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DEERFIELD BEACH, FL-Condo owners in Florida are getting desperate. That is, if the concession and enticement programs at nearly every community are any indication. Jack McCabe, chief executive officer of McCabe Research & Consulting here, says concessions ranging from free maintenance or homeowners dues to luxury cars are now commonplace across many Florida markets.

“We’re seeing some really creative and imaginative concessionary programs,” he says.At the Kensington at Royal Palm Beach, for instance, new purchasers can get 13% of the unit’s purchase price rebated as a sort of security deposit. The building’s owners also guarantee the unit buyer a competitive market rate income for two years. “There’s a question as to whether this practice is legal,” says McCabe. On a three-bedroom unit, the guarantee is about $1,800 per month, which over two years amounts to $44,000, he explains. Add the 13% rebate–which on a $300,000 unit would be $39,000–it works out to about $80,000.

“So they’re giving away more than $80,000 in incentives that are done after the closing, separate from the sales agreement,” says McCabe. “You could make the case that it’s inflating values because the seller truly is only receiving $220,000 in value off of that $300,000 sale. I would think the mortgage lenders would have some real problems with that type of business model because, in essence, if they’re[the lenders] making an 80% loan for a $300,000 unit, they’re loaning out $260,000 on a unit that truthfully is only worth $220,000. But because of the way the rebate is structured–after the closing–it’s being hidden from the lender. There are questions as to whether that’s legal, but it’s nonetheless happening.”

Indeed, local reports say the purchase price for the community’s 102 units–from $325,000 and $340,000–is similar to what condos were trading for during the peak of the market. Yet most of the buyers, it seems, are investors that won’t be living in their units. McCabe says there are even multiple purchases made by the same investor. Meanwhile, Lehman Brothers has instituted a “Value Protection Program” at the West Bay Club, its luxury residential project in Estero, FL. Under the program, which runs through June 1, the developer is guaranteeing it will sell or buy back the unit at full cost three years after closing. Lehman is betting there will be a market recovery within that period, bringing condo prices up again. In that case, says McCabe, they’re hoping the unit buyers will want to hold on to their investments.

Totaling about 220 units, the property consists of twin towers, each with 103 two and three-bedroom residences, as well as five penthouses, which are not included in the program. Unit prices range from $480,000 to $2 million, and Prudential Douglas Elliman is handling the sales.

McCabe calls the marketing program “smart” because it ensures a purchase price at a time when would-be buyers are concerned about declining prices. However, there’s a glitch, he points out–the prices Lehman is asking are significantly higher than comparable unit prices for the area. So someone could buy a unit for $200,000 elsewhere and if prices go down, that buyer wouldn’t lose much money; but if the market improved, the opportunity to make a profit would be greater than if they purchased the $300,000 unit. With the more expensive unit, the buyer would either make a slight profit, at best, or break even, at worst.

These are just a few of the myriad creative tactics property owners are using to attract condo buyers. At some properties, the developer is paying the first year or two of maintenance fees and/or homeownership dues. At another, the developer is waiving its fee, and some are even telling prospective purchasers to bring their best offer. “In some of the higher end buildings,” says McCabe, “some try to attract buyers by cutting deals with different celebrities to take down units in an effort to build up the property’s cache.”Despite all of the concessions, he notes, units are still not moving. “Concessions, in my mind, are only good if you’re one of a very few that are offering them,” he relates. “Then they’re a competitive advantage. But if everyone’s offering concessions, then it’s not a concession; it’s just seen as part of business. Then, you have to ultimately move to the last resort–cutting prices. Once you lower prices, it’s very difficult to ever raise them again in the future. That’s why you see this in every up and down cycle–they try concessionary incentives first. Sometimes they work, especially when you’re one of the first to offer them. But then everyone starts offering them, and there’s no competitive advantage.”

All of this is no doubt going to have significant implications for the market. Due to the sector’s blacklisting, says McCabe, it’s already difficult to get a retail mortgage loan or a commercial construction loan for a condo in Florida right now. The CEO says condo prices will continue to decline due to foreclosures and high inventory. “Prices will probably drop another 10% to 15% this year, and I think 10% to 15% next year, before all is said and done in many markets in Florida,” he says. “We’re also going to see a lot of for-sale product move into the rental pool.”

In fact, the shadow market has grown by thousands of units in the past few years. “That’s definitely affecting the long-term apartment operators in different markets,” says McCabe. “Rents skyrocketed in the condo conversion days because so many units were taken out of the apartment pool. In 2006, we saw rental rates go up 13.9% in South Florida–it was incredible. Rents actually went up 20% over the two-year period of the condo boom. But rents have now flattened and we’re seeing the return of rental concessions because of increasing vacancies, due to the shadow market competition. Now developers are effective giving away between 8.5% and 17% of their income in rent concessions. We’re going to see further erosion of prices in for-sale multifamily, flattening rents and probably the wide-scale return of concessions in the rental segment.

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