Some developers reduce preconstruction deposits as competition intensifies

Question: What’s the latest info on the preconstruction deposit structure? Are more developers coming down from the 50 percent requirement?

More than 285 new condo towers totaling nearly 40,000 units have been announced east of I-95 in the tri-county South Florida region of Miami-Dade, Broward and Palm Beach during this real estate cycle that began in 2011.

To date, Miami-Dade accounts for about 72 percent of all new condo units announced during this cycle. Broward represents about 19 percent of the proposed units and Palm Beach the remaining 9 percent of the overall total number of new condos, according to the preconstruction condo projects website CraneSpotters.com.

(For disclosure purposes, my firm operates the website.)

All indications are the number of newly announced condo towers in South Florida will keep climbing for the foreseeable future as developers in Broward and Palm Beach counties increasingly step up their participation in this cycle.

It is not surprising that as the number of new condo towers proposed for coastal South Florida has increased, so has the competition amongst developers to attract buyers who are willing to put down hefty deposits of 50 percent of the presale purchase price.

Sizable presale deposits are necessary for condo developers to make up for the lack of construction financing currently available from lenders.

During the previous real estate cycle, developers typically collected 20 percent deposits from buyers and then obtained construction loans to pay for much of the rest of the development cost.

The current deposit model of 50 percent is said to work much better with foreign buyers as the strategy of collecting hefty amounts up front is the norm in many of their home countries.

Domestic buyers, however, are somewhat resistant to the hefty deposits due to the fact that developers are permitted to use most of the money to construct the proposed condo towers. This reality creates financial concerns about what would happen to the buyer deposits if a project is never completed.

Given all of these factors, developers have initially focused their efforts on paying larger and larger commissions to real estate brokers to market their projects. When this cycle first began, the commissions for preconstruction condo unit sales bounced between 3 and 5 percent of the contract purchase price.

Today, an increasing number of preconstruction condo towers are offering between 6 and 8 percent in hopes of incentivizing brokers to promote certain projects over others to their buyers.

As the U.S. dollar strengthens against the foreign currencies of the countries from which Miami developers are targeting, there is a growing likelihood that domestic buyers will need to become more active to continue this current preconstruction condo boom.

In Miami-Dade, most developers are still standing firm with their requirement of 50 percent deposits.

It is worth noting that a newly announced project called the Edgewater condominium on the 400 block of Northeast 29th Street in the Biscayne Boulevard Corridor of Greater Downtown Miami has broken from the pack and is asking for only a 30 percent deposit, according to the CraneSpotters.com Developers Price Survey for November.

In Broward and Palm Beach, foreign investors for preconstruction condo units have been much less active. As a result, projects in both counties are focused on domestic buyers who want to put down lower deposits.

In Broward, the planned 18-story Paramount Fort Lauderdale Beach tower with 95 units on North Fort Lauderdale Beach Boulevard is asking for a 30 percent deposit from preconstruction condo buyers.

In Palm Beach, the two-tower Water Club of North Palm Beach with a combined 166 units is asking preconstruction condo buyers to put down 25 percent deposits.

The unanswered question going forward is how much longer the development community in Miami-Dade will stand firm in requiring 50 percent deposits when competition for buyers is only intensifying.

Peter Zalewski is a real estate market consultant, non-practicing licensed real estate broker and columnist for The Real Deal who now answers reader questions about the South Florida real estate market in a new weekly Friday column. Questions and comments can be sent to southfloridanews@therealdeal.com. The TRD editors will choose which submissions will be addressed.