Property flipping is sport in some markets

Part 1: Condo craze: Flippers, converters and first-time buyers grab a slice
By: Glenn Roberts Jr.: Inman News
Editor's note: The condo market is on fire across the country, with prices appreciating faster than single-family homes in some cases. Buyers are scrambling to be the first in line, and amateur real estate investing is akin to sports and hobbies in the hottest markets. In this three-part series, we examine the trend from the trenches, catching up with part-time investors and first-time buyers, along with an example of the type of unique conversion projects taking place.

Rajpal "R.J." Singh is selling a "super luxury Trump condo" in Manhattan's Upper West Side for $1.7 million. He's also selling a West Side condo for $699,000 and renting out another condo in the Hudson Heights neighborhood.

That's not his day job. Singh works in the software industry. Real estate investment is something he does on the side – he is not a licensed real estate agent.

"I happen to like new construction lately," he said. He focuses on Manhattan and Queens, and believes those markets are generally still a safe bet.

The condo market has sizzled in many markets across the country, with condo-price appreciation in some cases exceeding home-price increases. Murmurs of bubbles and busts haven't scared away condo developers from low-rise, high-rise and condo-conversion projects, though. And buyers in some markets are still scrambling to be the first in line for a condo unit in a pending project – even when that project is little more than a hole in the ground.

Singh said he has seen a lot of amateur investors getting into the real estate market, a trend that seemed to catch fire in 2003. He said the percentage of condo owners who live in their condos appears to be shrinking while the number of owners who rent out the condos is growing, which may be an indicator of this growing push by investors in the real estate market.

"I think it used to be roughly 90 percent owners, 10 percent renters – today I've seen 70 percent owners and 30 percent renters. If it goes to 60-40 or – God forbid – 50-50" he said.

"Because of the stock market and mutual funds not producing much return, people are shifting that money to real estate. A lot of people need an investment vehicle and they are finding real estate as the investment vehicle for right now," he added.

And then there is the demand from those people who are simply looking for housing – "There seems to be a steady flow of people that are in need of housing, hence they are willing to pay top dollar," Singh said. Some New York markets may already be overpriced, such as the Brooklyn waterfront, he also said.

Robert Holtz, of Hoboken, N.J., is selling a condo that he bought two years ago for about $419,000. He has already purchased another condo, a unit in a new development that is under construction. He's still fixing up the condo he's living in, he said, though he said he's willing to move out now if someone will give him the right price.

Then again, he said, he might consider selling the new condo instead – if he can get the right price for that one. "If I can get $559,000 without having to move into it – I don't have to sell where I'm living at now. I can put the other one on the market."

Decisions, decisions.

Condo sales, as a percentage of total real estate sales, have grown from 8.8 percent in 1994 to 12.1 percent in 2004, the National Association of Realtors reported.

And the rate of condo and co-op price increases has eclipsed that of single-family homes for the past several years. The average U.S. condo price increased 16.5 percent from 2001 to 2002, 13.7 percent from 2002 to 2003 and 16.4 percent from 2003 to 2004, the association reported, while single-family home prices increased 8.8 percent from 2001 to 2002, 7.2 percent from 2002 to 2003 and 9.3 percent from 2003 to 2004.

Also, the total number of existing condo sales grew 9.7 percent in 2002, 11.3 percent in 2003 and 12.2 percent in 2004; while homes sales rose 5.1 percent in 2002, 9.6 percent, and 9.4 percent in 2004.

Holtz said he knows that the real estate market can be cyclical, and there is always some cause for alarm when prices inflate very rapidly. He cited the example of a $609,000 "pile of dirt" in Florida that ended up selling as a $740,000 real estate deal just 90 days later. That was a deal he worked on with his family.

"It's always a worry when you start talking about one-half million dollars like it's nothing," he said. "But we're not talking about a (dot-com) or an Enron or something like that." Real estate is a tangible thing, he said. "People need to live some place. They need four walls and a roof."

So far, the local real estate market continues to thrive, he said. "If you price it right it sells in one day."

A first-quarter 2005 report released by Prudential Real Estate Investors, a part of Prudential Financial, though, expresses some serious caution about the condo boom. "The potential fallout from a meltdown in the condo market is unquestionably one of the biggest risks facing the real estate industry," the report states. "While we believe the excesses are fairly concentrated within a few markets, the effects of a shock would reverberate throughout the industry."

