A different kind of bubble

I was reminded yesterday why I love and live in Cocoa Beach. The morning began with one of those sunrises that make you want to charge into the day and live life to the fullest.

After checking the morning update for new properties and for the previous day's activity, I attended a short meeting where we discussed a specific sale last week by a condo owner who was so determined to avoid paying a real estate commission that he advertised and sold his condo entirely on his own. He was successful and achieved his goal of paying no commission, yet he accepted an offer of $175,000 that was conservatively $50,000 less than reasonable value. In this particular case, good comps would have been easy for the owner to get, yet he was so fixated on commission that he shot himself in the foot.

After the meeting, I settled into my office to write a new update about the whole subject of valuation when I received a phone call. "Dude, tide's almost low and the waves are fun." What's an earnest real estate agent to do? This agent bailed on work and paddled out for a lunchtime surf break. I'll trade real estate bubble for ground swell bubble most any day.

The ocean today was warm and the water was as clear as the Bahamas. The waves were small and fun. At least one other real estate guy was seen in the water.

This is one of those things that we have to think about when we talk about the "bubble". Will appreciation cool off? Probably. Will Cocoa Beach become undesirable? Never. Days like today remind me that special places like my home of Cocoa Beach have an attraction that will not go away no matter what the real estate market does as a whole. If you're investing in real estate, special places make more sense and seem more prudent than generic locales. And you can always ride a wave in your back yard as you enjoy the financial benefits.

Cocoa Beach is geographically restricted. Ocean to the east and Banana River to the west. Simply put, there is no more available land for new construction. We also have density and height restriction (no more buildings over 4 floors). What this means is that our supply will not be increasing much more. The character of our small city should always be much as it is today. Jim Cramer likes to say, "When investing, buy best of breed." Considering our location, our finite supply and, of course, our surf, Cocoa Beach qualifies as best of breed. As always, I could be wrong. I'm definitely biased. Here's a shot of one of my retired neighbors playing yesterday afternoon.

Oceanfront Pick of the Week

I'm getting tired of all the talk of impending doom and the collapse of the real estate market, so, instead of repeating my somewhat tired commentary on the "bubble", I'm going to pick out my favorite property this week and explain my reasons for picking it. First, a little background that supports my pick. Most investors' favorite target in real estate these days is pre-construction. Today I have 2 closings in a new riverfront condo project in Cape Canaveral. One of the closings is in danger of failure because the investor who purchased the unit is having trouble getting financing and may not be able to close by today's deadline. If that happens, he loses his deposit. Developers are far less flexible when it comes to extending closings for strapped buyers. For that reason, and the fact that developers' contracts usually contain no financing contingency, pre-construction carries considerably more risk than normal purchases. If you can't close, for whatever reason, your deposit is at risk.

Considering that risk, I think that carefully selected existing properties may be more suited to the average person wanting to invest in beachside real estate. We are seeing continued strong appreciation in waterfront properties with increasing demand in the lower price ranges. With that in mind, my pick this week is a cute little one bedroom condo in an oceanfront building in my favorite part of the beach, Crescent Beach. This unit has been completely redone with new tile, new kitchen and bathroom and has an excellent ocean view from a large balcony for $285,000. It's small, 750 sq. ft., and has no garage, BUT, it's under $300,000 and it's on the beach. This is not my listing, so, this is not a self-serving selection, just an honest opinion. Others may disagree. Here is the view from the balcony.




There are others that I like but if I have to pick one, this is it this week.

Interest rates continued their upward crawl this week according to Freddie Mac. If you're investing in this market, I can't stress enough the importance of knowledge and due diligence. If you don't know the market, find an informed agent who knows what's going on and let them guide you to the perfect property for you. There are dangerous investments right now and there are excellent ones. The difference is often not obvious. As always, use sunscreen, drink plenty of water if you're spending any time outdoors and be loyal to your hard-working agent.

Discovery is up

Proud Cocoa Beach residents watch Discovery leave Earth while surfers enjoy the surprise north swell and beautiful conditions. All work in Cocoa Beach ground to a halt as everyone turned their eyes skyward.

Space Shuttle Set To Go

The shuttle is poised for a second try at launch tomorrow. It's been a while since we've seen a shuttle flight and Cocoa Beach is excited. Our real estate market is less than excited and seems to be in a slow simmer at the moment. Over half of all condo sales in the last 14 days were under $400,000. The upper range continues to languish and we're seeing properties in all price ranges sit longer than they did earlier this year. Summer is historically slower, so, I'm unwilling to call this anything but a seasonal slowdown.

An interesting footnote is the fact that no Portside Villas units have gone under contract in the last 14 days. That's with 26 units actively for sale on the MLS. Word is that the first 2 buildings will close in August or September.

