All the Wrong Questions

The brutally cold winter of 2015 reignited a common dream for many, that of owning an income-generating vacation getaway in a warm oceanfront place. Cocoa Beach has made that dream a reality for many. Over the years I have gotten scores of requests for an ocean condo that would pay for itself while serving as a getaway for the owner. For most people, that condo does not and never has existed. Change "pay for itself" to "pay some of the costs" and units begin to materialize.

What questions should a prospective buyer of a rental ocean condo ask the seller? Some questions may have misleading answers. Let's look specifically at vacation rental condos, those with a minimum rental restriction of a week or less. In Cocoa Beach and Cape Canaveral there are less than 15 oceanfront complexes that allow weekly or shorter rentals. Because of the scarcity, high occupancy and income are possible in most of these units. For a buyer inexperienced with vacation rentals, these units can be difficult to evaluate. The previous years' income statements often won't accurately predict a new owner's likely performance. As mutual fund disclosures tell us, past performance is not an indicator of future returns. A buyer using previous years' statements to include or exclude properties for consideration may be making flawed decisions.

Imagine the owner of a nice weekly rental vacation condo in Cocoa Beach who stays in his unit several times every year. His annual income statement is going to show less income than the neighbor's identical unit that is available for rent during the entire year. The difference can be tens of thousands of dollars.

Imagine two identical units side by side each rented by different property managers. One manager charges 28% management fee and the other charges 20%. One manager, not necessarily the more expensive one, gets 20% higher occupancy. The net income difference can be significant.

A buyer who purchases a unit because it had a high net income may realize too late that he can't achieve that net because he can't manage as cheaply or as effectively as the previous manager. On the other hand, a smart buyer can buy a unit with a history of low net and turn it into a high net with higher occupancy and more efficient management.

Weekly rental vacation rental condos offer the greatest opportunity for a mix of personal use and income but prospective buyers need to be realistic with their expectations and know going in that very few units can pay all carrying costs from rental income if the owner is also occasionally using the unit. The timing and frequency of personal use can vary the net income drastically. An owner who uses his two bedroom oceanfront unit the month of March might lose $4500 in income but an owner who stays the month of October instead might lose nothing. A good buyer's agent will be able to guide buyers through the breakdown of seasons and strategies for maximizing income.

"I realized I might be lower on the social scale than I previously thought when the Real Housewives "Shabby chic" party looked exactly like my "dress nice" parties."  __Larry

Controlled Descent

The Cocoa Beach MLS inventory hit a major milestone yesterday. Most people involved in the market here are aware that inventory of properties for sale has been tight for some time but without knowing the actual numbers may not realize just how tight it is. Early yesterday morning the number of condos and townhomes for sale in Cocoa Beach and Cape Canaveral dropped below 200 units for the first time since records have been kept. Single family home supply has mirrored the decline in condos with current supply including half duplexes at 59 properties. Nine years ago there were 1200 condo units for sale and at drastically higher prices. A Canaveral Towers 2/2 unit that closed a couple of weeks ago for $247,500 sold in 2005 for $435,000.

To put current supply in perspective, the number of condos for sale this morning, 197, is the number of units that have closed since March 19 this year. Also of significance is the disappearance of distressed properties. There are just seven bank-owned units for sale and two short sales.

What now? Many of the sellers who were waiting and holding out for higher prices have been enticed back into the market although not at a rate high enough to keep up with demand. They'll continue to trickle onto the market but I don't think we'll see any significant numbers of new listings in the near future. The much-discussed "shadow inventory" being held back by banks has failed to materialize here on the beach. I don't think it ever existed in Cocoa Beach.

Sellers, if you've been waiting, come on in. The water's fine. Buyers, know what you want, what it's worth and move quickly and confidently when a target has been acquired. If you plan to get a mortgage, go ahead and do your preliminary work before looking at properties. Know that if you're rate shopping you may wind up with a lender who can't perform. With rates still very low, saving a few basis points might not be worth the risk of not closing. I can't remember a time in the past with so many mortgage delays and failures. A local lender always stands a better chance of successfully closing your loan.

