The end is near

I hope all had a happy, safe time last week and are resting for this week's continuing festivities and the end to a very interesting and challenging year. After a year of crazy low mortgage rates, expect the line on the graph above to continue upward through 2010 if Freddie Mac is right. The mortgage financier expects rates to climb to 6% by the end of 2010.

Our inventory numbers for Monday the 28th of December, 2009 are:

MLS-listed Properties in Cocoa Beach and Cape Canaveral

Condominiums, all prices______567
_____Sold and closed in 2009__402

Single family homes, all prices__120
_____Sold and closed in 2009____77

Condos over $500,000________69
_____Sold and closed in 2009__29

Homes over $500,000_________46
_____Sold and closed in 2009____5


I will post a full year end review the first week of the new year after the listing agents have (hopefully) had time to update their listings. It is apparent now that we will finish 2009 with sales slightly ahead of the last two years.

A little commentary on the numbers so far; all of the sold over-$500,000 homes were in Cocoa Beach, none in Cape Canaveral. Of the 29 sold condos over $500,000, 15 were at the Meridian of Cocoa Beach and only one of the 29 was outside Cocoa Beach, an oceanfront Shorewood unit in Cape Canaveral. Over three quarters of all sold condos in the two cities in 2009 closed for less than $300,000 and just less than two thirds of the sold homes fell in that price range. Expect that trend to continue in 2010.

"You can clutch the past so tightly to your chest that it leaves your arms too full to embrace the present."____Jan Glidewell

Thank you, Internal Revenue Service

I decided to write this post yesterday after answering a reader's questions about the costs of ownership of a vacation condo. Back in June this year I wrote a post entitled "Positive cash flow. Does it exist?" In that post I explored a hypothetical case detailing expenses, income and other factors related to an investment condo and how they affected the chances of achieving positive cash flow. One factor I did not discuss was the contribution that favorable tax laws make to the overall picture of investment condo ownership. I will use another hypothetical weekly rental condo and explore the effect to overall return that tax deductions will make for an owner. (Disclaimer: I am not an accountant (not even close) and do not claim accuracy nor am I offering tax advice here. This is just a hypothetical case using my understanding of current tax laws. Please consult your accountant and/or tax lawyer before making decisions based on my writings.)

We'll use a $280,000 weekly rental condo in this scenario. We'll assume a 30% down payment (Fannie Mae requirements for 2nd home condos) on a 30 year mortgage at 5.5%. Our fixed monthly costs will be (estimates but close to reality);

mortgage______$1112
property taxes__ 374
condo fees_____ 350
utilities________ 130
insurance_______ 70
TOTAL________$2036

Let's project a conservative average of $800 per week for our unit and a conservative 50% occupancy for the year. Management for weekly rental units runs from a low of 10% to a high of 40% in our area. Keeping our example conservative, I'll use the above-average 35% charged by the very efficient team at Cape Winds in Cape Canaveral for our example. That means that our 26 weeks at $800 will net the owner $13,520 after the 35% management fee, a shortfall of $10,912 to our annual expenses. Not looking so good at this point. Those two weeks a year of personal use are going to cost over $5000 each. Ouch! Not so fast. Let's look at the tax benefits. According to IRS publication 527 the following expenses are deductible.

1. Advertising.

2. Cleaning and maintenance.

3. Commissions.

4. Depreciation.

5. Insurance.

6. Interest.

7. Legal fees.

8. Local transportation expenses.

9. Points.

10. Rental payments.

11. Repairs.

12. Tax return preparation fees.

13. Taxes.

14. Travel expenses.

15. Utilities.

[Edited: Thanks to Anonymous CPA for pointing out the math errors] All of our example monthly expenses of $2036 are included in the IRS allowed deductions except the mortgage payment. The interest part of that (average for the year of $892/month) is, however, included. That comes to a total of $21,792 of deductible expenses for owners with active participation. The IRS also allows for depreciation of investment property over a 27.5 year period. That means that for each year of ownership of our $280,000 condo, we will be able to deduct $10,181.82 as depreciation. In this example our investment condo will generate $31,973 of legal tax deductions ( expenses plus depreciation). After offsetting the deductions with the income of $13,520, we are left with $18,453 of net deductions saving the owner $4613 to $5166 in taxes assuming our condo owner is in the 25 to 28% tax bracket. [As pointed out by Anonymous CPA, the limit for deductions is $25,000 per year which would max out the savings for a 28% taxpayer at $7000.] Remember that this is using a conservative 50% occupancy unit with high management costs. In this example our unit does not achieve positive cash flow. I have used management charges at the high end of the scale (35%) and modest 50% occupancy as I prefer to project conservatively so that my surprises are good ones. Good management is available for considerably less than 35% and occupancies of more than 26 weeks a year are common.

