Two recent articles in the Miami Herald show how Miami is a melting pot, not only when it comes to culture, but in regards to its economic status and recovery. As new construction is set in place, a looming inventory of shadow properties (property not for sale in the market and being held either in foreclosure or already repossessed by lenders) may hinder the boost that the new construction may bring to the real estate market in Miami.
As reported in the Miami Herald “South Florida, with some 200,000 homes […] already owned by lenders or headed for foreclosure, has one of the nation’s largest collections of unseen inventory. The number of shadow homes dwarfs the 30,000 or so that are listed on the active market. Even as prices have shown signs of stability this year, an impending wave of foreclosures threatens to keep real estate values deflated in South Florida and across the country.” As these shadow inventory* continues to rise, the values of homes may continue to fluctuate, and accurate assessments of a property’s value may seem less feasible.
*Shadow inventory can be broken into three categories:
• Properties lenders have repossessed, but have not put up for sale. These homes are referred to as real-estate owned, or REOs.
• Properties caught up in the clogged foreclosure process.
• Properties that are severely delinquent in loan payments — almost certainly headed for foreclosure — but have not yet entered the process.”
Lenders are continuing to hold on to these properties for various reasons, including not wanting to take these properties of their books and hopelessly hoping that the value of these properties would increase to a respective amount that may cover losses incurred through the foreclosure and default of the borrower. With this amount of withholding continues an unrealized market of property that seems to sit there and gather dust. Some property still harbors the borrowers who defaulted on these properties since lenders are not willing to prosecute on the foreclosure and request a final sale. Many of these borrowers have applied and subsequently been denied mortgage loan modifications by the lenders. Instead of accepting loan modifications that would create income for the lender and convert the loan to a performing loan, lenders seem to be content sitting on their properties.
Although lenders have looked for alternatives as the Miami Herald reports, “Given the grim outlook, lenders have begun to consider new alternatives to foreclosure. Short sales have increased this year, and real estate agents say the once-onerous process of selling a home for less than what’s owed on it has become more streamlined.
Banks are also cutting deals with homeowners who agree to hand over the keys to a house, rather than go through a legal battle. In some cases, lenders are forking over wads of cash to convince troubled borrowers to leave their homes amicably[,]” these alternatives dwindle in comparison to the inventory that is still lying dormant and without resolution.
On the other side of town, new and fresh construction may bring new life to the Miami real estate market. New construction in Brickell is sprouting new life in to the market; yet the majority of potential buyers may not be the much needed Miami investors, instead foreign buyers looking to secure their spot in burgeoning Brickell.
As the Miami-Herald reports, “Miami’s first new condo high-rise since the housing bust is set to begin construction next spring, developer Newgard Development Group announced Monday.
Called Brickell House, the $170 million project is part of a new wave of condo towers planned for downtown Miami, which saw development grind to a halt after the building frenzy that lasted from 2003 to 2008.”
The juxtaposition of the rising shadow inventory and new construction seem to embody the economic melting pot that is Miami. Seemingly, looking to forget about the past real estate market crisis, while trying to build new, bigger and better buildings to attract foreign investors. The formula seems creative – as Miami flourishes from the tourist dollar. But for those who are still struggling to pay or modify their mortgage, the current market is not yet forgotten in the shadows. Instead their best bet may be to post a “For Sale only to Foreign Investors” sign and see if the Brickell strategy pays off.
In my opinion, lenders need to be more realistic with their expectations of these properties. A performing loan makes the lender money, as a non-performing 18 month, litigious property, creates headaches. Although it is refreshing to see that new construction is on the horizon, the shadow inventory that continues to loom may make it harder on the resurrection of the floundering real estate market in Miami.
Eduardo D. Fons, Esq.
