The Real Deal Miami

Shadow market exposes tenants to risks

By Jennifer LeClaire | February 02, 2009 12:44PM

Repo Riviera. That’s the latest moniker for the Magic City in the wake
of a 60 Minutes report that prophesies the worst of the foreclosure
crisis is yet to come.

Miami ranks eighth in the nation for the worst foreclosure rates
in 2008, according to RealtyTrac. One in 19 homes is in foreclosure.

But it’s not just owners who are at risk of losing their homes. Tenants
that rent from investment property holders are also at risk of eviction.

Consider the big picture: about one-third of the country’s 378,250
properties in default or waiting for a foreclosure sale are not
occupied by the owner, according to RealtyTrac. That indicates these
homes were likely investment properties.

Miami is ground zero for rentals in foreclosure. Developers and brokers
seek solutions to a growing problem while prospective buyers become
likely renters and search for more affordable housing.

“We know that at least 50 percent of the condos bought in Miami were
purchased by investors,” said Alan Ojeda, president and CEO of Miami
real estate developer Rilea Group, the developer of One Broadway at
Brickell, a luxury rental community in Downtown MIami.

“What do investors do?” he asked. “Rent.”

The boom in foreclosures creates a shadow market, and it offers fewer protections to
both landlord and tenant. Ojeda estimates there are 3,000 condos in
Miami’s shadow market, a total that grows monthly as developers fail to
close on units and look for tenants to occupy them.

While renting from a respected developer may be a safe bet, renting
from an individual investor could be risky business if the owner isn’t
paying his mortgage, Ojeda warned.

“We’re seeing people get terminated. Their lease is with the landlord,
the landlord was foreclosed, they are out and they lose their deposit,”
Ojeda said. “We also see investors not paying condo fees so there’s a
skeleton crew to handle maintenance and security.”

Rosendo Caveiro, senior director in Miami for Cushman & Wakefield, confirms the chaos. He relates horror stories from people who have rented from individual investors only to get a message during dinner saying, “you need to be out in two days,” leaving the renter scrambling to find a new place to live.

“In many cases, the tenant has been paying rent to an individual owner
who was foreclosed upon — and that owner has been pocketing the money,” Caveiro said. “If an owner is in default, they are not going tell you. So
you are out of your rent money, out of your deposit and out of the
lease.”

Ojeda isn’t marketing the risks of renting from individual investors.
He’s pampering his tenants and hoping the word spreads. He’s also
offering options that individual investors typically don’t, such as
short-term leases on furnished apartments.

“The only reason renters are turning to the shadow market is because
it’s cheaper,” Ojeda said. “Buildings like One Broadway may be a little
more expensive but there is no risk of the lease being terminated due
to foreclosure.”