A Unique Opportunity For The Repeat Vacationer
The Orlando Sentinel reports on when an investment isn’t an investment. “After years bemoaning a lack of decent business-class hotels, Central Florida’s travel industry may finally get what it wants. But what makes this wave so unique are the hotels’ owners. These new projects would have hundreds of them, most with only a vague understanding of the hospitality industry.”
“Meet the condominium hotel. Developers plan to sell rooms and suites as condos, marketing them as vacation homes that generate a cash flow. Central Florida isn’t alone. Las Vegas, Chicago, Miami Beach and Palm Springs, Calif., are germinating condo-hotel projects of their own. ‘Construction costs have gone up so much that they have forced some developers out of the market,’ said Mark Lunt, a lodging-industry expert with Ernst & Young in Miami.”
“In many cases, condo-hotel developers move on after their projects are built and sold out.”
“Lodging-industry experts say a lot needs to be learned about condo hotels, including what will happen to owners’ units if the hotel doesn’t prove financially successful. Like any hotel project, condo hotels should be built to meet a need, (consultant) Pat Ford said. He advised buyers to consider how well the hotel is likely to perform once it is built.”
“‘There has to be a reason for the hotel to be built,’ he said. ‘There has to be sufficient demand from the market, and there has to be a desire on the part of the consumer to use the hotel for repeat vacations.’”
“‘I would call this a unique opportunity for people who want to use the property for 60 or 90 days a year,’ said Camilo Aguirre, a principal in CMA Development Group of Miami Beach, which announced plans for The Blue Rose, a 1,300-room condo hotel. ‘We’re finding all kinds of people who want a vacation home.’”
“Developers avoid depicting the hotel units as investments, saying that federal securities regulators restrict such pitches. Instead, they call them vacation residences. ‘They can’t be sold as investments,’ said Ford. ‘If you are looking to invest money and receive a normal rate of return, you would be better off putting your money elsewhere.’”
“Most hotel developers don’t expect owners to occupy their properties for long stretches. But there are exceptions. Victor Barrios of Clermont says he is interested in buying a condo-hotel suite as a residence. ‘My wife and I would want to live in the hotel,’ he said. ‘It has a certain appeal, though I guess after three or four years you might get tired of hotel living.’”
“Barrios said he thinks a hotel suite would be a good investment if he finds one offered at a reduced pre-construction price. ‘Mostly it’s an investment opportunity,’ he said. ‘If you can get in at a good price, you can make a hefty little profit after it is built.’”
I haven’t seen much about these properties. I find it hard to believe that they can even get financing.
‘Construction costs have gone up so much that they have forced some developers out of the market,’ said Mark Lunt, a lodging-industry expert with Ernst & Young in Miami’
How can an ‘investor’ with a ‘vague understanding’ make do in a market that has developers ‘moving on’ after they have sold out. Really, Ernst & Young.
Sure the carrying costs,and assoc. fees are more than the cost of just renting for the periods that people stay there, but hey, who am I to disuade “vague” investors.
Sorry this is off this particular topic, but the following article provides another visible sign of the housing bubble - a proposed development where homes will be sold without garages in an attempt to keep the prices affordable. There is hardly any mass transit - so bear in mind, every family will have at least one car. But no garages!
http://pressherald.mainetoday.com/news/local/060417housing.shtml
Whats really silly is garages don’t cost much. They basically cost the land, the concrete slab, and the fraiming.
Especially given “1 acre lot zoning laws”.
That’s why there’s now an “off-topic” thread.
This hotel/condo fees will go up in price yearly because you have to pay for hotel workers ,maids , etc. This is not a good investment and its nothing more than a fancy timeshare . When you want to stay in the place that will be the same time that hotel guests would want to stay in the place . In other words, you will be paying for the off season time in the hotel when the profit margins go down .
This condo-hotel nonsense has another bad aspect: Ruining classic hotels during the conversion.
