It’s Hard Sledding for Condo Sales, But They Are Selling
It’s neither the best of times nor the worst of times for the residential condominium market, according to panelists at the NAHB Multifamily Pillars of the Industry Conference in Colorado Springs, Colo. earlier this month.
While condo sales have fallen far below the frenetic pace of just a couple of years ago in the hot markets, builders and developers for the most part are getting by without having to resort to auctions or extreme measures to sell off their existing inventory, they said.
And those who are watching properties still in the pipeline reported that they aren’t too worried about buyers with signed contracts dropping out when their homes become available — although financing has now become more difficult to find at favorable terms and in some of the most overheated markets values have dropped below the original selling price.
“I don’t think now is the time to go out and build a whole new round of these buildings,” said James Borders, chief executive officer and president of Novare Group Holdings. Of the markets in which his company has been delivering high-rise buildings with big glass windows — Austin; Atlanta; Charlotte, N.C.; Nashville; and Tampa, Fla. — Austin may be the lone exception, he said, because it is a location “where everybody wants to be downtown.”
Borders said that all of the 430 units in a project currently being built in Austin are under contract, and 130 prospects are on the waiting list and available to fill in as soon as someone with a sales contract waivers.
Borders’ company is providing incentives for buyers to close early, such as a 2% to 3% price reduction or a free fireplace, and the results have been good.
It is possible that 25% of those who have signed contracts could fall out of the deal, he said, but “people don’t want to walk away from their earnest money, not really, if we have sold to the right person and not an investor,” he said.
Business on two projects in the 400-unit range in Florida is not so brisk, he reported. In one of them, 84% of the apartments have been closed, but the remaining properties are going slowly, at the pace of two to three a week, although that’s relatively strong for the local market.
On a project that will be delivered next year, Borders said that he will need to be selling at a rate of five a week. Demand for the product is still strong, he said, but the increase in construction costs that occurred during the boom has made it impossible to sell in the $250-a-square-foot range, which would easily draw more buyers, and has pushed the price roughly $75 higher.
David Nielsen, vice president and national condominium sales manager for Wells Fargo Mortgage, pegged second- and third-tier markets that didn’t experience “blow-out prices” during the boom as the best places for condos today. Examples of these are Birmingham, Ala.; and Memphis and Nashville, Ky., although Borders said of the latter that it can’t stand too much more product.
Working With Lenders
Nielsen noted the departure from today’s market of “the one-trick pony and one super-fantastic mortgage product” that turned mortgage bankers into vendors during the boom, when capital market funds lost focus on proper risk mitigation. “People were getting approved left and right and as we are finding out right now probably shouldn’t have been.”
However, he said, lenders can work with developers to identify strategies to boost condo sales, starting with educating consumers about the availability of financing.
“If you listened to the media today, you would think that no [mortgage] loan could ever, ever be made again,” he said, “but they can be.”
The temporary increase in the FHA mortgage ceiling and the loans that Fannie Mae and Freddie Mac are allowed to buy has helped ease up lending in California and some other high-priced markets, he said, with banks knowing that they can make loans at higher price points and sell the loans.
However, citing “HUD policies that are crazy and don’t make sense,” Nielsen said FHA overhaul legislation is definitely needed to make it easier for high-rise buildings to participate in this program.
Builders should also be looking at becoming more creative with how they use mortgage products to mitigate some of the fallout from the credit crunch, he said.
Interest-rate buy-downs and rate-locks can be particularly effective, he said. For instance, to keep a buyer from backing out of a contract signed today on a product that’s 24 months out, the builder can lock in the rate for 24 months, including a provision to allow the buyer to move to a better rate if interest has declined by the closing time.
Converting to Rentals Not Always an Option
Where sales have been especially hard-hit by the housing downturn, shutting down sales and converting to a rental project may not always be a viable exit strategy, Nielsen and other speakers said.
In a building where only a small percentage of the units have been sold, the developer would be challenged with having to take the entire deal back because Fannie Mae and Freddie Mac only allow one entity to own 10% of a particular project, Nielsen explained. Those who had purchased a home would have a hard time selling it under these circumstances, because prospective buyers would find it difficult to line up financing.
It was also noted that it can be difficult for large or luxury condos to be turned into rentals, because the rents they would command would be too low to support their actual cost.
Jerry Durkin, director of Wood Partners, suggested that the best strategy for developers of multifamily projects is to start out financing them as rentals. “Then you have no problem down the road,” he said, and they can always be converted if demand for condos arises.
Costs went up so much during the housing boom, Durkin said, that it is difficult to turn condos into rentals. If ground has not yet been broken on land that was purchased for a premium at the height of the boom, selling off the land and repaying the bank could be an alternative, he suggested.
Durkin said that there is still traction for condo sales in Atlanta, although “it’s hard sledding.” Higher-density projects in that market located “where the buyer really wants to be” will slowly be absorbed, he said.
However, there is no market for new condo projects and it is impossible to do presales. And Durkin’s company converted one large building to rental “when it was crystal clear that’s what should be done.”
In Palm Beach, Fla., Wood Partners is having to deal with one property where those who signed contracts bought at $300 a square foot and the appraisals are now coming in at $250. “The deposit becomes insufficient,” Durkin said, “and if they had the money to increase the deposit, they feel like they’re just further under water.”
The solution for those who want to close is to find the right appraiser, he said.