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Posts Tagged ‘Florida Property Investment’
A strategic default is when a person decides to stop repaying their mortgage even when they can afford to continue doing so. Why would somebody do that? You´ll lose your home and your good credit history will be badly damaged.
If you dig a little deeper, the logic becomes apparent.
Let me illustrate by way of an example. Mr Smith bought a 3 bed condo in a nice residential area of Orlando in 2006 for $260,000 and he took out a $230,000 mortgage which is costing $1500 per month to service. He has a nice job and has no problem paying $1500 per month.
However, he knows that half a dozen identical 3 bed condos in his community, which weren´t sold in 2006 have recently been purchased by cash buyers for $99,900 each and they´re renting out for $1000 per month. When you take the interest into account, his mortgage is probably 4 times the size of the current market rates for that property. So he decides to stop paying his mortgage and instead saves $1500 per month.
It takes the bank 9 months to get round to kicking him out, during which time he lives rent free. After he gets kicked out, he simply rents one of the identical condos around the corner and pays $1000 per month to his landlord. He won´t get a mortgage or a car loan for 3-7 years, but he doesn´t particularly care as he´s done nothing illegal, he´s free of that huge 20 year debt and he doesn´t mind renting for a while.
The moral hazard that traditionally prevented people from doing this is disappearing fast. Ten years ago, a person who got kicked out of his house for not paying a mortgage would feel huge shame and embarrassment. His friends and family would pity him and quietly shake their heads at how bad things had turned out in his life. Not anymore. In 2011 an increasing amount of these neighbours will be wondering how they can do it too.
In the USA, in Ireland, in the UK and lots of other countries, it is becoming socially acceptable to stop paying your mortgage. People will understand and won´t think much worse of you. In the US, they might even admire the way you got yourself out of a huge debt. There are now lots of websites offering casual and professional advice to people that want to default on their loans and declare bankruptcy.
What are the consequences of these defaulters?
As you might expect, lenders in the USA hate the fact that a person can choose to walk away from their mortgage. There is no law against doing it. These lenders are lobbying HARD to get the rules changed so that people don´t have an incentive to walk away. For example, they´d like it if a strategic defaulter couldn´t get another loan for 20-30 years instead of 3-7 years. That would prevent a lot of them from doing it.
It´s not easy to prove strategic default though - you´d need to show beyond a reasonable doubt that the person wasn´t suffering financial hardship when they stopped paying their mortgage. Imagine a bank trying to do that to 5000 customers. Better still, imagine a state court system trying to handle 10 banks doing it to 50,000 customers.
Additionally, nobody knows what percentage of people are defaulting because they´re broke versus people defaulting because they don´t feel like repaying a debt bigger than the value of their home. Come to think of it, there isn´t even an official definition for a strategic defaulter.
One thing is for certain though. With the previous chaos in the market abating and the supply of distressed stock dwindling (see graphs above), they represent one of the few ways which will continue to generate discounted houses that investors can pounce on. The flip side is that if it becomes too big a problem, I think loop holes will be closed and people will no longer be incentivised to do it.
Don´t expect the authorities to announce a date for closing these loopholes either - they´ll just do it and tell you afterwards. Otherwise, people would simply rush to default before a deadline.
So, I think I can safely predict that when banks finally restructure their property portfolios and the levels of foreclosures slow to a manageable trickle, they´ll start lending to normal people again. That´s when property prices in the popular areas will start increasing and that could conceivably happen this year.
Regards
Colin
In 2006, the property market in Florida all but collapsed. Investors who were expected to continue their property buying binge left the market en masse. A depressed economy and rising unemployment also ensured that local first time buyer demand took a nose dive.
When this demand dried up, the builders who couldn´t service their loans to the banks had their assets seized. The banks packaged these up and mostly sold them to pension funds, hedge funds, big corporations and high net worth individuals. The banks that couldn´t sell quickly enough became insolvent and were put out of business by big insurance companies and the FDIC. Big insurance companies who insured too many banks with a high property exposure also went bust. From 2006-2008 it was bloody mayhem.
Things have been somewhat calmer since then. With prices discounted by 60-70%, demand picked up rapidly and the existing housing stock fell dramatically. New foreclosed properties were still coming into the market in significant numbers in 2009 and 2010, but they were very quickly absorbed by the market. The two graphs below for the Orlando housing market illustrate this quite clearly.
