Thursday, May 15, 2008
An example of a Denver condo currently selling for less than $100/sf.
As a former apartment building owner, I know first hand the difficulty of maintaining a positive cash flow during an economic slump. I calculated that for every month that a unit was empty, it took 3-6 months to recoup the losses from that vacancy. When tenants left a unit in disrepair, the cost of cleanup and fix-up only added to the losses. In fact, for 22 years I had to carry these losses with the only hope being to recoup upon sale. During the 1980s, my vacancy rate was often as high as 50%. Fortunately, I was able to carry them during the slump, and finally sold at near the market high in 2000.
The new owner, experienced in real estate but apparently not in condo conversion, lost his shirt as the project took twice as long as projected, expenses were way over projections, and one unit did not sell for over a year, thereby tying up any profit.
And when the units did finally sell for over $300/sf, I was amazed that there was anyone willing to pay this price ($240,000) for an 800/sf unit, one that I had been renting out for $600 per month. Of course the units were “tricked out” and apparently marble counter tops caused potential buyers to go into a trance state where anything seemed possible.
I always wondered what would happen when a downturn came along. It would be like having many owners of the same building. If units were empty, the remaining owners would have to pick up the tab for the missing condo fees. If something major went wrong, some of these owners would probably not be able to come up with the money to cover the shared loss. Then what?
That slump is now happening in some areas of the country and it’s not a pretty picture. Read all about it here.
at 10:18 AM
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