

About a week ago, I called him again. This time the news was different. The listing agent told me that the bank had foreclosed on the property. Then, the bank gave it to another realtor for sale and it was placed on the Realtors MLS system. Very quickly, the bank got some offers and signed a contract to sell it for $155,000.

I called the new listing agent who is selling the foreclosed condo.
He tried to explain that what looked funny was "usual" since banks have 2 separate divisions, one for foreclosures and the second for short sales, and that they don't act in a coordinate manner. I don't buy into this foolishness. I am sure that a simple note in the file would have made clear to anybody involved in the bank that there was a solid cash offer for $199,000.

The bottom line is that there is no reason why a bank can foreclose on a property where they had an offer to sell for $199,000 and instantly list it (after foreclosure) and sell it for $155,000. That evidently would increase the loss of the bank by $44,000 plus the usual foreclosure expenses. That is an additional loss of about 22%

Later on, I had a conversation with the listing agent who had handled my short-sale offer and he was evidently distressed since he had worked with the seller for a long time, getting offers for up to $250,000 which were systematically ignored or refused by the lender. The outstanding debt was apparently of about $ 288,000. That meant a loss of a little more than 10% on the loan. The bank ended up taking an almost 50% loss. This is one of the major banks. It might be a peanuts case, compared to the hundred of billions these big banks are holding in their portfolios, but still a significant example.

The seller had apparently tried to save his property from foreclosure by selling another apartment, and keep paying his mortgage. But, later on, he opted to put it in short sale hoping to minimize the loan default and salvage his credit.

The realtor told me that after this experience he was considering retiring from this business.

This is not about the loss of a commission by me and the other agent.
Frankly speaking, the point is that this smells very "fishy".

The whole situation could only be one of two things. Complete stupidity, or fraud. Actually I wouldn't worry too much about a bank mishandling their business. But at this point, our whole banking system is being "bailed out" with taxpayers' money and we have the right to know.

Traditionally, there was a fairly transparent way of conducting sales and purchases of real estate. Lately, a very different environment is encountered by many professionals, and some of us fear that, even when people are losing their homes and our whole economy is deeply troubled, some persons or organizations could be involved in unscrupulous dealings.

Although I am not making any accusation, this case is, in my opinion, very strange. Of course, there is also the strong possibility that it's just one more instance of the banking mess, and that this is a case of plain bureaucratic stupidity.

Will our money be used to bail out this kind of businesses?

October 11th, 2008

Henry B. Nathan is a Realtor in South Florida. Please visit my website and search of the top real estate database. Great Search Tools will make your search enjoyable and successful. http://www.condo-southflorida.com

Regarding my comments on the weird twist of the “save-our-home” tax rule,

I just wrote about something that is the talk of the town. (Of the dozens of towns in South Florida) .

Today, I am reading in the Miami Herald, about how homeowners are reacting.

That might bring some more insight on the issue.

Florida's down-means-up rule baffling taxpayers - Fri, Sep. 12, 2008

By BILL KACZOR, Associated Press Writer

Michael McKenna was baffled by his property tax assessment this year.

The market value of his Longwood home fell by nearly $52,000, yet its taxable value increased by 3 percent - about $4,000.

"It just doesn't make sense," McKenna said.

He's among more than a million primary homeowners across Florida who've been scratching their heads over the state's down-means-up "recapture" rule that's been raising their property taxes.

The rule has been on the books since 1995 but had no noticeable effect until the state's real estate market collapsed.

That effect would have been even greater if voters had not passed a tax-cutting amendment to the state's constitution in January. The recapture rule is eating into Amendment 1's estimated average savings of $240 a year for homeowners if not wiping them out altogether.

In an e-mail to the proposal's chief promoter, Gov. Charlie Crist, McKenna wrote that his "net tax savings will amount to a staggering $78."

"I thought, 'What's all the big hoopla about a tax break?' " McKenna said in an interview. "Nothing's changed."

