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Despite optimistic reports, real estate industry could be heading for another crash

By September 24, 2013 No Comments

By Sean Galaris
President – LM Funding

A day doesn’t go by that we don’t hear about a rosy future for Florida’s real estate market. Foreclosures are slowing down. Prices are going up. And, sales are being made.

Sounds good, doesn’t it? A closer look at the real estate industry gives us pause to reconsider the market and look beyond the numbers to some extremely disturbing trends. If things continue on the current path, it’s possible that we’re heading for another collapse.

In today’s market, it is extremely difficult for individual investors to secure bank financing. As a result, those seeking to make a quick kill in the real estate market are tapping their savings and retirement funds to purchase units with the goal of flipping at significant profits.

Sound familiar?

The only difference is that today, these amateur investors aren’t losing the bank’s money. They are losing their own savings. Many find they can’t afford the taxes, insurance and fees. They frequently end up walking away — without their savings, without the ability to sell at a profit — and leaving associations in deeper financial stress.

Investors again are causing problems in the market. Hedge funds and private investor groups are starting to gobble up units with cash, simply because end users — those who will actually live in the units — can’t secure financing. The incentive for these acquisitions is that banks are more than willing to accept the low-ball offers and will gladly pay the statutory minimums due to the associations based on the Safe Harbor Law. This law stipulates that banks are responsible for 12 months or 1 percent of past due assessments, whichever is lower. The banks are also happy to shed the burden of taxes and insurance on the foreclosed units.

A new twist to the investor strategy is that these groups are starting to purchase large numbers of units in condominium communities, with the purpose of controlling the boards. Once these investor groups dominate the votes, they are moving, in some cases, to significantly raise the monthly assessments. In several cases it has become apparent that the increases are not to fund community improvements. Rather they are orchestrated to force struggling owners, whose units are already underwater, to abandon their homes because of additional financial stress.

The next step is for the investor groups to purchase additional units for pennies on the dollar. Their goals are twofold: to sell for significant profits (since they bought cheap) or to rent them out. Keep in mind that the latter strategy does not increase property values simply because that can’t happen unless end users (owners) purchase and then live in the homes.

Reports indicate that prices are rising nationally. As we saw in the first decade of 2000, these high prices simply are not sustainable. People buying at these levels will quickly see that their homes will soon be underwater. Again, this is a situation that is all too familiar and it could lead to another bubble and more abandonments and foreclosures.

Another disturbing trend and one that misleads the general public are reports of decreasing foreclosures. One major reason for this trend is that judges are dismissing many of these cases simply because banks are dragging their feet in the foreclosure process. They are being thrown out of court due to lack of prosecution. They won’t appear “active” until they are refiled. Keep in mind that banks may be delaying foreclosure proceedings because they don’t want the burden of taxes, insurance and assessments.

People continue to live in these units for free, another factor leading to financial problems for the associations. Likewise, many associations will not foreclose for the same reasons — it’s too expensive to own the unit.

Fannie Mae and financial institutions are also manipulating the market by not releasing “shadow” inventory because they realize that the demand would diminish as would current pricing levels.

The general public has short memories. We saw a similar situation following the savings and loan crisis in the late 1980s when buyers were lured into negative amortization loans. After a rebound, the financial markets responded with subprime loans and securitization, leading to the current situation.

Board members can avoid damages to their association by continually analyzing their documents in regard to the purchase of units by investors and the regulations regarding rentals. Boards should also encourage legislators to challenge the powerful banking lobby and move for timely foreclosures.

It takes this type of vigilance — as well as the ability to view current news with a bit of skepticism.