Even with our tight supply properties are being bought every day at attractive prices still far below 2005-2006 prices. Over 200 buyers have successfully located and purchased a condo here in the last three months. We welcome new neighbors.

Buzzwords for the day: sunscreen, hydration, shark repellent.

How many bass players does it take to change a lightbulb?
None. The keyboard player can do it with his left hand.

The Dude Abides

Multiple offers and the call for best and highest. These are stories of two very different multiple offer situations, one with a best and highest call and one without. I was on the losing side of both of these.

The majority of my clients live in other cities and states. Many start the process before they're ready to buy so that they have knowledge of the market and properties when the time does come. I typically take their criteria and wishes/wants list and send listings that I think might fit and we fine-tune our search in preparation of the day they're ready to pull the trigger. I had been going through this process with an out-of-state prospective buyer who had been casually looking off and on over several years. I had been sending new listings as they appeared that I thought would fit well with his criteria; under $200,000, at least two bedrooms and two baths and a "deal". He reviewed and commented on the properties I sent him and we fine-tuned our search over time. He kicked his search into high gear in the summer of 2013 and told me he was ready to execute and in an email "As I promised you awhile ago, you will be the person that represents me in finding real estate, regardless of when that time comes. I promise you I will not deal with any other real estate agent for any reason, period." My antennae twitched.

By this time we had narrowed our search to a specific floor plan in a specific riverfront condo complex south of downtown Cocoa Beach. In the summer of 2013 we had two very recent sales of that floor plan unit there, one 2nd floor for $167,000 and a ground floor for $174,000. Within days of the ground floor unit closing a new listing hit, second floor better condition than either of the other two sales and asking $179,900. I drove over first day on the market and took photos and looked the unit over. I sent the photos and called my client telling him that I thought this one was a good one and priced fairly considering the comps and the condition and would probably go for close to asking, $179,900. He agreed and instructed me to prepare an offer for $160,000 (still clinging to his hope for a "deal"). He commented that if they countered he wouldn't be going higher than $165,000.

Our offer was presented and the listing agent responded shortly with a call for our best and highest offer as there were multiple offers. After careful consideration he reluctantly upped his offer to his "best and highest", now $170,000. The seller chose another offer. His response when I told him that someone else's offer had been chosen was "Why didn't you give me a chance to raise my offer?" My response was "Unless the listing agent is unethical, a call for best and highest is just that and you get one shot, as I explained to you. You told me that $170,000 was your best and highest and that's what you signed and I presented." He told me that I had mishandled the process and that I was fired. He immediately called another agent and had her present an offer on another unit in the same building that we had earlier discarded in favor of the one we offered on. He offered $180,000 and closed three weeks later. The new agent wrote one offer, showed no properties and collected a check three weeks after her first contact with him. Larry got nothing for his efforts other than an education in the nebulous meanings of "best and highest" and "I promise". For the record, the nicer unit that he lost, closed for less than he paid for the second unit. His hissy fit cost him four figures.

I was involved in another somewhat different multiple offer scenario a couple of weeks ago. I was again representing the buyer. The listing agent was a well-known and respected broker from an office across a bridge from the beach. (That info disclosed to protect any honest and ethical beachside brokers from suspicion.) I presented an offer on his crazily over-priced listing that had been on the market for a couple of months. It was a Monday. The listing agent called back and said that the seller had told him previously that a number $10,000 less than our offer was "too low". Baffled, I encouraged him to consider and/or counter our offer of $10,000 more than the seller's "too low" number. No returned calls or emails the next day, Tuesday. He emailed me on Wednesday with "Presented it, seller still not happy, will let you know later today". Didn't hear anything else until Thursday afternoon when he called and told me that there was another offer "on the table".  Rather than ask for our best and highest he told me in a conspiratorial voice, "The other offer is $Y but the seller isn't comfortable with the terms. If your guys will offer $Y I feel certain he will accept." OK. I relayed this to the buyer and he raised his offer to $Y and I presented it Thursday evening. Agent emailed Friday with "seller is signing will have this evening ".

