Silver lining and good suggestions for developers

 

 

The following is part of a talk recently given at one of the Urban Land Insitute’s conferences by Pete Halter of Halter Companies. Its a good read:

Even though many Americans have lost faith in the United States’ financial system and the government’s ability to fix things (for the moment hopefully), I encourage all of you who have not been through this before to not forget we are blessed to be living in a country where creativity, ingenuity, and hard work have always led us out of our problems, including many of those noted herein.  It may take some time, but the current “time out”consumers are in will eventually end and a “new normal” will emerge.  Below are some silver linings that may be out there: 

1. All real estate is local!  There will be many second home developments and resorts that will do much better than others because of their brand, previous success, special characteristics, amenities, and locations. 

2. Some buyers still have money.  Nobody knows what impact Washington’s economic plan will have on the speed of the economic recovery or the “wealth effect” needed to reenergize the second home market.  This notwithstanding, there are many who will come through this with their jobs and retained wealth. Hopefully they are only momentarily holding back from the purchase of a second home.  My bet is this universe of potential buyers will return to the market sooner than one might think if properties are properly repositioned and their new offerings are compelling.  

 There are buyers out there. Many are still looking, perhaps not too many biting right now, but many realtors sense pent-up demand is being created.

3. Not everybody has lost their job.  As sad as it may be, it is important to remember that only 8% to 10% of those employed in America could lose their jobs.  90% will still be employed!  Through every recession there are those who actually prosper.  This will be true this time as well.  There are many working in relatively recession-proof jobs that will continue to accumulate wealth.  They could be among the first to take advantage of opportunities that will emerge in many second home developments. The unknown is what has happened to their investment portfolios and their appetite for a second home.  

4. Lenders to the rescue.  If the Fannie Mae and Freddie Mac presale and underwriting requirements prevail, many second home lenders will have no option but to get actively involved in helping their developers survive.  To this end, they will find a way to provide construction financing for builders, operating capital for developers, and even attractive mortgage financing for buyers.   

 Well, we can’t expect help from Fannie Mae and Freddie Mac, but financing is more available here now than it has been in the past.

5. Priced to sell.  Some opportunities for second homes will become so compelling (re-priced) that the value equation will, in fact, create a market that otherwise might not have existed.  Many buyers will decide to “get on with their lives” once the shock is over.  For many, this will be driven by lower prices and affordability. 

 We haven’t seen this so far, although some developers are offering other incentives that can equivocate a price reduction.

6. Are they stacking up?  The 75 million “baby boomers” are still out there.  While many will be temporarily out of the market, it is impossible to know how many in this demographic are actually in the process of “stacking up” and will eventually re-enter the second home market in mass. 

 That’s a lot of baby boomers and Mexico, especially the Vallarta region, is a great option if you want a place that’s got great weather and a low cost of living.

7. Drive-to destinations will win.  In all probability, the survivors will be the second home developments within a 2 to 3 hours drive time from major metropolitan markets or those developments with irreplaceable natural amenities such as skiing, beaches, or lakes.  Potential buyers will consider one of these options as either an “irreplaceable” opportunity or the best of both worlds because they can own both a weekend and second home in a convenient location.  These types of second home developments will be seen as more practical and less risky options.  Personally, I’ll bet on the drive to weekend/second home locations.  

 Well, we are a whole lot closer to driving home than Hawaii or the Caribbean… 

8. Success will breed success.  Another silver lining will be found in those developments that have already sold sufficient real estate and club memberships whereby the development will be virtually self-sustaining.  The advantage these developments have is the “sphere of influence” created by existing residents that will drive referrals and the credibility for potential new buyers.  Conversely, those developments that are in the early stages of development will need strong evidence of a strong developer, substantial equity investor, or lender that can reassure early buyers the development will survive without financial disruption. 

 This is very important and will become even more important moving into the year. 

9. Re-sales will be priced to sell.  Another opportunity for buyers will be the opportunity to purchase a discounted, “like new” re-sale in a completed or nearly completed successful development.  As noted, the primary “sales team” for these developments will be the existing owners.  As the market recovers, there will be an abundance of opportunities for “like new” re-sales over the next 24 to 36 months.  This situation can also create an opportunity for developers to capture additional revenue by expanding their onsite sales organizations into the re-sale business. 

 Re-sales have had a tough time competing with new products in the past. They are now big competition for developers.

10. New and innovative products.  I also believe the change in the market will lead to smaller, lower-priced homes and condominiums.  It is important to note that previously, many buyers bought or built far more home than they needed; again, the “wealth effect.”  This phenomenon in the second home industry will diminish substantially.  Many builders and developers will begin producing more competitively priced products in order to reach a larger market and more easily obtain construction financing.  Such changes will once again open the second home industry to a larger market.  It is important to note, however, that there will always be the “mega rich” who will buy and build what they want.  With this said, most developments can simply no longer take the risk of only targeting this market.  As a result, most developers will stop pushing their prices.  Finally, while no one is focusing on it, if inflation raises its ugly head as a result of the trillion dollar bailout infusion, interest rates will rise.  Ironically, this could happen simultaneously with the recovery of the second home market.  If this happens, it will impact the cost of ownership, and the only way the developer and/or builder can compete will be through lower product pricing! 