The Camlin Hotel in downtown Seattle was converted to “vacation condos” a few years back. The beloved-and-often-crowded Cloud Room piano bar on the roof of the building was closed. They tore out the original mahogany closet doors.
And all for what? When this phony “equity” party ends, many of these vacation condo “investors” will bail out and/or sell at a loss. The city will be left with a half-empty building full of tacky “updated” interiors that used to be a classy hotel.
My parents have a “condo hotel” unit on the beach in the Virgin Islands, that they bought in 1987. After years and years of negative cash flow, problems with management companies, hurricane damage, you name it, you’d think appreciation would make up for it. Nope, the selling prices in 2006 are 20% below what they paid in 1987.
wow, that’s telling for all the folks buying into this silly scheme now.
I hope they at least enjoyed visiting it over the years!
Everyone buying into the scheme is just absolutely screwed. At least my parents had the cash to stick it out and suck up the losses. And yes, they have enjoyed it over the years - and so have I!
There would be months at a time with little or no income because of hurricane damage, and then make it a double whammy because of assessments for repairs. Then for a while there was a corrupt management company which didn’t pay the owners for more than a year. What a mess!
Poor investment decisions aside…
I cannot help but laugh at the thought of seeing all these “owners” wandering around the place, each thinking that they are empowered to tell the guests to be quiet, remind the maid to dust the pictures in the hallway, etc.
These projects will end in a bad way…a very bad way.
Oh man you are so right. Had one new owner poking around a condo project as we rapped it up wanted to know why his electric meter read a little higher then the other units. Seriously, I think we figured he was worried about a possible $2 difference between his unit and the others after plunking down 400K for a hotel room.
OT…
The Basics
The negative equity epidemic
All those ARMs and teaser rates are coming home to roost. 1 in 10 homeowners has no equity or is even ‘upside down.’
By Liz Pulliam Weston
http://moneycentral.msn.com/content/Banking/Homefinancing/P148861.asp#msnhp
OT:
Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more.
from: The negative equity epidemic @ MSN Money
They have been doing these in Orlando for a couple years now.
They have been converting poorly performing hotels, and even motels off of 192 & 441 (some of the less desirable locals in the Orlando area). There is one near Sand Lake & 441 that has been selling for almost a year & a half. Others off 192 were basically failing motels which developers took over, converted and are trying desperately to sell to Europeans who take there month holiday in Orlando. Those are a bad investment.
As far as new condo-hotel being built where investors buy rooms and the hotel leases them out I think its a great idea they can generate income through positive cash flow. If a room cost you 200K and you are paying out $1600-1800 a month in mortgage & fees but renting a premium hotel room for $150 a night even if the room is vacent half the year you still turn a profit on the rental.
You have to remember that the “owners” have to split the $150/night 50/50 with the property management company.
Yikes… 50% of the rent goes to the hotel manager… I did not know that, I thought when you buy the unit you pay the fees on it and everything was covered.
Orlando is already saturated with hotels, you can get a decent hotel room for $79 a night, the really nice places maybe $150-199 a night. Ritz Carlton & Gaylord Palms runs about $250-300 and up.
Another problem is you have real hotels like Ritz, Peabody, Palms, and all the Disney hotels competing for the same customers. They can offer much better deals and vacation packages that the owner of a room can’t unless they want to loose money by having to offer park passes and other goodies in exchange for renting from them.
And the going rate for a hotel room in Orlando may go even lower in the near future. Check out this article from the Orlando Sentinel (published April 9):
http://www.orlandosentinel.com/news/columnists/orl-miket0906apr09,0,6859601.column
On New Year’s Eve, 12/3173, hotel occupancy outside the Disney property/Buena Vista was running about 10-20%. Many hotels died on the vine from the drop in tourism that resulted from the OPEC oil crisis. That evening, four of us had a table at one of the larger motels on 192, toward Disney, and we were the only customers in the restaurant.
