South Florida Real Estate: Treasure or Fool's Gold?

Many observers are pointing to falling home prices as a once-in-a-generation opportunity to buy homes, especially here in South Florida . They believe buying real estate in these distressed markets is child’s play, as apparently low prices seem to offer significant downside protection against further price declines. I think it’s more likely a game of high stakes hot potato, where buyers should reconsider their positions when the music stops and shudder at the potential consequences of being “fortunate” to win their purchase bids.

Buyers don’t want distressed properties; they want financially and operationally secure properties that happen to be available at distressed prices. But aren’t foreclosures and short sales (pre-foreclosures) great deals? Maybe. In the case of a freestanding single family home, a foreclosure/short sale may be a great deal. These days, however, many of the newer homes are available only within planned communities and come with financial strings attached, called homeowners associations (HOA). These HOAs cause owners to effectively become financial partners with everyone in their community. Buying foreclosures/short sales in these planned communities are trickier. A buyer may fall into a money pit requiring payment of a “special assessment” resulting from all the unpaid maintenance charges from other foreclosures in a community. (Mortgage lenders repossessing homes are not generally liable for the unpaid monthly maintenance charges and assessments of deadbeat borrowers.)

Condominium communities are potentially the biggest nightmare, because owners are so inextricably and substantively linked, e.g., they share roofs and walls, not merely some recreational common areas. Consequently, monthly maintenance charges tend to be much larger with condos than with other types of housing. In addition, communities that sold homes at astronomical prices during the height of the real estate boom, 2006 give or take a year, are most likely to have a higher percentage of foreclosures, because those owners are significantly upside down on their mortgages, i.e., they owe significantly more on their loans than their homes are currently worth. In extreme cases, special assessments can increase the ultimate cost of acquiring a foreclosure or short sale by several thousand dollars. Along with financial considerations, buyers should further consider the negative psychological effect of living in a community abandoned by a significant share of owners.

To add to the potential nightmare, today many mortgage lenders have very limited capital and lending to homes in problematic communities are not high on their list of new business opportunities. Such a lack of available liquidity hinders acquisitions by new buyers, further reduces prices and thwarts the operational and financial recovery of such communities.

Unfortunately, the dramatic imbalance of the supply and demand for homes, especially in South Florida, combined with the current difficulties facing our lending institutions, most notably Fannie Mae and Freddie Mac, means it will probably be months before our housing markets stabilize and years before they fully recover. Going forward, and once markets stabilize, mortgage lenders should be encouraged to subordinate their claims against homes to those of homeowners associations, thereby enabling HOAs to recover unpaid maintenance charges from lenders when foreclosures occur in the future.

Why propose an initiative that could potentially hinder new loan activity? I believe that encouraging lenders to reserve capital for homeowners associations like they already do for property taxes and insurance will reduce their loan-to-value ratios and ultimately improve the quality of their loans. Encouragement to secure the fiscal integrity of HOAs will in the long run prove beneficial to homeowners and mortgage lenders that right now need to be bailed out, and will favor all the taxpayers who ultimately pay the bill.