Nothing Friday evening and agent not answering phone or emails Saturday morning. Finally made contact Saturday afternoon when he answered the phone saying he was in Ft. Myers and ended the conversation five minutes later saying he was in Ft. Lauderdale. Speeding apparently. He said he had the accepted and signed contract and would send it to me. It took three email attempts over the next several hours before he successfully attached the signed contract and got it to me. One problem conveniently not mentioned: the seller had changed the length of the inspection period which meant the signed contract was not executed until the buyers initialed off on the shortened inspection period. Buyers changed inspection back to the originally asked for and apparently previously acceptable time period and I sent it back Sunday morning to the agent for seller's initials. Agent went radio silent all day Sunday and emailed me Monday morning with "Seller is withdrawing his counter, since there is no acceptance." I called to discuss and he told me the seller accepted another better offer.

We can't help but suspect that the other buyer, whether it was the original offer or another, was told the number and terms of our offer and allowed to better it, same as we were. The stalling and maneuvering would have given the agent time to get the other deal done before we had an executed contract. This is not how the vast majority of agents handle multiple offers but it obviously does happen. All it takes is an absence of ethics and/or some greed especially if the other buyer happens to be the listing agent's customer. I'll know the answer to the latter when the property closes. There are plenty of agents that I know and work with who I would never suspect of shopping my offer but my mental do-not-trust list has grown by one agent. Shame on you Mr Big Shot broker. Stay off the beach.

Don't work with an agent you can't trust. Looking back, this agent's behavior was suspicious from the get-go and confirmed when he told me the amount of the other offer. If your agent is acting shady, trust your sensors and look for one who doesn't light up the alarms.

"The secret of life is honesty and fair dealing. If you can fake that, you've got it made."  _________Groucho Marx

Materially Different - Uh, oh!

Just as real estate agents and property sellers were lining up to get a second drink at the crazy party that is the current real estate market, a giant turd surfaced in the punchbowl. We have known the turd was in there since January but thought that maybe it wouldn't matter. It does.

First off, I am not an appraiser nor have I played one on TV. I am merely observing activity in my market, Cocoa Beach and Cape Canaveral, and speculating about possible causes from a curious participant's perspective.

In 2014 mortgage originators sold $434 billion of mortgages to Fannie Mae. By selling a new mortgage to Fannie the lender can then put that capital right back to work in another mortgage. Rinse, repeat, get fat year-end bonus. In order to qualify for sale to Fannie, a loan must meet Fannie's guidelines. I'm told that even if a loan isn't intended to be sold it can be prudent to still underwrite to Fannie's standards. Fannie has long used a desktop underwriting system to make it easier for lenders to make sure they are making qualifying loans. Fannie can require a repurchase of a mortgage that doesn't conform.

In January this year Fannie Mae implemented an additional tool, an automated risk assessment system for appraisals submitted to Fannie Mae called Collateral Underwriter. CU reviews appraisals by looking at specific information in the appraisal such as sales price, comparables, size, condition, room counts, quality of construction, etc. and compares it with appraisals of similar nearby properties among the millions of appraisals in its files. It looks for inconsistencies and generates a risk score and can suggest as many as 20 alternative comparable properties or it can issue a hard stop calling for correction. The system will notice that, for instance, a $15,000 adjustment for a garage is not in line with what other appraisals in the area have used or that it has no data to support an $18,000 adjustment for a boat slip. It may notice that the appraiser has been inconsistent with the condition grade of a comparable. When it finds an inconsistency CU will kick out an error message (flag) that requires action. While Fannie claims that "CU does not take a “lower is better” approach" it apparently does not flag low risk or low value but does flag several categories of items with "materially different" notes that suggest it is more strict with items that indicate "over-valued". I would love to hear from local appraisers on this. Several recent appraisals that I am aware of suggest to me that Fannie's post-purchase infrastructure shift "to a focus on increasing certainty through defect prevention" has had a side effect of lower appraised values. I am aware of five appraisals in the last three weeks in our market coming in from 10% to a whopping 30% below contract price. Coincidence? Maybe. Or maybe it's the fear of receiving the dreaded CU message # 0195 "Fannie Mae will not accept appraisals from this appraiser." Being black-listed by Fannie is a virtual pink slip.

