Zombie Condos: Fat in the Middle

Posted by jeff

Fri May 1st, 2009 03:57 PM

Zombies.jpgSo I've been crunching away on my zombie condo data. It's tedious work, but as you grind through the data, pictures start to be revealed. Okay, I will admit to being a bit of a research junkie, something a lot of folks get no thrill from. But I get a charge out of finding out things other people don't know....or at least can't prove (it can make you money). So what have I learned about zombie condos?

First off, the city's database, as sub-optimal for doing large scale research as it is, has tons of great data; you just need to figure out where to get it. Want information about the debt on a property? Don't try to look at the mortgage documents; they are not necessarily all there (in my experience) and don't always have numbers in them. Find a unit that has been sold and look at the partial mortgage release. This is the document where the developer's bank let's you, Mr. Buyer, off the hook on the debt attributable to your little piece of heaven, while implying that the developer stays on the hook, for the rest of the units for the rest of perdition. As a service to you and the developer, the lender lists all the debt that has been heaped upon the stamp-sized parcel of land over the years as well as the various and sundry loans the developer took out to actually build the building.

I know, I know, you can't thank me enough for that nugget of wisdom. But bear with me, I do actually have a point to make. By actually looking at the documents for every lot in the building (every piece of land in the city has a block and lot that identifies it and when it goes condo the original lot is subdivided into as many lots as there will be condo units) you can find out how many units have sold and what they sold for (and even the size mortgages people took out....smaller lately). Combine this data with the debt data and you can get a pretty good feeling for whether the developer is going tapioca or not (assuming they don't have a ton of cash sitting waiting to be given to the bank to make up for shortfalls).

So if you are looking at buying a condo in a new development building (you will have to pay all cash if the building isn't 71% sold), you may want to go through this exercise or hire someone to do it for you. Having a bankrupt sponsor is not good for owner relations or property values.

By the way, your broker can look at their "MLS" system, which uses broker reported data to get at the same information. However, these data are stale compared to the city's data, probably because brokers are not good about reporting it in a timely fashion, whereas lawyers register your deed with the city promptly.

So what about the "zombie condos," those where they have not contracted 71% of the units and where people can't presently get mortgages to buy? I have found some interesting data so far. First, some buildings were built with reasonable enough loan to costs and enough upside in the sell out price, that even after selling only 50% of the units, they actually could pay off the principal on the loans outstanding....these guys are in a better position to bargain with buyers, although they still have all that accrued interest to pay (numbers which can only be guesstimated because they don't draw all the construction funds at once and often have reserve numbers in their budgets that can be reversed if things go smoothly).

Most interestingly, zombie condos are fat in the middle and skinny at the tops and bottoms. That is....and this is totally intuitive, but I have now seen the empirical data to prove it....the first apartments that sell out are in the middle of the building because no one wants the lower floors. The penthouse and upper floor sales also seem to be a bit less desirable because of costs. This may not be true all the time, but is likely being impacted by the collapse of the $5 million and above market as a result of this crisis. One of the big problems for developers is that much of the value in these buildings was locked in the ground floor retail units (which also are not selling well), that many built into the buildings and the upper floor apartments/penthouses. So in many cases they have sold out half the units or more, but a disproportionate percentage of the profits have not been realized. So if you go looking for a unit in a partially sold condo, you should push hard for a deal on any high floor or low floor units, there is a lot of unsold supply out there. Who knows, you might even have a floor to yourself for a while.

I will be putting together a list of "undead condos," those where there are still units that need to be sold, but the developer has cashed in enough dollars that they are probably not going to have to turn over the building to the bank. This is probably the least ugly place to go fishing for deals. It will take me a few weeks, so let me see how it comes together and if/how I can make it available to our readers.