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What about 2011? There will not be another round of Florida based banks and builders going bust in record numbers - it has already happened. Demand and supply are closer to equilibrium again. A recovering economy is also helping to steady the domestic market and should result in fewer foreclosures from homeowners struggling to service their mortgages.
In other words, the supply of the type of product Torcana sources is not currently in abundance. Finding high quality, pre tenanted, developer owned and highly discounted stock in nice neighbourhoods is very hard work. Siesta Lago is one of these deals. It took a lot of effort to find, but they´re selling fast (3-4 units per day) and mostly to regular investors who agree with our analysis of the market. If you click on the link above and complete a short enquiry form, a full information pack will automatically be sent to you within 10 minutes.
There is one intriguing trend in Florida (and elsewhere) that is worth close consideration and is causing lenders to pull their hair out. I´m referring to strategic defaults. I think they are going to be a big influence on the market this year and will soon enter the political mainstream.
Regards
Colin
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Florida has been very good to Torcana his year with many successful launches under our belts (with Mosaic, Arbor Lakes & Sabal Point being the standouts).
More will follow in early January as we continue to source high end condos with bulk discounts in affluent middle class areas that are pre tenanted by local professionals. Net yields will generally be 8% and prices 70% below peak rates.
Early in the new year we will bring other US products to the market including a variety of bespoke services for investors seeking to purchase multiple units (please get in touch if you´d like to know more).
Lies, damn lies and statistics (Disraeli)
I´ve had US housing numbers coming out my ears this year and I´m going try and ignore them for the next two weeks. For those who don´t want to watch Harry Potter or Willy Wonka on television, there´s no shortage of housing statistics on the USA market available online.
I´ll just give you two graphs in this newsletter though, one which shows the inventory in Orlando over the last 3 years and other which shows new contracts issued in Orlando during the same period.
Off the top of my head, I can think of half a dozen Housing Ministers in the EU and elsewhere that would sell their grannies for stats like these.
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Warm Regards Colin |
Florida has spent most of the past 10 years near the top of many Irish & British buyers list of places to purchase holiday homes and property investments.
According to a recent survey carried out by the National Association of Realtors (NAR) and our own anecdotal evidence from the ground, the international buyer has never been more important in Florida but they are being led not by the British and Irish, but by the Canadians.
Torcana has never had a bigger variety of international clients than we have now. For example, we sold 25 properties to 7 different nationalities in October this year in Sabal Point alone, which included Americans, Canadians, Spaniards, Swedes, Germans and of course, British and Irish.
According to the NAR survey, 36% of international buyers in Florida were Canadian, followed by 16% in Latin America, 15% in the UK and 14% from the rest of Europe.
Setting aside Florida´s natural strengths as a holiday, retirement and investment destination, the combination of a huge drop in property prices (up to 70% from 2007 prices) and a weak US dollar are attracting huge numbers of international clients whose pounds, dollars and euro have never stretched so far.
Another key trend we´ve noticed among our key overseas buyers is the disappearance of the new property purchase and the dominance of the cash buyer. Agents and developers who are depending on sales of brand new properties and/or sales to buyers who need mortgages are in for a very tough time on both counts. There simply isn´t a demand for it.
The statistics bear this out: 81% of all international buyers and 73% of UK buyers in Florida paid for their properties with cash (i.e. no mortgage financing) while 89% of all international buyers and 81% of UK buyers purchased a second hand rather than a new home. These are both enormous changes from just 3 years ago.
The typical two bed apartment we are selling now for $65,000 to cash buyers would have been previously sold for $195,000 to buyers availing of cheap finance. These are prime properties in great locations which can be sold either vacant or with a tenant already in place, depending on whether the buyer is a pure investor or somebody seeking a holiday home.
So it would seem that the buying opportunities are still there for those with the means and ends to get them.
Just don´t be surprised to see keen eyed Canadians and Latin Americans joining you in the taxi queue at Orlando International Airport next time you pay the Sunshine State a visit…
Regards
Colin
Unlike a 3 year old, when an investor thinks about bubbles, the first thing that comes to mind is probably the real estate bubbles that have been bursting over the past 2-3 years. As a description of something which can grab everyone’s attention, and yet is unstable, fragile and difficult to control, a bubble is quite a nice metaphor to use when discussing real estate markets from 2003-2006.