MLS Stats for July 25, 2005

contracts last 14 days

condos over $500,000___ 3
condo under $500,000__ 32

homes over $500,000____ 2
homes under $500,000___ 4

active listings

condos all prices______420
condos over $500,000__ 126

homes all prices______ 59
homes over $500,000__ 36

Waiting on the Space Shuttle

It has been an intense week here on the Space Coast with the impending launch of the Space Shuttle Discovery and the return to space for the U.S. manned space program.



Residents of our area are very proud of our astronauts and engineers and all those who contribute to this incredibly complicated and dangerous endeavor. If things go as planned, we should see a second try at a launch the end of this week. So far we are enjoying the flood of journalists and film crews from all over the world. In the absence of launch news they have been scrambling for stories since the first launch delay. There was even a film crew in my favorite sushi bar, Yen Yen, last week.

Our market continues at a somewhat subdued pace as is normal for this time of year. Inventory is almost unchanged and the pace of sales is holding steady. I had to adjust my MLS stats this week as we had a group of 39 developer contracts go contingent or pending all at once. I subtracted these numbers from the totals because they are not accurately portraying actual sales during the period. Investor demand for pre-construction remains high with not enough first-round, pre-construction units available to fill that demand. There is continuing resistance from buyers in the high-end resale units. If you're playing with pre-sales in the high end, you better be prepared to close. At the other end of the range, sales are robust. Portside Villas is maintaining brisk resale activity, I believe, because the current prices still represent good value and they are in a very sweet spot of the market, under $300,000. We will probably never again see new construction beachside for under $300,000.

You may want to read an interesting article in today's Florida Today about condo conversion This is a trend we've been seeing in our area that we can probably expect to continue. With property values soaring and rents flat, it is inevitable that this happens. Take a recent conversion, Brisas del Mar in Cape Canaveral.



This 14 unit apartment building represented some of the developer units I factored out of my stats this week. This property as rentals was probably generating around $100,000 a year in gross rents. Converting to condos yielded around $2.6 million before costs. With numbers like these, we can expect this trend to continue. There are still quite a few rental properties in Cocoa Beach and Cape Canaveral that are suited to conversion.

Other developments locally are the ground-breaking of the 77 unit Magnolia Bay complex on the river in south Cocoa Beach and the tear-downs of 2 more houses on the west side of S. Atlantic Ave. This is a trend I see continuing. There are quite a few old houses across the street from the ocean that are candidates for tear down and replacement. We saw a tear-down condition home built in the 1920s sell recently for $649,000. It commanded that price because it sits on a lot large enough to build 3 units. Expect to see luxury townhomes or condos there soon.

Here are the numbers for July 17, 2005.

contracts last 14 days

condos over $500,000___ 6
condo under $500,000__ 31

homes over $500,000____ 3
homes under $500,000___ 3

active listings

condos all prices______417
condos over $500,000__ 126

homes all prices______ 55
homes over $500,000__ 32

Do your homework, get pre-approved before you start your search for property and keep your procrastination in check. It can cost you a fortune.

Happy Independence Day

Happy Independence Day - Yesterday, as I cruised down the Banana River from Cocoa Beach to Port Canaveral and the ocean, I considered the recent changes in our river shoreline. Beginning in south Cocoa Beach on the river we passed five condo developments under construction and 3 others yet to break ground. As we headed north we saw to the west on the eastern shore of Newfound Harbor in Merritt Island, dozens of large new homes and one new, 3-building condo project. Under the 520 bridge and north to the Port, we saw 4 new developments on the shoreline in Cape Canaveral. There are over 600 new units in just these existing riverfront projects in Cocoa Beach and Cape Canaveral. Add the planned projects, unfinished new oceanfront and non-waterfront developments and the supply of new units beachside is well over 1000. That's a lot of supply for a market that recorded 39 units sold in the last 2 weeks. Where is the disconnect? There are two distinct sides to the new supply market. One is the pre-construction market which is dominated by investors who rarely plan to live in the units. These sales most often don't show up in our MLS. The secondary market, on the other hand, are the buyers who are purchasing for residences or for second homes. These sales do show up in the MLS and are reflected in the numbers I report here. Draw your own conclusions. Noteworthy this week; sales in the over $500,000 range have ticked upward significantly. Also of note is the fact that mortgage rates continued their fall. Here are the numbers for July 4, 2005.

contracts last 14 days

condos over $500,000___ 8
condo under $500,000__ 31

homes over $500,000____ 5
homes under $500,000___ 3

active listings

condos all prices______417
condos over $500,000__ 124

homes all prices______ 53
homes over $500,000__ 31

Have a safe 4th, use sunscreen and drink plenty of fluids. It's hot out there. Remember, it's a $200 fine for possessing fireworks in Cocoa Beach.