 For developers that we have been talking to, smaller and lower-priced homes and condominiums are in their plans.

11. Lower “post purchase” shock.  More creative club membership programs will emerge, including how initiation deposits are paid and even how club dues are handled.  For the near term, helping lower these costs will be necessary to keep the buyers from postponing their buying decisions because of the “post purchase” shock that comes with a second home purchase.  Today, it is possible for price to be the most attractive part of the purchase decision.  The club initiation deposit, club dues, homeowner association dues, insurance, taxes, maintenance cost, and fear of special assessments, can all be seen as additional cost of ownership that is prohibitive.  Therefore, more creative programs for club costs will have to be created until the market recovers.  You may see programs such as seller financing that defers some or all of the initiation deposit for 5 years or until the buyer’s property is resold.  The reality is that the club needs the dues line and members, so you may see more imbedding of 3-5 years of club dues in the price of the purchase in order to attract new buyers.  You may also see forgiveness of one year’s dues with every homeowner referral.  In other words, with price reductions, sales incentives, and lower cost of membership, it will get less expensive to purchase a second home than previously experienced.  

12. Creative sales options.  If the Freddie Mac and Fannie Mae presale requirements prevail, you may also see creative lease purchase programs for completed homes and condominiums.  These will stay in effect until the presale requirements are met.  Such programs may allow the purchasers (not yet owners) to rent their units or homes and recapture what would be the owners’ share of the rental income.  This revenue could be applied towards their club dues or down payment.  Such programs would be used by developers as incentives to achieve their presale requirements.  

13. No new developments.  For the survivors, one of the competitive advantages that will come out of this downturn is the probability that virtually no new second home development will be started for the foreseeable future (3-5 years).  This will not only eliminate what was going to be new competition from proposed developments, but it will also create opportunities for developers to purchase deeply discounted, well-located, and entitled second home properties.  While this will require substantial passive equity, those who have it will find many lenders willing to deeply discount their loans and continue to finance such properties, as long as the new buyer can escrow 2-3 years interest on the loan and fund all other associated carrying costs of the development. 

 3-5 years? Believe it or not, we are talking to developers that are planning on coming on to the market with new product. I just can’t help but think they are being a tad over-optimistic…

14. Opportunities abound.  The same scenario as above also applies to existing operating developments (of all types), as long as the borrower can show the ability to both pre-pay the interest and carry the operating cost of the development for an acceptable term of the loan.  Those choosing this route should be very careful and do their homework.  In some situations, buying an operating development may be the cheapest part of the purchase. 

15. Product Extension.  In times such as these, many developers need to use their platform and their market to consider new business and joint venture opportunities.

16. Buy now build later.  For many developers that have historically developed and constructed their own product, a new program may be initiated that defers the overall cost of the purchase.  This program will be through a “buy now build later” concept.  Through this program, a customer could buy a home site, but not be required to build the home for a predetermined period of time.  They would be required to select a home from the builder portfolio, as well as use the developer/builder to construct their home.  Such a program will take buyers out of the market and create developer cash flow.  It will also allow the buyer to enter the development at a lower cost, use amenities, and construct their home when their personal financial situation allows, so long as it does not exceed the agreed upon date for their building requirement.   

17. Interval ownership.  As strange as it may sound, the current situation will likely create an even larger and more robust market for timeshare, interval ownership, and private residence programs, especially those offered by major brands such as The Ritz-Carlton, The St. Regis, etc.  These programs offer the reassurance of a brand, comprehensive amenities, luxury, location, lower prices, sufficient usage, and the flexibility to “exchange” with other comparable resort locations all over the world.  Don’t be surprised to see this segment of the industry increase dramatically for all aspects of the market. 

 This is interesting. When the downturn first become most apparent I thought they would be the first to get hit hard. Destination clubs are having a hard time and this will certainly see consolidation in the market. Interval for the luxury market perhaps, but it seems the next part of the financial market to get hit will be the credit card industry, and that’s what has been driving the timeshare industries for some time.

18. Don’t underestimate the best and brightest.  Finally, I should note that I am blessed to personally know many of the leaders in the second home and resort industry.  I will bet on them all day long!  They are smart, creative, and will find solutions for many of the challenges herein.  They are some of the best businessmen and women the real estate industry has to offer.  Don’t underestimate them!

I agree here. Americans are definitely creative and resourceful. They want to be active, doing something, making deals. That’s where the recovery will come from.  

 

 

 

 

 

 

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