Condo Glut, Lenders Profit?Comments Off on Condo Glut, Lenders Profit?

Condo Glut, Lenders Profit?

Lew Sichelman, an excellent news reporter and a longtime colleague, recently interviewed me about my take on the Miami real estate market. Having known Lew for more than 35 years, and trusting the quality of his writing and reporting, I felt comfortable agreeing to the interview.

When the story was published earlier this week in National Mortgage News — THE news weekly for America´s mortgage industry — I noticed that the title mentioned, “lender profiting”.

From my point of view, in this case, the lender certainly did not profit. If anything, the lender left more than$20 million on the table. No wonder our government has to bail out the banks. If you leave $20 million on the table often enough, you can expect a crisis like this one in Miami with real estate owned condos.
Here are some numbers that show the bank wasn´t “watching the store”: I “sold out” this Miami Beach property in 2005 for $72 million. At that point, the developer had completed 95-percent of the construction and was looking forward to a nice profit. As we know the worldwide market then started to tumble, money got tight and in some cases shut off. Without funds from the bank, the developer didn´t have the money to complete the job and inevitably the lender foreclosed on the property.

This irrational action by the bank created chaos for the developer and wrecked his entire business, also triggering the foreclosure on his beautiful, 20,000-square-foot office building in a class “A” location. He was forced to rent a 4,000-square-foot warehouse on the outskirts of town. In addition, more than 100 buyers lost earnest money deposits on units they hoped to close on, and for the most part, live in. 

Since then, the property has been resold to investors with no development experience for approximately $24 million, and they intend to complete the construction and put the property back on the market for approximately $60 million — a difference of $36 million. I estimate it will take at maximum $15 million to complete, market, and pay interest on the debt, yielding a tidy $21 million profit to the new investors. The shame of this is that everyone loses when lenders foreclose, especially when it didn´t have to happen this way.

In my “Ten Commandments for Lenders”, the first commandment is “don´t fight with the developer, only ´cool heads´ will prevail.” The other nine commandments don´t matter if basic communication breaks down.