Purchasing units in fractured condominiums in bulk may be prove to be a smart investor 'play' in today's market, especially if the asset has a multiple number of lenders selling individual units in the same property.
Most real estate investors are familiar with dollar-cost averaging. Purchasing fractured condominiums in bulk offers a similar income averaging opportunity.
The strategy: Purchase a large number of units in bulk from the developer, then purchase other bank-owned units in the same community to lower the total price per unit.
How it works:
A condominium developer of a 200-unit condominium sold 120 units for $150,000 before the market crashed, leaving him 80 unsold units with rapidly declining prices. He decided to hold the units, lease them, then put them on the market for a bulk sale for $50,000 each, or $4 million. (The substantial price drop is a realistic example in many Florida condominiums. Price is being driven by lender pricing for foreclosed condominiums).
Once the new buyer purchases the 80 units, he is in position to start buying individual units in many cases for less per unit than he paid for the bulk prices. While some lenders may hold at the bulk price or close to it, for their empty units, other lenders will want to sell fast and move on for a lower price.
Examples of units selling for much less than market are abundant.
If the purchaser of the 80 units for $50,000 can pick up another 21 units for an average of $30,000 each, his average cost for 101 units would be about $45,700. Owning 101 units would give him control of the 200-unit member association.
The benefits cannot be denied:
Benefit to bulk buyer:
1. Buyer can choose whether or not to gain control of association by purchasing individual units,
2. Price averaging allows resale flexibility depending on tax implications.
3. Buyer can choose to sell the units he paid the least or most for when he decides to sell. He no longer has to wait for 'the bottom." He's close enough!
4. Buyer can start resales in phases whenever he chooses .
5. Buyer has positive cash flow from day 1 on all purchased units.
But potential buyers cannot be too careful. Fractured condominiums are not cut from the same 'due diligence' cloth as apartments, shopping centers, and other income driven assets.
As a principal in Gray-Robinson, a 10-office Florida law firm, and a Florida real estate attorney for more than 25 years for some of Florida's largest real estate communities, Delahunty brings both a legal and experienced perspective to his clients.
"Fractured condominiums have different aspects than other types of income property assets," Delahunty said, "and are growing in popularity throughout the state."
"But the new purchaser should insist on enough due diligence time to evaluate the status and impact of the condominium association's financials as well as the legal matters associated with the purchase."
"One practical matter to check is if the other unit owners are paying their assessments sufficient to run the common area. Increasingly condo associations have a receiver in place and have to obtain a court order to ensure that the tenants of rented units are paying the association's assessments before paying the balance to the landlord unit owner," according to Delahunty.
"It is also important to understand that the units, most of which may be rented, will be purchased 'as is' without any warranty or recourse against the seller," so the seller needs to balance his risk tolerance against the time and costs of examining the property and the state's condominium law," Delahunty said.
He suggests purchasers pay attention to accrued assessments affecting the unit, as institutional first lenders obligations are limited to six months or 1% of the original loan amount, whereas purchasers might be fully liable for amounts owed.
"Also, remember that on the sale of the units, there is an obligation to provide a complete set of all the condo docs to the buyer," Delahunty said.
According to Florida real estate professionals, the fractured condominium market offers a window of buying opportunity that will might close by the end of this year.
The reason for the window: It is generally believed that condo prices have bottomed out. Some fractured condominium buyers 'buy and hold' until prices improve. Prices are so low that renting the units provide substantial cash flow in many cases.
Others buy at such low prices they can resell to waiting buyers seeking second home bargains in Florida condominiums.
Commercial buyers for apartments, shopping centers and other properties are sitting on the fence with cash in hand waiting on commercial pricing to sink and commercial lending to surface.
But for those cash investors with an appetite for fractured condominiums and have a good real estate attorney, the fractured condominium table appears to set and a ray of sunshine is beaming through the window.