Our take-away: For sellers, it makes sense to prepare in advance for a low appraisal and to decide what reaction will be productive. Buyers should always attempt to renegotiate down to a low appraisal number but shouldn't let a good property at a fair contract price get away because Nigel from Scared of Losing My Job Appraisals may have been practicing self-preservation. That is, of course, finances permitting. Cash buyers, your crowns are sparkling.

"A lot of people are afraid of heights. Not me. I'm afraid of widths."  __Stephen Wright

SNAPPED

The real estate market here has been somewhat stressful in recent weeks. In fact, it has pushed some participants right over the edge. The message below was mailed yesterday by a local agent to every member of our county association of Realtors. It is presented unedited except for the city location for your entertainment and contemplation. Caution: profanity

"I have had a dozen showings on a vacant house in $City.  Only 3 agents left cards.  and nobody, actually nobody called to offer feedback.  and only 2 responded to email feedback inquiries.  Who the hell trained you?  or should I say, who did not train you?  If u dot want to leave a card or provide feedback, dont fuckin show any of my listings."

A followup email was sent to all members last night (probably with his broker's gun to his head) apologizing for the profanity but interestingly not withdrawing the order to not show his listings. It's pretty amazing that someone with people skills like this has listings. I wonder how well he'll handle an offer. I imagine he'll be as difficult to deal with as the wound-up agent I was negotiating with last week who took more than 24 hours to respond to every email and phone call. A negotiation that should have taken one day stretched to six because the agent was either too busy or too slack to professionally and promptly respond to the buyer's agent.

Folks, choose your agent carefully. Settling for an incompetent or cuckoo agent can be an expensive mistake. If your agent is too busy to respond to you promptly she is probably too busy to deal competently with the other parties to your transaction. If she can't handle the stress you can do better.

"I find it rather easy to portray a businessman. Being bland, cruel and incompetent comes naturally to me. "  __John Cleese

Shrinkage

11 PM, May 7 and the first named storm of the 2015 Atlantic hurricane season, Ana, formed off the coast of South Carolina. We got a taste of this storm as it was percolating northward a few days ago with an inch of rain early Wednesday in Cocoa Beach but clear skies by dark. We have had some fun small surf from the storm and mellow longboard conditions are still lingering this morning, better south.

May is blueberry season and there are several places to pick for those interested. The photo is from Holland Family Farm in Mims where you can pick three different varieties for $3 a pound. Lots of fun and well worth the short drive from the beach. The kids will love it. No charge for the ones you eat while picking.

Our inventory according to the Cocoa Beach MLS this morning is hanging steady with 226 condos and townhomes for sale in Cocoa Beach and Cape Canaveral and 61 single family homes. Properties have recently been selling faster than new listings are appearing so it is reasonable to expect the inventory to continue to shrink. In the last four weeks there have been 54 new condo listings and during the same period 67 units were contracted. There were 13 new single family listings while 21 were contracted in the same four weeks.