Not yet, but lawmakers are expected to take up legislation to repeal the recapture rule next year.

"This was a tax increase that the Legislature really hadn't voted for or against," said Rep. Nick Thompson, R-Fort Myers. "The whole idea of the recapture rule is taxing people at a time when they can least afford it."

Senate Finance and Tax Chairman Mike Haridopolos, R-Indialantic, called the rule "silly."

Thompson and Sen. Mike Bennett, R-Bradenton, sponsored similar repeals this year but they never got a floor vote in either chamber. That's because Senate leaders put a clamp on further property tax relief. They said they first wanted to see what effect Amendment 1 would have.

The recapture rule stems from a quirk in the Save Our Homes Amendment voters adopted in 1992. The amendment limits annual assessment increases for primary homes to no more than the increase in the Consumer Price Index or 3 percent, whichever is lower.

Save Our Homes, though, doesn't say what happens if market values should drop; so then-Gov. Lawton Chiles and the Florida Cabinet adopted the recapture rule to cover that situation.

It requires an assessment to increase according to the amendment's criteria no matter if a home's market value goes up, down or stays the same.

The only limit is that an assessment cannot exceed a home's market value. That's unlikely because market prices have gone up over the long haul much more than assessments have increased thanks to the Save Our Homes cap.

As a result, the rule was seldom applied and largely forgotten until last year when Florida's housing market crashed.

The bills Thompson and Bennett are planning would reduce an assessment by the same percentage that home's market value falls. If that value remains unchanged, so would the assessment.

Those changes, though, would exacerbate inequities between homesteads and other types of property such as businesses and second homes, said Dominic Calabro, president of Florida TaxWatch, a budget watchdog group.

Until Amendment 1 passed there had been no cap on assessment increases for non-homestead properties. They now get a 10 percent annual limit, but that's expected to offer relatively little tax relief because values seldom go up that much in one year.

Calabro also questioned whether the Legislature can repeal the recapture rule without passing another constitutional amendment. That would take 60 percent approval at the polls and likely wouldn't go into effect until after the 2010 election.

A legislative staff analysis of Thompson's bill cited no legal bar to passing it, but at least one lawmaker plans to introduce a constitutional amendment to repeal the rule.

In 1995, Broward County's then-property appraiser William Markham challenged the recapture rule at administrative hearing before the Cabinet passed it.

Administrative Law Judge Donald Alexander approved it as an appropriate way to apply the Save Our Homes Amendment when property values go down. He also rejected Markham's alternate proposal, which would have left assessments unchanged if values declined or stay unchanged.

Save Our Homes says no such thing, Alexander wrote, adding he had to go by its "plain language."

Even if lawmakers repeal the rule at their next regular session in March, that won't affect current tax bills.

It'll also be a moot issue - until the next housing bust - if the market recovers as predicted in late 2009 or early 2010, again driving up home values.

"I'm furious," said Edna Mattos, a Hernado homeowner affected by the recapture rule. "Next year may be too late."

Henry B. Nathan is a Florida Realtor at United Realty Group Inc.Visit my website: http://www.condo-southflorida.com/where you can search for Aventura Condos, Florida Condos,

Broward County Service Cuts

September 11, 2008 By Henry B. Nathan

Here we go again. I just read in the papers today that cuts in service in Broward County are going ahead no matter how unpopular they are.

This is business as usual in Florida, where there is always a way around laws and good sense. Legislature mandated budget cuts? Cities can always find a way to circumvent them.

Lower assessment values due to real estate debacle? No problem, cities will get around the lower property values, by just pumping up their millage rate. Remember: the equation is: millage time assessed value. So either part of the equation can be raised to make your taxes higher.

Still not enough money? Cities and Counties will just cut services. Less parks, less educational services, less seniors transportation, and so forth.

And a last recourse? Just charge the property owner for services traditionally free.

All of this is been used alternatively by one or another city or county.

There might have been some savings. But nothing substantial. Nothing essential.

