Tuesday, June 02, 2009

Semi-charmed life

Big fish in the surf at sunrise in south Cocoa Beach. The office can wait.

We are seeing more and more condo sales fail because of financing-related issues. With Fannie Mae's new rules related to association health, many condo complexes are missing the cut for Fannie Mae loans. As these loans represent a sizable chunk of the available condo financing, the impact is significant. The new scrutiny includes review of reserves, number of owners past due on condo fees and percentage of units owned by a single entity. I am aware of buildings that are immediately disqualified because of the latter. Another fly in the ointment is the new appraisal rule mandating no direct contact between the lender and the appraiser. Good intentions but the result has been less than impressive. Instead of experienced local appraisers who understand our market and who receive the entire appraisal fee enabling them to spend the time necessary to do an accurate appraisal, the man or woman doing the appraisal now is often the low bidder who is receiving at times 1/3 of the fee,(2/3 going to the appraisal management company) and may be driving across the state to do the job. For the fee being collected, there is not a lot of incentive to research the difference between a weekly rental building and a one-year-minimum rental building or the significance of the higher value of a building with a recent major concrete reno project and one staring at a major project in the near future. Think the low bidder will consider other good comps when it's pointed out that the ones he used aren't really comparable. Not happening.

There are a few takeaways here;
  • Buyers, your financing may not happen no matter how shiny your credit report is.
  • The appraisal will likely not represent a true picture of the condo's worth (could be high or low), although a buyer may use a low appraisal to his benefit in renegotiating a lower price post-contract.
  • Cash is no longer king. It is ruler of the universe. Sellers, you must treat cash offers as golden because they may be the only way you will sell your unit in this environment.
Time for predictions. The biggest question on everyone's mind is, when will the market bottom? I can't say but we have already seen sizable upticks in selling prices in a few complexes. That doesn't mean another distressed seller or bank-owned unit won't surface in these complexes. It does indicate that we are sniffing around the bottom when there are buyers willing to pay more than the previous low price. With prices now at pre-runup levels, the amount of downside is reduced enough that, barring total economic collapse, the "bottom" is close enough that risk levels are tolerable in some buildings and complexes. I am talking about existing buildings with no developer-owned units. This does not apply to any of the new luxury units. I expect more price erosion, possibly significant, in the over $500,000 condo market with the most pain in the brand new buildings. I would not pay today's asking price in any new building in Cocoa Beach or Cape Canaveral.

If you are looking for a very specific type of unit or in a specific building or area, waiting for the bottom could turn into an exercise in frustration. You need to to recognize when you've found the perfect unit and do your best to negotiate the best price possible rather than hoping to find the perfect unit at the exact market bottom. Example: if you wanted to buy a unit in Mar Bleu in south Cocoa Beach, you have had 2 chances since 2003. No units have been offered since the last sale last summer.

One thing that is easy to predict is the rate of sales for the rest of the year. We are right at the peak time of year for condo sales and we can expect sales to decline from this point through the end of the year if recent years are an indication. Graph of sales so far this year over the last two years below.

Sellers; take note. If you don't have a contract yet and you'd like to sell this year, get aggressive and do your best to reach acceptance on any offer you receive. Recognize that it's very likely that your expectations are not realistic and that you may have to accept less than you thought. When I bring you an offer please consider it carefully. There are 671 condos currently offered on the Cocoa Beach and Cape Canaveral MLS and, if you are unwilling to accept the June 2009 reality, we'll move on to the next one.

No fashion error was ever made in black.
_______________Calvin Klein