The report also states, "As housing prices soar, comparisons between the housing market today and the dot-com bubble during the late '90s tech bull market grow more frequent by the week. Although condo fever is more of a coastal phenomenon than a national epidemic and is more bubble-like in some markets than others, the warning signs are getting harder to ignore." The report mentions media reports of properties that are sold and resold in a short period of time – in some cases in the same day.

"If a condo bubble develops (or already exists) and bursts as interest rates rise, loan delinquencies could increase sharply and liquidity in the debt markets could dry up very quickly, at least until lenders can assess the impact of falling property values." On the other hand, the report notes that a downturn in the condo market could benefit the apartment rental industry, as condo rentals are typically more expensive than apartment rentals.

Philip Conner, vice president in the Investment Research department of Prudential Real Estate Investors, said, "There are a lot of factors driving the condo market that aren't necessarily symptomatic of a bubble," such as the higher cost of single-family homes and the "urban renaissance" phenomenon of residents moving into denser housing developments in downtown areas.

But some markets, particularly in Florida, have been named as exhibiting some bubble-like characteristics, Conner said. Some warning signs of a condo slowdown are an oversupply in condo inventory and a growing gap between the ownership costs of a condo unit versus the cost of rental housing in a given market area, he added.

Michael Gasior, president and founder of American Financial Services, an investment training company, titled his March newsletter "Real Estate is Over." Gasior said that last month he saw an e-mail notice about an East Florida condo that was selling for about $850,000. "I went back through my e-mail box and saw that same condo about 90 days prior and it was $779,000. Now it's $940,000." The listing price kept escalating even though the property hadn't sold, he said.

"When you see speculators enter the residential real estate market that's often a sign of the top. There's no way borrowing money is going to be easier or cheaper than it's been," he added, and condos may feel the brunt of a market slide. Gasior noted in his newsletter that if the 30-year fixed interest rate rises about 8 percent, "the market will need to give back nearly all the gains enjoyed between 1999 and 2005 in order to stabilize the marketplace.

"The decline that would result would be more severe than the one experienced in the Northeast and Southern California between 1989 and 1994 when homes depreciated between 20 percent to 25 percent in those markets and condo prices dropped between 40 percent and 60 percent. No region of the U.S. would be immune although each area could look to 1999 market values for an idea where their respective bottom might be."

To capitalize on the frenzy for pre-construction condos in Florida, Realtor Steve Dalia of Exit Team Realty in Coral Springs, Fla., launched a Web site this year, PreConstructionProfits.com. Dalia said some condo markets in Florida "seem to be absolutely on fire" in terms of buyer demand, and most of the visitors to his Web site are from outside the area.

On the other side of the country, Mike Machado, a Realtor for Pacific Union GMAC Real Estate in San Francisco, is selling a one-bedroom, one-bathroom condo unit in a high-rise development for $689,000.

"Since it's getting really pricey I don't see a lot of first-time buyers," said Machado. He does see Baby Boomers, retirees and a growing number of investors shopping for condos these days. He said San Francisco real estate has been a good long-term investment, but "if you're thinking about flipping this thing in a month and making $100,000 on it then forget about it." He has seen some sellers in the San Francisco market are taking the money and running for other parts of the state or country.

Machado, like many other real estate professionals, has played the real estate market himself, buying and flipping properties for a profit. Richard Shrake, who left California to sell luxury condos and other property in Las Vegas, said, "A lot of purchases are made by brokers. I've bought myself in this market."

He said that the real estate frenzy in Las Vegas, which has sent property values soaring and seeded several high-rise condo projects, could be headed for a glut within the next few years. Investors can protect themselves, he said, by doing their homework. But he is new to this real estate business. "I haven't been in there that long. I don't know where this is going."

Machado said that as with other cycles, it may be too late when real estate investors and speculators realize the market is turning – people may not realize what's happening "until we all get burned."

He added, "It's just like the stock market in the late 1990s. Now, we're all in real estate. Real estate's the new stock market. Which we all know can't last forever."

Tomorrow: A New England town converts a hospital into condos.