Our mini-cities with their duplicated services and ridiculous bureaucracy are a large part of the problems. I don’t have access or enough time for the research. But I would be curious to know how many police departments and fire departments and water departments, city commissioners, city managers we can count in the Tri-County area of Palm Beach, Broward and Dade, which population doesn’t even measure to that of a large world metropolitan area like London, or Tokyo.

I know that this will not sound as music to the ears of the concerned parties. But it’s something that will have to be addressed one day or another.

Generous pension plans, rampant bureaucracies, flamboyant city halls, are a luxury that has to be reassessed. At stake is home ownership for the common Floridian and perhaps the dynamism of our whole economy.

This is the article in the Sun-Sentinel, that triggered my comments.

Despite residents' protests, Broward County forges ahead with cuts in service

Officials defend reductions as necessary to close budget gap

By Scott Wyman - September 10, 2008

Joggers and softball players protested park closures. Seniors and low-income residents questioned the loss of community shuttle buses.

Residents turned out en masse Tuesday night to protest spending cuts made in Broward County government to guarantee property tax relief this fall. Despite the concerns, county commissioners held firm on Broward's most sweeping rollback in decades.

Parks will be closed most Tuesdays. Community bus routes with low ridership will cease. Libraries will open later and close earlier. Help for the mentally ill, the homeless and victims of domestic abuse will be curtailed.

"Nobody likes cutting library hours or closing parks, but we are trying to make decisions on being cost effective," Broward Mayor Lois Wexler said.

The average homeowner should save $96 on the county government portion of the tax bill. The county taxes paid on a home valued at $186,450, the average in Broward, will drop from $763 last year to $667 this year.

Commissioners had to fill an $87 million gap in their $3.6 billion budget because of the decline in real estate values this year and the change to the state constitution that doubles the homestead exemption. They will give final approval to the budget later this month.

As part of the cuts, community bus routes used by fewer than seven passengers an hour will be eliminated. Commissioners said they preferred cutting the shuttles rather than major bus routes, but agreed to ask cities if they want to take over the neighborhood routes.

Davie residents along Griffin Road said the loss of their shuttle would leave them with no way to go to the grocery store or work. They unsuccessfully tried to persuade the county to reconsider the cuts using ridership numbers since gas prices increased.

"We aren't close to anything at all — there is no supermarket, no drugstore, no clothing store," said Karen Howard, a resident of the Griffin Gardens neighborhood. "So if we lose our bus because of the budget or whatever and you don't have a family member, you lose all your ability to get about."

Some park users also complained about the decision to close on Tuesday and eliminate early openings. Commissioners chose to close parks on Tuesday except during school breaks because that is the day with the lowest use.

"The end result is not the trimm ing of the fat, but the trimming of the lean," Fort Lauderdale resident Christopher Brennan said. "On 365 days a year, there are taxpaying Americans using the park system."

Henry B. Nathan is a Florida Realtor at United Realty Group Inc.Visit my website: http://www.condo-southflorida.com/where you can search for Aventura Condos, Florida Condos,

The Wave Condos on Hollywood Beach

One of my favorite affordable condominium buildings in Hollywood, the Wave is my little secret to propose to buyers in search of a comfortable and cozy refuge, right on the beach.

Here are the details:

2501 S. Ocean Drive

A beachfront condominium building, in a great location.

It is the product of recent condo conversion.

Studios, one and two-bedroom units.

Many with good ocean views.






Preferred by beach lovers, a relaxed atmosphere is the mark of the Wave.






Well located, close to the Hollywood Boardwalk,

the Diplomat Hotel, and a short drive to the Casinos and Aventura Mall.







Amenities:

Heated pool and spa
Party room
Fitness Center
Valet Parking
Bar
Executive room with wireless internet
Billiards room
Piano Room
Washer/Dryer in unit



















Henry B. Nathan is a Florida Realtor at United Realty Group Inc.
Visit my website: http://www.condo-southflorida.com/
where you can search for Aventura Condos, Florida Condos,