Of the 61 single family homes for sale in Cocoa Beach and Cape Canaveral only one is distressed, a foreclosure. There are zero short sale single family homes. There are five foreclosed condos for sale and a lone short sale. In spite of the tight inventory, those looking for an oceanfront condo have several new  listings this week that deserve consideration at prices from the low $300s to the mid $600s. Several new riverfront listings as well. Those who understand the magic of south Cocoa Beach have several ocean and river units available. If you need a buyer's agent I'm happy to show any or all of them.

Cocoa Beach Firefighters golf tournament Saturday morning, May 9, 8 AM. Join us for a good cause. $50 for 18 holes includes lunch by Long Doggers and a shot at prizes with proceeds to benefit the CB Firefighters Charitable Fund. Weather is forecast to be perfect.

Happy Mother's Day to all qualifiers and to those in the bullpen.

"If you want to assert a truth, first make sure it's not just an opinion that you desperately want to be true."  ____Neil deGrasse Tyson

Another Day - Another Record

Real estate inventory in Cocoa Beach and Cape Canaveral continues to set successive all-time low records. This morning there are a total of 226 condo and townhome units for sale in our two cities. Half of those have been for sale for three months or longer and fully a third have lingered for over half a year. We can safely assume that these are what I call "not really for sale". In this market, if a property is priced close to fair value it will sell quickly. I have seen some units sell recently for more than what I considered fair value so taking a stab at over-pricing does have some merit if a seller isn't in a rush. If the unicorn buyer hasn't shown up after three months, it's time for a seller who really wants or needs to sell to get realistic. The market is always right.

There was another record set this week. After hovering around 7 to 9% of the total units for sale for about a year, our distressed inventory (short sales and foreclosures) plunged this week to just three percent of the total. Out of the 226 units for sale, six are bank-owned and for the first time since 2007 there is but one short sale condo in Cocoa Beach and Cape Canaveral. On inventory in general, our bread and butter property type has always been direct ocean units with at least two bedrooms and two baths above the ground floor. Buyers looking for one of these units asking less than $300,000 have zero to consider this morning.

It is just as tight in almost all property types. There are 63 total single family homes for sale in Cocoa Beach and Cape Canaveral. Buyers looking for a waterfront single family have 27 to consider, none of them distressed. If the budget peaks at half a million dollars, there are but ten on the list. Buyers, you better have a direct MLS link and/or a buyers agent who is on the hunt for you if you hope to score the property you want. There are others looking for that same property and they may be able to move more quickly. Need a buyers agent? Contact me. By the way, 67% of all condos closed in our two cities so far this year have closed for cash.

How do you know there's a drummer at the door? The knocking keeps speeding up and slowing down. How do you REALLY know there's a drummer at the door? Your pizza has arrived.

"Everyone is a genius. But if you judge a fish on its ability to climb a tree, it will live its whole life thinking it is stupid." ___Albert Einstein

A Timeline of Disaster and Recovery

I began writing this a year ago in 2014 when the Magnolia Bay project in south Cocoa Beach finally sold out after a grueling decade of drama and hardship. I decided then to wait until the dust had settled before posting it. Now seems as good a time as ever.

----------[ from spring 2014 ]

Something happened last week in Cocoa Beach for the first time in almost ten years. The number of units offered by the developer at Magnolia Bay returned to zero. The very last one was contracted. It was a crazy, ten year roller coaster ride. Much money was lost, homes and businesses were lost and yours truly got yelled at a few times.

It was 2004 and flipping real estate was the national pastime. The most profitable niche in our local market was buying pre-construction contracts. It was possible at most projects to put down 10% to reserve a unit and then ride the runaway appreciation for a couple of years before either closing or selling the contract for a profit. Tripling and quadrupling the investment in a year or two was the norm. There were $18,000 reservations at Portside Villas that profited $100,000. There was so much demand for pre-construction that one major developer held drawings to pick names of lucky buyers who were "permitted" to reserve a unit. Timing was everything. An investor stood to make the greatest gain if he could have the longest time from reservation to close. As we found out later, he also had the greatest exposure to ruin. A few lucky contract holders at Sol y Mar and Almar in south Cocoa Beach got a profitable bonus when the City of Cocoa Beach imposed a construction permit hold for about a year before those buildings got started.