Funnily enough, even though we´ve had the most dramatic and painful changes to the global real estate market in living memory, my gut feeling is that there are still way too many real estate bubbles that should have burst a couple of years ago and others that are actually getting bigger. These are by definition much more risky places to invest, as something other than the natural order of things is keeping prices artificially high. In economic jargon (if that´s your thing), the prices in too many markets are still considerably at variance with intrinsic values.
Regards
Colin
Some positive housing market indicators taken from the Florida Realtors Association website
Florida existing home sales: Up 15%
(month-to-previous-year comparison)
Florida existing condo sales: Up 33%
(month-to-previous-year comparison)
Florida existing home median price: $143,400
Florida existing condo median price: $95,000
National existing home median price: $183,700
National (Freddie Mac) mortgage rate (all housing types): 4.44%
……………………..
Details on all of Torcana´s Florida real estate listings can be found here.
A very positive article on the Florida Tampa Bay coast was published earlier this afternoon in the USA Today. Please see main extract below.
Florida is a huge second-home destination. It seems to have something for everyone: secluded beaches and urban buzz, golf communities and marinas, high-rises and bungalows at prices from ultra-luxury to shockingly affordable. It’s also diverse. The mansions of Palm Beach are far removed from the beach towns of the Panhandle and theme parks of Orlando.
But if everything that Florida offers came together in one place, it would be on the coast of Pinellas County. This includes Clearwater and St. Petersburg, just outside Tampa. It’s known by other names, including the Tampa Bay Area.
“We call it the ‘Nature Coast,’ ” says Debra Nobile of Innisbrook Real Estate Services. “The east coast (of Florida) is all big buildings and parking lots. Here, everything is nestled among the trees. There’s more beach. It’s more laid-back.”
Anthony Jaquinto, a longtime Realtor with Re/Max Realtec Group, says the area has great appeal to part-timers.
“The second-home market is big, about half my business,” he says. “It’s because of the beaches and the country clubs and all the other amenities.
“The Tampa Bay Area has an enormous amount to offer. There’s a really terrific airport, and within 35 minutes, you can be at towns up and down the coast or in premier golf communities. We have professional football, baseball, hockey, a big downtown and lots of cultural happenings.
“It’s much more cosmopolitan than Jacksonville or the Panhandle but much more affordable than Naples or Palm Beach, and a lot more natural than the entire East Coast. There are so many choices and amenities, and it’s all very user-friendly.”
It even has major theme parks: Busch Gardens and Adventure Island.
In much of Florida, only the deepest pockets can afford waterfront. But Pinellas County — the strip of coast from St. Petersburg north to Clearwater and beyond — invites a wide range of buyers.
“There are more or less luxurious communities, gated or non-gated, condos, single-family homes and townhomes,” Jaquinto says. “The price range allows almost anyone access to the Gulf. I can show you a smaller two-bedroom condo right across the street from the water for $150,000 or penthouse apartments on Sand Key for $2 million. Whatever your purchase price, we can probably accommodate you.”
That’s more apparent since the BP oil spill in April caused jitters on Florida’s west coast, and prices for some listings dropped 5%.
Condos along the water begin around $150,000, and single-family houses, even those with boat docks, can be found in the low to mid-$300,000s. Inland property is even less. Condos in the area’s premier golf communities begin at just $100,000, Nobile says.
The combination of low prices, beaches and urban amenities attracts buyers largely from the Northeast and Midwest. Jaquinto says many properties are used just for spring break and winter holidays. Thanks in part to affordability, they are often rented out at other times.
Harsh as it may sound, there are several ways those who are still liquid can profitably take advantage of a global downturn which is still causing much suffering to others 3 years after the credit crunch began.
One of these ways, which Torcana identified more than two years ago, is to purchase highly discounted and undervalued properties from distressed sellers. To maximise the return and minimise the risk of these types of properties, they must be purchased
- in wealthy, democratic economies
- with a history of renewal and recovery from recessions
- in fundamentally sound cities and neighbourhoods
- where locals rent long term
- where locals have and are currently purchasing these properties
Apart from that, the properties must be fully completed, cashflow positive and in well located and well run buildings or communities.
