They're called "fractured" condos, and they're among the hottest targets for investors in South Florida's shell-shocked real estate market.

A fractured condo project is one that's built but only partially sold out - and the developer or lender wants to get rid of unsold units in a hurry at a discount -- whether they're entire floors or scattered through the building.

Hedge funds, private equity "vulture" groups and individual investors are all shopping aggressively to pick up these distressed units at deep, deep discounts that start at 40 percent and go much lower.

New Valley LLC, a Miami-based subsidiary of Vector Group Ltd., a New York Stock Exchange-traded company, says it's got $250 million in cash ready to invest in South Florida fractured condos or in troubled rental projects.

Vanessa Grout, vice president of acquisitions, told Realty Times that the situation has become so dire for some developers of prime condo projects this year that her firm sees "pivotal opportunities" right now to pick up high-quality, well-located condos at once-in-a-lifetime prices.

But Jack McCabe of McCabe Research and Consulting in Deerfield Beach, Florida, a firm that advises prospective investors on market strategy and pricing, says there are important snares and pitfalls in bulk condo sales that complicate matters, even when the price of the units -- or the underlying debt -- are temptingly low.

For example, McCabe told Realty Times, if you acquire 10 units or more in any single building, you run the risk of becoming a "developer in lieu" under Florida statutes. That means you may assume some of the legal liabilities of the original developer -- including claims by existing unit owners that the property is physically defective or hasn't been managed properly.

"You step into the middle of a lot of potential lawsuit issues," said McCabe, "and they can tie you up for a long time."

McCabe said another challenge to bulk condo investors is property taxes. Though Florida law generally protects "homestead" owner-occupants from annual tax increases exceeding 3 percent, investor purchasers can get hit with huge increases - he has seen some as big as 100 percent or more.

Plus investors have got to be prepared for fast-rising insurance costs and declining income as the glut of condos converted into apartments continues to depress rental revenues.

Bottom line here: No question that there are once-in-a-lifetime investment opportunities right now in South Florida's fractured condo segment. But you can end up getting fractured YOURSELF if you don't do meticulous due diligence research before making your move.

Published: May 15, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.