The easy money was pretty much finished by 2006 in Cocoa Beach and Cape Canaveral. Pre-construction contract holders who hadn't flipped by then were faced with a dilemma; go ahead and close for an immediate paper loss or walk away from their deposit. In almost every case, walking from the deposit was the wiser move. The projects that closed after 2006 turned out to be disasters for the buyers who chose to close. A few developers and banks suffered huge losses as well. The area of south Cocoa Beach outside the city limits was especially hard hit with unfortunate timing for multiple projects.

Magnolia Bay was supposed to begin early in the decade on a big parcel of riverfront in south Cocoa Beach between Jack Baker's Lobster Shanty and the River Falls subdivision. It was an overgrown snarl of vegetation and mangroves with a secret homeless camp hidden in the middle. The residents of the River Falls subdivision mounted an organized opposition to the planned project that resulted in several emotional County Commission meetings. I was verbally attacked by angry homeowners because I dared to speak on the developer's behalf to the Commission. For me it was less about the project getting approval than it was about the hypocrisy of the opposition. Most of the vocal homeowners were living in an area that had just been developed a few years earlier on a similar piece of riverfront land. "I've got my house. Now, no more construction."

The Commission eventually approved the project with a concession on height of the closest building to the subdivision and a planting of screening vegetation. (Interestingly, that screen is not in evidence today in 2015) The delay would prove to be disastrous. Construction began and business at the nearby Express Grocer exploded from the influx of construction workers. This in addition to their regular business from the little trailer park next door made life good for Sam, the owner, and Gary, the long time clerk. I can still remember the sign posted on the door one day: "Gary is not allowed to give credit anymore.  signed, Sam"

Pre-construction units at Magnolia Bay were first offered in 2005 from $549,900 to $899,900. The lowest prices were for the five Plantation units on the 1st floor in the middle C building. The highest prices were the two top floor Signature units at $899,900. The corner Savannah units in the C building were $689,900, $729,900 and $769,900, prices climbing with the floor number. Even with the heady prices being paid for new condos at the time, this was rarefied air for non-oceanfront units.

The first group of reserved units began closing in January of 2007 at the pre-construction prices with eleven units closed that year and three the following year. By that time, the real estate crash was the headline of the day and fear predominated. I have no idea how many buyers walked away from their pre-construction deposits rather than close. Although painful at the time, that decision would prove to be prudent for those who did. The last unit to close in 2008 was the first to close for less than the pre-construction price. At the new reduced prices, four more units closed in 2009 with two Plantation units going for $370,000. By the end of 2009 the first short sale was in the works and it (2nd floor Plantation) closed in December 2010 for $300,000 as did another short sale Plantation that set what was to be the lowest sold price at the complex, $295,000 for a 1st floor (above the garage) unit. Plantation units have sold since for as much as $418,000. None have yet approached the what now seems crazy high pre-construction prices.

As I finish writing this in April 2015, there are three re-sale units offered, two Plantation units asking less than $370,000 and a Savannah corner for $455,000. Market dynamics suggest to me that we'll continue to see rising prices here though I doubt that I'll live long enough to see them get to pre-construction levels again. Sam and Gary don't care either way. Express Grocer is gone for good. I wish them well wherever they are. The site of the old trailer park next door sits empty, the residents and trailers moved out for a townhome project that never materialized, victims of timing and the market crash..

Just across the highway, after years of no new construction in south Cocoa Beach, pre-construction units are today being offered at two new projects. Prices start at $800,000 for oceanfront units at Cocoa Cabanas with construction well underway. Time marches on.

"I feel bad for the homeless guy, but I feel really bad for the homeless guy's dog, because he must be thinking 'Man, this is the longest walk ever.'" ___Norm Macdonald