The Swamp Ape & Negative Cash Flow

Negative Cash Flow. I get a lot of requests for "a good beachside investment property that will break even or generate a little cash". Folks, that has become the swamp ape of the Florida coast. In other words, they are rumored to exist, some sightings have been reported but no actual photos can be found (except for the one below and it is somewhat suspect). 

With recent years seeing unprecedented buying of second homes and investment property on or near the beach, the supply of rental properties is huge. Rental rates have barely budged in years while selling prices have headed for the stars. What that means for investors is that income can no longer be a criteria for making your buying decisions. If you must have positive cash flow, you haven't been and won't be buying beachside unless you are paying all cash or making a substantial down payment. Don't let the dreaded phrase, "negative cash flow" scare you away. There are some extreme exceptions to this such as high-occupancy, short-term rentals that are owner-managed combined with interest-only loans. At any rate, let's explore a real world example. 

 Example; an oceanfront condo in Cocoa Beach that just sold for $380,000 this month is next door to an identical unit for rent at $1350 per month. That's $16,200 in income before any management fees. This particular unit can expect about $8800 in condo fees, property taxes and insurance. If the new owner has an 80% mortgage at 5.75% for 30 years his annual mortgage expense will be $21,288. That boils down to cash out of pocket at $13,888 per year. There are other variables such as tax savings, repairs, vacancies, damages but the fact is that this new owner had better have around $1157 per month of extra money to take care of his new investment. Does that make this a bad investment? Not when you consider that this same unit according to tax records has appreciated at 38% per year since it was last purchased in 2003 and stands a good chance of continuing to appreciate. These rates of appreciation can't possibly continue, you're probably thinking. I agree except that all the new supply of oceanfront condos approaching and exceeding a million dollars has pushed a large number of buyers down into this lower price range and continues to do so. There is a far greater supply of buyers willing to pay $500,000 for a unit than there are buyers for million dollar units. Building has not slowed and demand is still high so I expect a reduced but substantial rate of appreciation to continue for select price ranges. 

Any investment in real estate at this stage of the game has risk. Interest rates could skyrocket, the so-called "bubble" could burst and everything will have been a bad investment. However, if you choose your targets carefully you can mitigate that risk and enjoy healthy returns on your investment barring a catastrophe. Make sure you know what areas of the market are moving, what areas are not and don't walk away from an otherwise good investment because of negative cash flow. In our example above, this owner will make over $20,000 a year after debt service and expenses if appreciation cools to 10% and will still make money at only 5% appreciation per year. He also has the possibility of having another 38% year in which case he stands to make a healthy six figure return in one year. I measure all my investments by comparing risk and reward. The possibility of making six figures on the high side and breaking even on the low side meets my criteria. 

Do your own due diligence and if you're buying in another market, find a guy like me who understands and studies his market and use him to help you select your properties. If you're buying in Cocoa Beach or Cape Canaveral, you've found your man. Email me at larry@southcocabeach.com or call me at 321.917.5786 and I'll help you locate the perfect property.

June 14 Update -

An early tropical storm was all over the news last week but turned out to be an anti-event. Hurricane season is high on everyone's radar and should be on buyers' minds as they select properties. Storm damage was inconsistent and there were quite a few properties that suffered NO damage during last year's active season. The market has not rewarded these storm-tested properties with a price premium but they should, in my opinion, command a higher price than properties that suffered storm damage. Be sure to ask your agent about a property's performance during last year's storms before making your offer.

There has not been a lot of change in our activity since my last update. Rate of sales is pretty constant and the activity is still concentrated in the under-$500,000 range. We have a 48 week supply of over-$500,000 condos at the current sales rate and a 17 week supply of under-$500,000 units. Mortgage rates dropped once again last week to their lowest level of 2005 at an average of 5.66% nationwide for a 30 year fixed rate. Our strong appreciation rate continues for the lower priced properties but we are seeing some resistance to ever-increasing prices in the high end.

MLS statistics for Cocoa Beach and Cape Canaveral

Active listings:

Condominiums______418
__over $500,000____120

Single family homes___55
__over $500,000______34

Contracts in the last 14 days

__condominiums_____40
__over $500,000______5

Single family homes___4
__over $500,000______4

If you have specific questions about our market or properties, you can email me at larry@southcocoabeach.com or call me at 321.917.5786. Be aware of the sun and the heat when you're out there in our beautiful Florida outdoors and take cover at the first sign of an approaching thunderstorm. A lightning strike will ruin a good day at the beach or the golf course.

Here's one of our new buildings in south Cocoa Beach. Oceanfront penthouse, 3 bedrooms, 4 baths, 3400 sq. ft. with rooftop deck; $1,700,000.