While I really miss the laid-back Central Florida of pre-Disney days, I would not wish a repeat of that 1973 misery on the area hotels and their employees. But I think it is possible, because many things that hammer tourism are happening at once: gas and aviation fuel are going through the roof; housing prices are collapsing; incomes seem flat and credit will be restricted, from lower LTVs for new loans to restricted HELOCs.
When this happened in the 1970’s, people just walked away from some very high-quality timeshares. It will be interesting to see what happens with this newer iteration.
You think the management company won’t have the right to sell at market? Ha! They’ll be giving deals out at $60/night, then they’ll split that $60 minus some bogus expenses with the owner, which will be almost nothing! I’m tellin’ ya, these “owners” are screwed.
This site is a trip. You read the above posts and scream, ‘I’m right, I’m right, I’m right’ then you read yesterday’s (Fresno, Rosen) and you scream ‘How many of these idiots are left out there?’ I shook my head in amazement about the Rosen’s. They out bid for the house, which means they overpaid to start with. It was their ‘dream house’. Why would you sell your ‘dream house’? Why not just find a new job in the local economy? Then in 5 months you run off to Atlanta and buy while you still own in Fresno; sounds like someone putting in job transfers to chase the housing market (can we be sure the story is on the level?). Most job transferee’s get relocation with a house buyout, but the key is you only get market value for the house and the offer only lasts for 60 days, however, there is not RE commission to the sellar.
In my husband’s company only management gets paid relo. They’ll move you if you want but it’ll be out of your own pocket.
Re the reasoning of the dreamhome sellers moving: My Dad moved in early 70s when everyone around him said a recession was coming and northern VT was not the place to weather it out. They expected the area to be hit hard…especially his industry. We moved in 74 and he never regretted it. The look back in the mirror proved his advisors right! Perhaps that is why the dream house owners moved. A good reason to never invest in a dream home unless you or Dad are your employer!
this astute gentleman gave permission to repost the following (from keith’s housing panic) thank you keith, thank you, anon.
I’m the former RTC REO Marketing Analyst, but prefer to be Anonymous because I know some people are going to become very alarmed and very angry when I discuss what happened the last time.
When I left the RTC at HomeFed Bank in 1991, the RTC was in the process of closing down. It was the tail end of that cycle.
While at the RTC, I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Not for 20-30% less, but 20-30% of that real estate’s former value from just 2-3 years earlier.
Mortgage defaults and bank REO are increasing rapidly already as of today. Keep in mind that banking regulators will never give lenders leeway to play the market so to speak, or hold on to REO in the hope of an improving market to get a better price or to cover their nut (i.e., mortgage). They HAVE to get those non-performing assets OFF their books. I have lots of stories about those days and I’m convinced this time it will be far worse because back then we didn’t have any of the Geo-Political crises we have now (rampant illegal immigration, wars, we’re a bigger debtor nation, we have a bigger trade imbalance with China than we ever had with Japan I’m sure, etc., etc.), interest rates that were artificially depressed to levels not seen in 40 years, dangerous and irresponsible lending products, and because the advent of the internet now facilitates the free flow of information much faster. Look at all the housing bubble blogs there are with all the reliable data they are providing. It’s almost an avalanche of data supporting why all but the most ill-informed should not be looking to buy for at least 2 years.
I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data (brokers like me knew based on MLS data only available to members) to cite in support of the impending crash, and the media, especially newspapers, weren’t going to report it because their largest advertising constituency is Realtors/brokers.
With the internet and the info that is available on it, you’ll soon see the amount of time it takes for real estate to crash significantly compacted this time. Just look how fast things have turned bad since just before the holiday season started last year.
Homeowners are now increasingly starting to put their homes up for sale to get an early start on the summer home buying season, and some are just now realizing how inventories on their local MLS’s have tripled, quadrupled and worse. As of today, ZipRealty reports that San Diego is just about 4 weeks away (based on the average daily increase in inventory I have been monitoring since late last summer) from breaking the old record of 19,250 during the last down cycle.
