Kirsten Valle from the Charlotte Observer called my friend David O'Connell for some quotes the other day to pen an article about the risks and problems associated with preconstruction buying.
I think Charlotte came in late on this concept, long after Myrtle Beach real estate had fizzled out with it. We've had our share of nightmares here, what with the ill-fated Bahama Island Resort fiasco - for those not familiar - the developers allegedly have absconded with millions of dollars of loan monies and customer deposits, and the resort was never built. Anyway, for the most part, in South Carolina and I think most of Florida, the preconstruction condo market has slowed to a stop.
Kirsten's article begins telling a story of a NASCAR team manager named Michael Landis who invested over $30,000 in a preconstruction highrise in Charlotte...the 210 Trade in the Epicentre. He had planned to move into it by December of this year, however work on it ceased in February, and now he is stuck.
One of the reasons the preconstruction boom ended so badly was construction costs. Here in Myrtle Beach, the developers (and buyers!) who got into it early on...about 2003-2004 made a boatload of money. It was not uncommon to purchase an oceanfront condo in Myrtle Beach for $200,000 preconstruction priced, and flip it a year later for $500,000. One of the guys I did work for bought 9 units at a resort called Crescent Shores, and flipped 5 of them the first year, making double-plus on every one. He held on to 4 of them, on advice from his tax guy. I'm not sure if he held them too long and got stuck, or if he moved them the next year. But he's in the condo rental management business anyway, so it's not too bad of a loss for him either way, as long as he was able to find the money to close on and hold them.
The Causes of the Bubble Bursting
As the builders saw all this money being made here and in other resort areas, they started going up on their charges, trying to cash in on the gold rush too. This began to create problems because the developers had worked a certain cost into the budget for these multi-million dollar projects. The condos were price-pointed to give everybody involved their cut. When the builders reneged on their agreed-upon costs, that threw a monkey wrench into the project - who was going to absorb the extra cost? The original land/hotel owner? The Developers? The commissioned Realtors who were selling the units?
In cases where the deal had gone so far as to require the first 10% down payment and contract with the customers buying the condo, these buyers were protected from price increases. The costs had to come from the development teams. The beginning of the end started there. Many couldn't or wouldn't take a cut out of their profits, and building completion stalled...as the parties involved argued over who was going to ante-up. Sometimes the actual buyers weren't aware of this. Months went by that saw no work on the property, and the Realtors who sold the units had no answers to give the buyers either.
Projects began to fall apart. Sometimes the buyer got his deposit back, (with no interest) after a year or more of investing anywhere from $25,000 to $100,000 in the down payment.
Sometimes the deposits were not so forth-coming. If the developers had spent it, they were hard pressed to find the cash to refund the buyer, and stalled for time as long as possible.
Some of the resorts got built and the ones that took the loss were the developers. And eventually even the real estate agents suffered, who ended up with only half of the commissions they should have received.
Sometimes the developers walked away and said, "Sue me". And many DID get sued. And a few of the projects are still sitting around half-finished, still hoping to find buyers. We have a handful like that now...I probably better not name names.
Anyway, it all came crashing to a halt, and for as many of the people who got in early and made enormous profit from them, there are those that got burnt in one way or the other. Greed destroys all good things, no matter who the greedy party is.
Back to the article... Kirsten reports that experts say preconstruction investing can be a good thing, "especially in Charlotte, where the market has remained strong - but that it's always a risk."
Quoting the article:
"Preconstruction sales have come to a halt in other cities, said David O'Connell, a Myrtle Beach, S.C. real estate agent and developer who owns a website called PreconstructionCondos.com." (one of our used-to-be-hot sites!)
"Preconstruction condos hit their peak nationally about two years ago, costing close to $600 per square foot, he said. The prices have been dropping since then, and developers are hard-pressed to pay off their debt, let alone make a profit. In harder-hit areas such as Las Vegas, people are finding foreclosed properties more attractive to buy than preconstruction condos. The risk simply is, you don't know what the price is going to be when it's finished. Those who bought at the peak are finding out that the market can go down."
The article continues to say that the 210 Trade has stalled, and offered the buyers a refund, now citing its completion date at 2010. Another project called "The Park" is going into foreclosure, and looks eerily similar to our Bahama Island nightmare. The developers owe the bank more than $27 million on it, and the foreclosure auction has only acquired a bid of $17.9 million. It goes without saying that the bank gets theirs first.
They report two other high-rise towers at a stall, and one called "The Catalyst" still selling well and in good order.
"O'Connell, the Myrtle Beach developer, said the market will turn around across the country by late next year.", she quotes David as being confident.
I agree. And if anyone should know, it's David O'Connell. He has lived, eaten, and breathed condos for the past 8-10 years. More than 3 of those years had me right along with him...:-)
Post-note: According to my two newest clients, Greenville SC homes and condos are still very popular and the market there is stable and good. Greenville never really went through the resort boom, however. And Jack Ragsdale, a Denton, Frisco and Flower Mound Texas real estate agent reports his sales of retirement and golf course condos are doing well too.
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