I´m sure there are plenty of other types of properties that can make you a healthy profit, but these are the ones we´ve identified with the best risk/reward ratio. It´s difficult to see how these kinds of properties will give any serious problems over the next 5 years and the potential benefits are huge.
So our criteria is very strict, but we´ve found plenty of properties that tick all these boxes and the latest is Arbor Lakes in Orlando. Here you can buy for 30 cents on the dollar in a beautiful and pre tenanted condo with 7-9% net rental yields.
If you haven´t received an information pack, please send an email to investments@torcana.com and request one.
Kind Regards
Colin Murphy
I read an interesting little article today on realtytrac, which is very similar to the philosophy Torcana have been following in Florida these past 2 years. I´ve summarised the main points below.
“Buy low. Rent smart. Sell high.” It should be every real estate investor’s mantra in today’s market. It is for investor, author and educator Andy Heller.
“I think the entire country right now is for sale,” said Heller, who recently founded the newly launched social networking website RealtyJoin. “A few areas are marginally better because they experienced greater falloff, so they have greater growth potential.”
To Heller’s way of thinking, the best strategy for investing in real estate today comes down to three ingredients: buying at a significant discount, buying the right type of property to attract the types of tenants you want to rent to, and lastly…location.
“To me, for investors the bigger issue – as opposed to what parts of the country are better than others – is all parts of the country are great so long as you can buy low enough,” added Heller. “ Today the investor should be buying property between 30 and 60 percent off.”
Based on data from RealtyTrac, National Association of Realtors (NAR) and Bureau of Labor Statistics (BLS), all of the metro areas on the list below had an average discount of at least 35 percent on foreclosure purchases, positive year-over-year growth in median home prices and relatively low unemployment rates.
If you´d like to see how to apply these principles to our newest investments, please get in touch with us today.
Kind Regards
Colin
I´ve had a few clients ask me about the new Irish government bonds recently and what the pro´s and con´s are for these versus a real estate investment.
Whilst these bonds guarantee a standard rate of return, in reality, they are not offering anything new, with some of these incentives already achievable through various savings schemes already in place. The main points are –
1. Interest Rates are fixed at 1% per annum, and DIRT is payable on the interest earned.
2. Bonuses are the only part of the scheme which are not taxable and you must leave your money in for a minimum of 5 years to receive any bonus (10%), 7 years to receive a 22% bonus, and 10 years to receive a 40% bonus.
3. After 10 years, the net return after DIRT would be equal to 3.96% return per annum – which certainly isn´t enough to get me to part with my cash for 10 years.
Additionally, these figures do not allow for any inflationary indexing. In other words, as the value of products and services go up, the value of your investment remains fixed, and there remains the very real potential that any interest and bonuses earned will be dramatically wiped out due to rising inflation.
Further information available here
Compare this to the “bricks and mortar” test in Florida –
1. You will achieve an annual rate of return on your investment at a minimum of 7 to 8% net of all costs. Due to the allowances and deductions which exist, you should never reach the tax thresholds in the States where you are have an income tax liability on the net rental income achieved.
2. The rental leases are signed on an annual basis and you can expect them to increase year on year in line with inflation, thus protecting your net rental return from any significant inflationary increases. The bond scheme offers no such protection.
3. The capital appreciation potential in these severely discounted properties is very real in the medium term and would certainly have the potential to outstrip any potential bonus offered under the government scheme (bear in mind you only receive a 10% bonus after 5 years, expect your condo to increase in value by more than this during the same period).
4. If you hold the property in Florida for the full 10 year government bond investment period, at a minimum you can expect a 7 to 8% annual rate of return on your investment every single year (a much higher rate of return than the bond scheme), and you will also benefit from significant capital appreciation after 10 years.
5. Your rental return will be in dollars, a very safe and strong currency at the moment, and certainly a lot less volatile than the “eurozone”. If the euro weakens any further against the dollar your rental returns will increase significantly in euro terms, as will the value of your investment.
6. Our Florida based investments are available for are approx 70% less than previous verifiable sales prices, and cost around 50 to 60% less than it would take to build the condos today.
7. Florida is an area of the States with excellent infrastructure, year round sunshine and lots of economic diversification. It is much better positioned to recover from the “bust” cycle than Ireland is at the moment.
Kevin Cross, Torcana