I know some have said that you can’t use that figure because San Diego has a larger population today, but I disagree and here’s why. There are far more FSBO related companies today than 15 years ago because of the Internet and collectively, many of their their thousands of listings are not included in the ZipRealty figures. Also keep in mind that last year population in the County went down, and don’t be surprised when it goes down again after this year finishes up.
Look how the tone of articles from mainstream media in the last 2 months alone have changed. Panic has already set in for many, but they have no idea how ugly it will get.
The one thing I’m always amazed to find out is how many borrowers think that when their home goes back to the bank, that’s the end of their problems. What they don’t realize is that if the lender writes off or forgives any debt to them (i.e., short sale, etc.) the former borrower will get a 1099 for the amount of that forgiven debt as though they had received it as income. If they sold their home through a short sale at the begining of the year and they got a 1099 by January 30th of the following year, they not only have to pay taxes on that forgiven debt, but now penalties and interest too, because it was due (unless you pay estimated quarterly taxes) at the time the debt was forgiven. I personally knew a borrower who had 11 rental properties and after he lost the first one to foreclosure, he got hit with a huge IRS penalty. He started selling off the others, but had huge tax hits because of depreciation recapture, and because the market was getting worse, he could not sell some for what he owed. I was an underwriter at the time and on paper, just prior to losing his first property he had equity of over $1,000,000; but in the end he lost it all because he couldn’t sell in a market where bank REO dominated, and when he tried, the tax hit from depreciation recapture buried him further.
The same sheeple psychology that drove everyone to ignore cash flow fundamentals by flipping condos and homes based on the greater fool theory, will invert like it did in 1990, and for the next few years you’ll hear nothing about real estate except how terrible of an investment it is, and it will be true for those who either bought with high leverage or refinanced with max cash out based on the value of their homes in the last 2 years.
And anyone who says rents will catch up to all the adjusting I.O. and ARM loans is in fantasy land.
Between 1990 & 1994, I had my landlord reduce my rent three times by simply giving notice that I could rent a better condo at the
beach for less. And you know why that’s possible? Because of all the bank REO that was (and will be again) unloaded on the market. Owners who buy REO can easily compete on price alone. Market rent is meaningless to them. I rent a $750K place now and have been renting since we sold our residence in 2002 and our rent is under $2,000 and in the 5 years we’ll have been here, the rent will have only increased by 3% from 2002 through 2007.
To those who ask how long to wait and how low will it get, here’s my answer. Even though the Internet will compact the time it takes to crash, I still say don’t even think about buying for at least another 18 months. Don’t be fooled by ocassional news or market conditions that lead you to think things have turned better because that always happens on the way down, just as it does with stocks on companies you know are “Dead Man Walking”.
As far as the percentage, don’t think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO. I think you will be able to get property for 20-30% of what it appraised for in 2005. Trust me. Even if you don’t for whatever reason, others who are diligent will.
In 1995, my wife and I bought a La Jolla 1-BR condo one block to WindanSea beach with a peek ocean view off the balcony. It was in default and we bought it for a total price of $104,000 AND got the broker to kick in half his commission. That’s how bad it was last time : )
IT WILL GET VERY UGLY \”/
What the heck does this have to do with condo-hotels in Florida????
How about, “it will get very very ugly”.
This post would be a subject for a new thread. Those of us that remember the RTC, the Tax Reform Act of 1986 and the S&L crash could impart our great wisdom to those that were just babes at the time.
I would say what was said in this article is far more important than a condo-hotel in Florida LinOrlando. I would be saying thank you instead of whining.
BTW great post cereal
Thanks cereal. This is a great post!
Great post Cereal! thank you!
Thanks Cereal…I’m saving this on my computer to e-mail everyone that thinks I’m nuts. This says it all!
