Estate and mortgageCape Coral/Ft. Myers Flipper Caught In Buyer"s Market
Caught in a buyer"s market with excess inventory, swooning prices and lots of competition, a Florida "flipper" asks for advice.
Blanche,
I read Realty Times daily and appreciate the valuable information from the many professionals who contribute to this website.
My wife and I purchased two new construction up-scale condominiums in NE Cape Coral in September 2004. They were completed this year in January and we closed escrow in February.
It was our original intention to flip these properties, but with the turn in the market we are renting out both units. Based on the current market conditions we would break even if we sold the properties. My wife and I are in a position to hold the properties although they are producing about $400 a month each negative cash flow.
I am interested in getting your insight on the outlook for the Cape Coral / Fort Myers market over the next 3 to 5 years, which is our time frame for holding the properties.
What websites might you recommend that will give me local market information? I am currently working with an agent and she has been helpful in providing information but I would also like to do additional research on my own that may assist me in identifying trends.
Thank you for your attention. Regards, Scott.
Realty Times responds:
As far as websites that give local market information, you can"t beat ours. Check our Market Conditions Reports. Key in the state, then the city or neighborhood and read what local Realtors have to say about the Cape Coral area. Otherwise, visit Realtor.com and peruse the listings.
The outlook for Cape Coral/Ft. Myers isn"t good for the short-term, because of excess inventory that still needs to be absorbed by the marketplace. Right now, it"s a buyer"s market, but without any buyers, because they are waiting for prices to drop even further.
According to the National Association of Home Builders, and our recent story about their report, Cape Coral/Ft. Myers built 337 percent of the normal (the production for the previous five years) number of homes in 2005. That"s a sobering statistic because that"s just one year. So to say the area is overbuilt is an understatement, but on the positive side, the reason the area succumbed to speculative fever is that people want to live there.
The good news is that you have demographics and migration on your side.
People are moving south and west, especially as they age. The largest homebuying demographic in history -- the baby boomers -- are reaching their retirement years. Right behind them the echo boomers are emerging as the second largest homebuying demographic. As the "bookends" on either side of Gen X, you"ll find that first-time and move-up buyers of condominiums are actually older (43 years to 41 years for buyers of single-family homes) and spend more money on their homes because they are choosing to live out a lifestyle.
The challenge is that condo buyers typically have less income than single-family home buyers, with the exception of luxury home buyers, in which case a condo can be a second or third home in a destination city.
Explains Walt Molony, senior associate spokesperson for the National Association of Realtors, "While the median price per square foot is highest for the condos ($169 compared to $118 for all homes purchased), median income of condo buyers is lower than the median income of all buyers ($59,100 vs. $71,800). "The price per square foot of condos is higher than single family homes because there is a concentration of condos in higher-cost housing markets. Within a given area, condos typically cost less than single-family homes -- with the exception of upscale units in urban cores."
What that mean is that condos are subject to more market volatility. If they"re more expensive and appeal to those with smaller incomes, such as single heads of households, then you have a narrower pool of qualified buyers to take these properties off your hands at a profit.
That said, market volatility can work for you. Condo buyers move (every four years) in and out of homes 33 percent faster than buyers of single-family homes (every six years.) Why? They are tied to core centers for jobs and entertainment, rather than the suburbs for schools. As the bookend buyers, they buy as singles, non-married couples or couples without children. As they begin families, they may move to the suburbs, and return to condos as divorcees, widowers, empty nesters, etc.
Delayed marriage, friendly loans to younger and less-qualified buyers, and other reasons have lowered the age of first-time homebuyers to the youngest in history, with a higher concentration of single homebuyers than ever before, over one-third.
That"s why condos set housing records for 10 years straight, before falling 10.4 percent in 2006 says the Commerce Department. That"s nearly two percent more than the existing home market fell, which is a high percentage considering condos are only 12 to 13 percent of all housing transactions.
For that reason, condos have a reputation for volatility. And it"s that reputation, not necessarily the quality of your units, that any condo owner has to overcome. For that reason, your five-year timeline seems reasonable.
While some would argue that it"s stupid to lose money every month, your $400 may not be a net loss. Talk to your accountant and you may find that between depreciation, upkeep, advertising, renting costs and other deductions, you may actually be making money, albeit the passive way.
You can always occupy one of the units yourselves for two years, to offset about 15 percent of your sales price that you would otherwise forfeit as an investor.
You also have tremendous competition from newer units, so I would carefully watch when and where new units are being built around your properties. As soon as you start to see building activity pick up again, that may be a good time to sell, before those units come online to compete with yours, especially if you see that the prices are higher and square footage/amenities are fewer.
The bottom line is you can"t do better than a local agent for up-to-the-minute data, especially if she/he is a condo specialist, international marketing specialist or relocation agent.
I think you"re wise to adapt to current market conditions and rent your property. That"s what I advise anyone in a softening market to do if they can"t cash out. Only you can decide if it"s worth it to you to hold the property or cut your losses and try something else, but flipping isn"t going to be viable in many areas for a while, so you might as well get used to being landlords.
I think you"ll soon see people sniffing around for bargains, because 1.5 million new households are forming annually and as communities become more densely populated, condos will make more sense for more households. It will likely take several years for prices to return to 2004 levels, and that"s if Florida builders don"t add any more to unsold inventories.
Talk to an accountant who may be able to work with you on your what-if and tax picture, including the amount you can depreciate your homes as rental units, to ease the pain of more outgo than income and see if it"s worth it to hold, fold or walk away.