Sunday, June 18, 2006

Why High Rise Developers Sell To Investors

My wife and I were recently discussing the state of the real estate market.....My wife and I were recently discussing the state of the real estate market, particularly the differences between single family detached (SFD) “new builds” and high rise condo new builds.

We see that in many of the high rise condo buildings being delivered today as many as fifty percent of the units were originally sold to investors. We know this because of the very large number of units that go back onto the market (resale) as soon as the buyer closes the purchase with the developer.

This observation led us to wonder why the high rise developers allowed this to happen when builders of SFD homes made it EXTREMELY difficult for investors to buy in their communities; and even then as many as thirty percent of those houses were purchased by investors.

I believe that in both cases; the high rise developers selling to investors and the SFD developers not selling to investors do so because it benefits them.

In the case of the SFD developer, because the delivery time is only nine months or so, they can not afford to sell too many units to investors. In a typical SFD subdivision the developer needs at least two years to sell, build, and deliver the units before moving on to the next subdivision. During that time, new potential buyers will be “shopping” the subdivision, assessing whether or not they want to buy there, while folks who bought nine months earlier are moving into the subdivision.

Now, can you imagine how sales would absolutely drop off if nine months earlier the developer had sold fifty percent of the units to investors and those investors turned around and put the homes on the market as soon as they were built? How many potential buyers would feel comfortable buying into a community in which EVERY OTHER HOME HAS A “FOR SALE” SIGN IN FRONT OF IT? After all, we know from basic economic principals that an unusually high supply of homes will lead to downward pressure on prices? Who wants to buy into a subdivision if they think prices are going down and not up?

So, the SFD developer restricts sales to investors in order to avoid this problem and to protect their own interests and future sales.

On the other hand, the high rise condo developer has a very different sales and delivery cycle. With a high rise condo development, ALL units are delivered within weeks or months of each other. The developer doesn’t face the possibility of their future potential buyers recognizing that too many units have been sold to investors. By the time we get an inkling of an idea of how many units sold to investors the buyers are already financially committed to the purchase.

So, in this case, the developer can sell to whomever the heck he wants and doesn’t risk the possibility of future sales in that project being compromised; great for him but lousy for his customers.


Anonymous said...

Great article Will!
I personally couldn't agree more... Afterall, I live in The Vale and my father lives in The Biltmore Towers. The only way the scenario could get any worse would be if my Mother lived in The Orpheum Lofts... (she doesn't)
By the way the auction bombed!
-Which was just a very bad idea to begin with.
My Father and I bought to live at these places, and not to flip. Both communities' Sales Teams insinuated that they were going to be standard, warrantable condos. When I asked (and believe me I did) how many units were being sold to investors I got the standard answer, "No more than 25%". When the time came for the Lender to order the condo questionairre I saw the truthful ratio, at which time the money was non-refundable. I think these Sales Teams had an obligation to disclose the truth to the buyers.
It is sad that there is no recourse... Both are beautiful communities if you ask me- as is The Orpheum. The only "problems" these communities have is the way the Sales were handled.
(With no integrity or thought of the future of these developments)
I believe Optima deserves some sort of negative press about this. -Although for selfish reasons I would rather there be good press considering my Father's future resale value.
Some communities limited these investor sales.... One example is Century Plaza- they didn't have to, but they did...

Will Daly said...

Being a fan of urban living (and resident in a high rise) I too am disappointed with the actions of some of the developers and their sales teams throughout town. Hopefully their irresponsibility does not jeopardize the long term viability and success of high rise and loft living in the Valley.

Please know that when I talk to developers I show them ways to hit their sales goals but by selling to true owner occupants and not professed investors or those who pretend to be owner occupants but are truly investors.

Regarding the AZ Republic, stay tuned..... I am planning to respond to their "doom and gloom" articles with several of my own and we're looking at buying a full page in the Republic in order to get it distributed. In fact, all morning (and prior to reading your comment) I have been working on the theme and language of one of the articles.

Finally, what do you know about Century Plaza? Sounds like you might know the developer or the sales team.

Anonymous said...

Mike Webb- he is the "Sales Team" at Century Plaza. I just know that last year in the midst of all the chaos- He (along with Equus) limited the number of investor units to 20%. I believe Titan Realty did the same for Cosmopolitan Towers.
Last year these projects would have sold out in record time without selling to investors!
I think it is a good idea to rent a full page ad to get some "blue sky" back for high-rise/ loft living... There are still some great stories happening all over town- just that certain undeserving projects seem to be in a funk.

Will Daly said...

I know Michael at Century Plaza. He's a good guy. However, I don't know if anyone can truly say that they limit investor participation to 20%. How could anyone know for sure what the intention of any buyer is? Someone can easily say that they are going to be an owner occupant when they truly have no intention of living there.

Additionally, in no way do I wish to question Michael's integrity, but all the builders/developers say that they limit investor participation. I wonder if you personally know Michael, I mean on a close, personal, friend level and if he has told you any stories of how he has limited investors. Otherwise, short of having such insider knowledge there really is no way for us (the public) to know how many investors are in a building until the building is finished and delivered and we then see how many immediately go back up for sale. W

Anonymous said...

I hear ya, but they are doing the 1 year anti-speculation clause...
(anti-flip clause)
I only know Michael through selling a few units there- although I've seen so much of him that I do consider him a friend now.
-Most people hate the 1 year clauses limiting their sales- but I for one believe they are needed in hot markets like that of last year.
This year people are buying to live there- which is nice for a change...

Anonymous said...

Artisan Homes has always restricted sales to Investors and that is why there are few units for sale in those projects. Buyers also often sign papers that state they will be owner occupied but they never move in. WHat can a developer do about that. In fairness, Buyers sometimes have intentions to move in but when projects get delayed there needs change and they don't want to walk away from the equity they were building up. Another problem is that when the market falls and they haven't sold their existing home they put both on the market and hope something sells.