Thanks Cereal Very useful information. As someone who was just too young and had no capital in the last downturn I am happy to hear from someone that went through it and was in the thick of it! I have a question, it appears to me that this time round the properties that will get the keys handed back will not be owned by the local bank. This time round the banks have securitised the debit and passed it on down the line. In this case, who do you give the keys back to, and more importantly who ends up with the properties that need to be sold for “pennies on the dollar” - some offshore hedge fund? in which case how will the foreclosed properties be sold? I have the capital this time around and am preparing myself with the knowledge to purchase at a great price and want to know who’s mailing list/ speed dial I am going to need to be on. If you can give me some insight into this I would appreciate it.
Even when debts have been repackaged into an MBS and sold on the open market, there is a company that manages the loan. Think Countrywide (they do a lot of debt servicing). There are usually guidelines on how much loss they can take, how long they can hold a foreclosed property, and under what terms they can relinquish them to the open market. I wouldn’t say it would be as efficient as bank ownership, might even slow the process of the crash. (There are some accelerants and some deccelerants this time around that make it slightly different)
Either way, bond holders don’t want a management company riding the prices down. They will slash prices much harder and faster than Joe McBoomer who “has to get $575K” for his crackerbox in South OC or he just won’t move. This is why down-sides are accelerating rather than linear and tend to overshoot. The pressure to liquidate timely by institutional investors causes increased momentum.
Can we talk about what’s going on today with oil, metals and interest rates?
Simple: Up, up and up… Nuf said.
I mean, like, do you think all of this is going to hasten RE’s fall? Or will it make RE more valuable, as investors look for hard assets to hedge against inflation?
Right now, real estate is not a “hard asset”.
It is currently an illiquid holding that is frozen by the belief that it is more valuable than the market fundamentals will support.
I wouldn’t touch it with a 10ft pole.
The quick answer, real estate has topped out due to record low interest rates and easy credit and money availablility. As interest costs rise and wages stay flat, real estate will become even less affordable. The rent to value ratio is totally out of whack. Real estate has nowhere to go but down. So, where to put your money? Stocks? P/E ratio’s are well above historical norms, and the markets are also topped out. Commodities? Risky but demand is increasing due to China, India and US growth. Precious Metals? Gold/Dow ratio is low compared to historical norms. Based upon my analysis, gold could be selling from $816 to $2426 The question I ask myself, is the Dow too high? Yes. If a “panic” were to cause a run on gold, the short term run-up in gold prices could be phenomenal. By the way, inflation adjusted since the mid 80’s when gold was selling in the range of $400 would put the price over $2000 today. Oil is riskier? Don’t know, but $100/bbl is within sight with geopolitics as of late. I believe that real estate is toast in any scenario.
LAINV — I got it. Dry, buy good.
interesting stuff that post cereal…
back to condo-hotels, though…I think one of the posts above about how sure, seems great, your monthly expenses are covered if you have the unit booked just half-a-year, d’oh!, the management company takes a huge chunk of that (why wouldn’t they?!), uh..okay, so it’ll cost you per month quite a bit, but you have a great hotel room at your disposal and surely it’ll appreciate tons in a couple years and you just re-sell it…a flip-play with no potential for down-side at all clearly!
I saw some piece on this trend telling the tale of some guy itching to spend his loot from some RE sales in the past couple years, who actually bought 6 of them in various cities (his ‘worth’ therefore estimated at like 4 million dollars I think) and doesn’t seem worried at all about what’ll happen…his reasoning went like oh, well, if the re-sale market sours I’ll still have 6 great hotel rooms! Amazing…it’ll be interesting to see the possible litigious fall-out from the people who will claim they were misled about how much of their ‘expenses’ would be covered by the bookings they’d expected to get. A downturn in the economy, the notorious difficulty in running hotels well enough, the conditions accompanying a sour resale market for hotel rooms (i can’t believe we’re actually talking about resale markets for hotel rooms, it feels like a total pitch to the people who’ve never even dreamed about ‘vacation homes’ but have at least stayed at a nice hotel once or twice…) would also make bookings drop I’d guess
The posting from the other site is fabulous. Thanks for sharing. I am sending it to my neighbor whose underwater and won’t sell at lower prices as he needs to make a profit and soon.