But wait, there are other benefits and deductions. A well-informed and law-abiding owner can generate additional deductions including but not limited to some acquisition costs in the year of purchase and travel expenses to manage, conserve or maintain the property. In addition, with higher occupancy and/or lower management expense the numbers can look significantly better. Conclusion; a rental condo at today's prices can come close to paying for itself and, with good management, generate cash flow. Let's also not forget that an owner is allowed to use an investment property for the greater of "14 days or 10% of the total days it is rented to others at a fair rental price". [Edit: I didn't mention possible appreciation or mortgage principle paydown over time nor depreciation recapture taxes upon the sale. The combination of all three could be either a net positive or negative. No way to accurately project without a crystal ball.]

These same rules apply to units rented for longer than weekly periods. The overall numbers are generally less for units that rent for monthly or longer periods but the tax benefits still apply and will make the costs of ownership considerably less than at first glance. As always, do your homework and talk to your trusted expert before making a purchase. Non-American citizens, I have no idea how your tax laws treat your ownership of American investment property.

I hope this was helpful and not too confusing. I also hope my errors are minor. I expect to hear from readers more informed than I. Please contribute your thoughts, observations and experiences to the comments below. And to everyone reading this, I hope you have a happy, safe, rewarding holiday season filled with love and joy.

"Unless we make Christmas an occasion to share our blessings, all the snow in Alaska won't make it 'white'." __________Bing Crosby

Dude, where's my deal?

Where are the new listings? If I look at the number of new listings every month it appears that we have a steady stream of new listings exceeding the sales. However, the chart above of actual inventory of MLS listings tells another story. Digging into the Cocoa Beach MLS data, I find that only 10 of the 33 new condo listings so far this month are actually first-time new listings. The other 23 are listings that have either expired and been relisted or withdrawn and relisted by the same agent to reset the "days on market" number in the MLS. This explains the evidence in the chart above that the actual number of listings has declined substantially. The new listing activity on the MLS is predominated by the churning of existing listings. This does not mean that there aren't new deals appearing. It only means that the number of listings selling exceeds the number of actual new listings. Many of the reticent, over-priced sellers eventually concede to market reality and those are the ones that sell. (See the anatomy of a round trip at the bottom of this post.)

A buyer in this market has to be more prepared than in the recent past if they hope to pick off a deal. Eventually we will find that we have surfaced into a normal market without a high number of distressed sellers. Are we close to that point? I can't say but I can say that we are closer than earlier this year and that finding that smoking deal has become more difficult as we work through the limited number of distressed sellers in our small market. If you're hanging on waiting for clear evidence of a market bottom, that evidence may come in the form of no more distressed sales. Plan your purchase timing accordingly.


Anatomy of a round trip (emotional and financial). A Cocoa Beach townhouse was purchased in April 2004 for $149,000 [confidence]. It was put back on the market four days later for $229,000 [enthusiasm] and stayed at that asking price until December 2004 when the listing expired. It was relisted in March of 2005 for $285,000 [greed] by the same listing agent. The market was still rapidly appreciating and the flipper was probably calculating his increased net worth daily over his morning coffee, hence the increased asking price. He kept the asking price unchanged until August of that year [denial] when the listing expired again. This time the flipper relisted with another broker the following week for $279,000 [denial mixed with a little concern], expectations beginning to abate. Price held firm until December 2005 when the listing again expired unsold. It disappeared from the MLS until May of 2009 when it reappeared with a new listing agent asking $154,900 [fear]. Price was dropped in August to $149,000 and again in November to $139,000 [panic]. Now that the seller has accepted market reality he is within striking distance of finding a buyer. There have been six sales in the complex during the time this unit was listed, all six for more than the current asking price. One red pill at any time in the last five years would have been worth not less than $10,000 to this seller.

"Even if you are on the right track, you will get run over if you just sit there."
_________Will Rogers

Ten questions for prospective condo buyers

I've seen many a search for a beach condo grind to a halt or take an abrupt turn when a buyer encountered an issue that they hadn't considered earlier. One's mental image of the perfect beach getaway may be at odds with the reality. Below is a list of ten pertinent questions prospective buyers of beach condos should have asked and answered prior to beginning the search.

1. If planning to get a mortgage for the purchase, how much down payment will the lender require? Mortgage requirements for Florida condos are different than those for condos in other states and for houses. Expect to have to put down 25 to 30% in most cases for Florida condos. Your pristine credit does not matter.

2. What will my taxes be? Forget what the current owner is paying. It does not apply to the new owner except (sometimes) for the first partial year of ownership. Estimate your taxes here.

3. Will there be a problem with my English Mastiff? Probably. Most condos have rules limiting the number and weight of pets. Some don't allow any pets at all.

4. Do the condo fees cover all expenses? No. In most condos the monthly fees cover insurance and maintenance for the building, water and sewer, basic cable, lawn care, common area electric and other common expenses. Some condos also include hot water in the fees and some even cover AC units. At the other end of the scale, some do a special assessment every year when the insurance bill arrives and a few complexes with artificially low monthlies seem to assess every time the wind changes direction. Be suspicious of condos with too-good-to-be-true low monthly fees.

