10 Apr PRE-CONSTRUCTION DEALS MIGHT LOOK LIKE A GREAT OPPORTUNITY TO GET IN ON THE GROUND FLOOR, BUT ITS NOT ALWAYS A BETTER INVESTMENT THAN RE-SALE CONDOS
April 10, 2018 – If you follow Miami’s real estate news and worry that you might be missing out on amazing deals by not buying into the hundreds of pre-construction condominium opportunities, a new report from Real Estate Broker and expert Ross Milroy shows you might be making the right decision.
Based on Milroy’s report, out of a sampling of recent condo re-sales by buyers who bought in pre-construction, the percentage of speculators who wound up making a significant profit was far less than those who recorded losses on their re-sales. This trend, especially among those who waited 2-3 years to resell after they first purchased, should make buyers strongly consider their options when evaluating pre-construction investments.
Among the many identified trends associated with pre-construction sales is that about half of the speculators resell immediately after closing and about half hold on to them as rental properties. That leaves approximately 25% who plan to keep their condo for an extended period of time to live in or use as a vacation home. “This is a very typical Miami condo scenario,” states Milroy.
All sales are not created equal: Some pre-construction buyers are finding themselves in a worse situation than even that of their neighbors.
“In addition to many re-sales being priced at levels less than buyers paid during pre-construction, the report also found that some buyers bought condos in the same building with comparable views for as much as 20% – 25% more than their counterparts. This means that two buyers at the same development in the same lines were found to pay a $100k – $150k premium for nearly identical properties,” said Milroy.
Milroy states that this most often a matter of timing but also due to scarcity as sales progress. Since developers release the building inventory in a series of phases, potential buyers are limited in the amount of available inventory they can choose from at any given time. Some speculators find the best deals early on while others take advantage of the developer’s desire to sell out as the building nears closing. According to Milroy, the best-case scenario for buyers is to find a developer who has a good reputation in the real estate community and is willing to be transparent about when certain blocks of inventory will be released and the pricing that can be expected. Without the complete information, buyers face uncertainty, which causes elasticity: an increase in supply of units while the demand remains the same will cause prices to tumble.
A sleek new condo building certainly has its draws, from attractive floor plans to lifestyle concierges, energy efficiencies, fast elevators, and over-the-top amenities. But is it worth it – especially for those speculators simple looking to turn a quick profit?
Brickell has experienced the greatest influx of new construction condos in Miami. One example from Milroy’s report is at the newly opened Brickell Heights, (55 SW 9th Street, Miami): a buyer bought for $637,400, plus an estimated $15k in closing costs (developer fees & HOA), plus $40k in build-out and furnishings, leaving the final cost around $692,400. Now open for under a year, that same unit is for sale at $550,000. At that assumed re-sale price, minus $38,500 in closing costs, the seller will net $511,500 leaving them at a loss of $180,900, a 26% loss on investment.
At Midtown Edgewater’s new Icon Bay, (460 NE 28th St, Miami) more than 70% of the property owners who recently sold their condos did so at a loss compared to what they paid the developer in pre-construction. In 2015, some investors who sold immediately after closing made a return or at least fared better than those who sold in the past two years – such as the most recent sale from earlier this year, which recorded a loss of 33%.
Due to the fact that Miami Beach is not facing the same glut of new condos as is plaguing the City of Miami, examples of pre-construction buyers making a profit can be found in some parts of the county.
On Miami Beach, in one of the newest ‘hot’ neighborhoods, a few select examples of these wins have been recorded. At Palau Sunset Harbor (1201 20th Street, Miami Beach), the developer had 43 residences offered at pre-construction pricing. During this time when the neighborhood was still facing construction issues of street-raising, Palau saw an average pre-construction price of $754/sf. In addition to the desirability of the neighborhood for great walkability and entertainment, the prime boat access also helped maintain and increase property values. The development offered several deeded boat docks on site that sold at an average of $2,730 per linear foot.
These details, along with the completed flood risk mitigation with the raised streets make Sunset Harbour properties an ideal location, fitting the bill for that perfect South Beach second home. The result is that those original buyers that re-sold their condos at Palau have seen increases of an average gain of 22% and at least one selling at a 44% profit.
Local knowledge might have brought about those who made a profit here. Most buyers at Palau were from Florida, as well as several from the northeast, Houston and San Francisco. Milroy identified that approximately one-third are investors / speculators, and many are local empty nesters.
Another example of a development that has turned a profit was the complete gut renovation of the Gansevoort Hotel turned into 1 Hotel and Homes, (102 24th Street, Miami Beach). One bedrooms here started with pre-construction prices at $1.2M during 2015 and 2016. In the years following, the developer has been successful in selling out the majority of the penthouses in 2017 at $2,267/sf compared to 2016 prices of $2,180/sf.
The fact that 1 Hotel & Homes is an oceanfront property in South Beach that comes with a strong hotel brand affiliation has helped maintain resale values. Additionally, it is a certified green building; there are no rental restrictions and it includes a full amenity package with four pools and spas, personal chefs, a private entrance and dedicated concierge. These attributes have brought handsome returns for early investors: Currently there are 28 units available at an averaging asking price of $2,102/sf. To date, 13 re-sales have been recorded since 2016 with average sales prices showing a gain of 23%. The highest profit for a re-sale was a 3-bedroom that turned a 53% profit in 2016.
These buyers were a mix of domestic and international investors, with many from typical feeder markets in the northeast looking for a beach pied-a-terre that can pay for itself when not in use by owners.
However, Miami Beach is not immune to the types of losses discussed for the City of Miami. At a condo at One Ocean (1 Collins Ave, Miami Beach), located in the upscale South of Fifth neighborhood, a buyer paid $7M during pre-construction with easily another $150k committed in finishes. After listing the condo for resale at $8.9M for many months, the speculator opted to cut their losses and sell for what netted just over $6M – a million-dollar loss in less than two years.
While there are certainly ‘deals’ to be found, the findings of Milroy’s report are perfect examples of the importance of due diligence, attention to timing and obtaining expert advice. Buyers need to take caution when presented with offers from developers and realize that just because they get in at the ground floor does not mean there will be quick profits to be made.
To discuss pre-construction opportunities or to hear more about how to maximize investment value by buying re-sale property in newly opened buildings with a proven sales record, contact Ross Milroy.