Simmsays…
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
They have these in San Diego, too. They pitch them as “investments” to the sheeple, as I’ve blogged about before - Condo-Tels in San Diego. From that entry:
Do such units make sense as an investment? The numbers don’t seem to add up to me. Imagine that you purchase one of the studios for $450,000 with $50,000 down on a 30-year fixed mortgage at 6%. (Yes, I know most “investors” in real estate would rather go with the option ARM or I/O loan, but let’s be real - the attractiveness of these loans are quickly losing their luster as the Fed continues its interest rate hikes and the effects of inflation set in…) That would be a mortgage payment of just under $2,400 per month on the $400k balance. Now, the units are cleaned nightly by maids, and from my understanding the hotel does the bookings. So what’s that got to cost, maybe a few hundred per month? Throw in property taxes and condo insurance and we’re quickly going north of $3,000 per month.
Let’s assume that it does run exactly $3,000 per month, which I think is a bit low. To break even on your “investment” you’d need to book it EVERY night of the ENTIRE year for an average of $100 per night. I’m guessing that while the studio itself might run north of $100 per night, the hotel’s taking off a percentage for the booking, cleaning, etc. In other words, it looks as if a condo-tel is anything but a wise investment.
Sure, if you’re going to be using the unit often, it might make sense. A ~$100/night unit is cheaper than any decent downtown hotel room, plus you can rent it out on the off nights or loan it out to friends and family. Hrm, sounds an awful lot like a time share, which are pretty horrid investments to enter.
Worse than timeshares (which at least have a secondary market where you can trade your allotment to go somewhere different each year).
If it works the same as it does in other countries, you may not have access to as many booking nights as the hotel itself does. This assumes that the corporation that created the condotel owns and holds rooms of its own as a sort-of-actual hotel operation. That begs the question: how is it decided that yours is the room rented tonight, instead of Fred’s?
On Condotels, what will happen to all of those great hotel rooms if the building gets tied up into some kind of legal issue. Could the owners still ‘use’ it? What if it is closed down for whatever reason? I could see that these ‘investments’ could possibly become a zero value proposition if anything like that happens. Any other thoughts?
Since I often look for a hotel/motel room at priceline.com, or similiar service and expect to get the room at a discounted amount than numbers used in these calculations, I would expect that these owners would be the last rooms to be rented out and in a low season get skunked for that time period. Other comments?
Dumb (lock yourself into the same vacation destination for life) and dummer (by buying an investment whose value will soon tank)!
I would rather have the option to go to different places. And even going to the same general area, by staying at different places, you will get a different experience each time. This condotel idea is very STUPID.
How about going places in your $1,000,000 RV? Tangentially related to the housing bubble and this thread. But it does mention people selling their FL property and buying an RV instead.
http://www.chicagotribune.com/travel/chi-0604170108apr17,1,1696722.story?coll=chi-homepagetravel-hed
Needtoleave-issius (not to compete with Rainman18, but complement) - “Person who buy Condotel made decision while sitting on their brain.”
According to some friends of mine in the time-share business, in Reno a time share company bought a 2nd rate hotel in Reno for $3 million, put $3 million into repairs/upgrades, and took out over $36 million over the next three years.
brilliant post cereal - could you talk a little bit about how to develop a relationship/deal flow through an REO office? How will the securitization/sale of mortgage loans affect the end “owner” when these things go into default?
Ugh, condo hotels, what a crappy investment.
I got the chance to live out of hotels for over a year doing various out of town business travels for my previous job. No way would I ever want to live in a condo hotel with noisy tourists…regular condo owners are bad enough as it is.
“Barrios said he thinks a hotel suite would be a good investment if he finds one offered at a reduced pre-construction price.”
HA! If you really must buy one, get an aftermarket one that some sucker is trying to unload.