5. Will the insurance on a Florida condo be sky high? No. As the condo fees cover the insurance for the building, the unit owners have only to cover the interior and contents of their units. I pay less than $1000 per year for a small 2 bedroom beach rental condo.

6. If I don't like the layout will I be allowed to remodel my unit? Yes. In most cases, any interior alterations that do not affect the structural integrity of the building are allowed. Removing non-load-bearing walls and building new walls are common alterations. Exterior alterations in most cases are more tightly restricted. Replacing the tired wooden front door with a hip new stainless steel door will likely not be allowed.

7. Are ground floor units undesirable? Not according to the people living in them. If you don't plan to go to the beach often, you will prefer the view from an upper floor. If you're one of those people or families that will be on the beach a lot, you may want to consider the lack of barriers (stairs or elevators) between your unit and the beach. I've found that the people in the ground floor units are the ones who spend the most time on the beach. Bonus here is that the ground floor units usually sell at a decent discount to higher floor units.

8. Can the condo association bill me for repairs to the building without my consent? Yes. All owners in a complex share the expense of maintaining the common elements and the board has a duty to maintain those shared assets. When the time comes to repair the balconies or replace the roof, if sufficient reserves don't exist, each owner will be assessed their share of the total. Sometimes an association will get a loan to pay for a large expense and increase monthlies to cover the repayment of the loan. This is why it is vital to review the condo budget and to read minutes of recent meetings. A buyer should be aware of recent and/or upcoming repair projects. Some buildings have reserves to pay for future expenses and some have none. Lack of reserves may kill chances of a mortgage. If considering a unit in an older building, all other things being relatively equal, a building that has recently completed a large renovation project is more desirable than one staring at an upcoming project.

9. If the seller agrees to pay the assessment for the upcoming concrete restoration project should I be concerned about anything else? Yes. The assessment might not be enough to take care of unexpected issues that surface during the project. Even more important, are you prepared to deal with the noise and inconvenience of the project for an extended period? Major concrete projects in addition to being expensive, are unbearably noisy, balconies are out of use and often pools are covered for the duration. As stated in number 8, a building with recently finished project is preferable all other things being equal.

10. Will I be able to rent my unit out for some income when I'm not using it? Maybe. Some condos have no rental restrictions while others have up to a one year minimum rental period. If you are prohibited from renting for less than a year, you won't be using the unit at all if you choose to rent it. If you buy a unit in a building with a one month or longer minimum rental, you may have a hard time picking up a monthly or longer tenant outside of the January through April season. You can read my detailed post on rental restrictions and their implications here.

This is by no means a comprehensive list but it's a good start. Knowing about restrictions and issues may eliminate a lot of wasted effort in your search. If anyone has others I've not included, please add them in the comments below.

"Trust your hunches. They're usually based on facts filed away just below the conscious level."
________Dr. Joyce Brothers

November Numbers

The Cocoa Beach real estate market maintained it's unseasonably strong pace through November with the year's total sales of condos in Cocoa Beach and Cape Canaveral exceeding 2008's total (371) before the end of the month. November 2008 saw only 18 closed condo sales in the two cities. Like the rest of the year, sales were concentrated in the lower price ranges with only three of the of 34 total recorded sales (as of this morning) over $325,000, all three at the Meridian on the ocean in north Cocoa Beach. Those units went for $640,000, $535,000 and $510,000.

Sales of note among the rest included;

3rd floor direct ocean Emerald Seas 2/2, 1602 sq ft $325,000

3rd floor south view "C" Mystic Vistas 3/2, 1686 sq ft, furnished $315,000

2nd floor direct Windward East, 1394 sq ft, 2/2, furnished $304,500

3rd floor direct Windrush 2/2, 1495 sq ft, furnished $265,000

2nd floor side view Spanish Main 2/2, 1153 sq ft, furnished $240,000

1st floor Captains Cove canal front w/boat slip, 3/2, 1650 sq ft $215,000

2nd floor Solana Lake 2/2, 1698 sq ft short sale $200,000

5th floor Solana Lake 2/2, 1828 sq ft short sale $190,000

2nd floor direct Royale Towers 1/1, 888 sq ft, furnished $180,000

4th floor south view River Lakes 2/2, 1244 sq ft $169,000

2nd floor direct river Cape Shores 2/2, 1034 sq ft furnished $128,000

6 yr old foreclosed Cape Gardens townhouse 3/2, 1706 sq ft $114,000

All of these had garages with the exception of the Cape Shores unit. More sales from November are sure to push the total number up as tardy listing agents update the MLS. I'll edit this post with the updated numbers in a few days with a graph of the year so far. For what it's worth, there are 103 condos under contract but not yet closed in the two cities.

"I have made this letter longer than usual because I lack the time to make it shorter."
__________Blaise Pascal