The condo money pit

Swire has 135 units left to sell in the Rise <strong>building in Brickell City Centre.</strong>
Swire has 135 units left to sell in the Rise building in Brickell City Centre.

UPDATED, Oct. 4, 11: 30 a.m.: For the first owners of a two-bedroom luxury condo on the 36th floor of Rise, one of two new luxury towers at Brickell City Centre, buying at a preconstruction price turned out to be a losing proposition. On May 10, a shell corporation owned by Venezuelans Carolina Jimenez Suastegui and Jose Marazita Espinar sold the 1,344-square-foot unit for $700,000, which was a 24 percent loss from what they paid in 2016, when Rise was completed. After deducting closing costs and the broker’s commission, Suastegui and Espinar cleared $637,000 three years after closing at a purchase price of $920,900.

Sandra Heath, the Fortune International Realty agent who listed their unit, said Suastegui and Espinar decided to cut their losses before the hole got deeper. Even though they were successful in renting out the unit, her clients were in financial distress and had a mortgage on the property for $450,000 with a due date of Aug. 1, Heath said.

“They ran the numbers, and even if they had kept it for 10 years they would have ended up paying even more than they were making,” Heath said. “They decided to take a loss now rather than a bigger loss later.”

Suastegui and Espinar are not the only Rise preconstruction buyers to take a beating in Miami’s resale market. Analyzing Multiple Listing Service resales data, The Real Deal found that 12 units at the 43-story building were resold between January 2018 and June 2019, at a time when the developer was also unloading more than 100 remaining units. Eleven of those resellers flipped their units at prices way below what they paid during the project’s preconstruction ramp-up. The only deal to make money was the March 18 sale of a four-bedroom unit on the 39th floor for $2.8 million; the original owner paid $2.7 million in 2016. However, after deducting closing costs and sales commissions, the reseller walked away with $2.5 million.

A comparison of the resale prices and preconstruction prices shows the resellers flipped their units for an average of 11.77 percent less than what they originally paid. Subtracting closing costs and sales commissions, the gap widens to 22.5 percent. The units spent an average of 308 days, or 10 months, on the market.

The Rise resales provide a snapshot of the dovetailing luxury condo market in South Florida, in which resellers seeking to cash out their investments are competing against developers for the same diminishing pool of wealthy buyers. As a result, developers like Rise’s Swire are offering deal sweeteners, such as covering maintenance costs or property taxes for a full year, in order to sell out remaining units, local luxury brokers and market analysts said. Resellers have no choice but to drop their asking prices and take a financial hit, they noted.

“We are definitely in a buyers’ market,” Heath said. “We are seeing 10 percent discounts from sellers’ original asking prices.”

Ana Bozovic, a Miami Beach broker and founder of Analytics Miami, said resellers aren’t getting higher returns because they can’t compete with developers that can spend six-figure sums on marketing and give brokers higher commissions than the standard 3 percent in the resale market. Many developers are offering a minimum of 5 percent and as much as 10 percent. Thus, “agents have an incentive to market the developers’ units,” Bozovic said.

What’s more, units in new buildings in the urban core, such as Rise, attract less interest because the abundance of luxury condos available along the waterfront.

“There is so much inventory on the ocean that it is difficult to get people to buy properties that are not on the water,” she said.

In the red

The condo resale market experienced an inventory increase of 75 percent in 2018, according to the 2019 ISG Miami Report, which tracks the luxury condo market in Miami, Fort Lauderdale and Palm Beach. The MLS showed 21,000 condos on the resale market for all of Miami-Dade and Broward counties and an average of 2,400 sales per month as of April, ISG found.

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During the first three quarters of 2018, Miami-area resellers of new construction properties lost an average of 3 percent, not including buying and selling costs, according to an analysis of the resale market by Miami-based HB Roswell Realty and digital data firm CondoBlackBook. The report looked at 102 resales involving condos built from 2016 to 2018 in downtown Miami, Coconut Grove, Miami Beach and surrounding coastal communities.

Of those deals, 38 broke even or made a profit while 64 resales lost money. When factoring in buying and selling costs, 78 percent of the 102 resales were left in the red after closing, the report found.

“For those who speculatively invest in preconstruction properties, timing is everything,” said Sep Niakan, president of CondoBlackBook. “Most owners in Miami lost money reselling new construction units that they acquired when the market was stronger.”

Another broker, who has listed Rise condos for resale and requested anonymity, said Swire is giving buyers credits, in the form of free maintenance association fees for two years or covering their taxes, that are not factored into the final sale price. “The developer’s prices appear high because they don’t want to look like they are going against the people who bought from them during preconstruction,” the broker said.

According to Swire, the average listing price for a Rise resale condo is $1.2 million, while the average price for a new development unit is $941,000.

Through its spokesperson, the developer would not comment on what credits the company is offering to sell out its remaining 106 units at Rise and 26 units in the sister tower, Reach, but said the incentives generally do not result in pricing that is below the preconstruction prices. The two towers have a total of 780 units.

The spokesperson said some of the 12 Rise resellers were distressed buyers who needed to cash out. “We’ve been seeing incidences like this across Miami lately,” the spokesperson said.

Meanwhile, the number of active condo listings is growing at a faster rate than sales, according to MLS data crunched by Analytics Miami. Its most recent report shows that the luxury condo market in Miami and Miami Beach ended June with more active listings than in the same month last year. Miami ended the second quarter with the lowest transaction volume since 2010, Bozovic said.

“Buyers of preconstruction are not fully informed, so they probably think they have a market to resell into. They have no idea how small the resale market really is past certain thresholds,” she said. “The luxury market is much, much smaller than most people think it is.”

Correction: A previous version of this story provided the incorrect number of unsold units at Rise and Reach. Separately, Swire now says it does not cover the cost of real estate taxes as part of a buyer incentive.