Monday, February 16, 2009

Knife Catching In Cape Coral, Florida

There's a guy who comments, all day long, on Mish's blog by the name *Black Swan*. He's sharp as hell - on most stuff anyway. In fact, I referenced him before in - The Red, White, and GOLDman Sachs.

For a while now, he's been threatening to go down and grab some foreclosed homes in Cape Coral, Florida which is on the coast between Naples and Fort Myers. He must have finally persuaded himself to action. He posted a short summary of the town and his recent *investments*:
Florida weighed in with the nation's second highest state foreclosure rate in 2008. Last year, one out of every 22 housing units in Florida was subject to receiving at least one foreclosure filing. Lee County, Fl., home of Ft. Myers and Cape Coral, had a higher percentage of foreclosures than any other Florida county. 41,040 properties in Lee County received foreclosure related filings last year. That was up 219% from 2007. The Cape Coral-Fort Myers area, itself, had the nation's highest foreclosure rate in 2008. Additionally, Cape Coral has an almost 10% unemployment rate. That ranks the sunbelt city right up there with rustbelt Detroit. So why are so many Cape Coral residents smiling?

The senior citizen and matriarchal owner of the Italian restaurant, Wine and Roses, was smiling because business is booming in her family restaurant. The restaurant, which is just little more than a year old, is located in downtown Cape Coral, a 1960s low-rise strip center kind of downtown. She and her family love where they now live and work, and have no intentions of ever going back to live in Wisconsin.

The owner of the Sand Dollar beach paraphernalia store in Ft. Myers Beach, just minutes and two short bridges away from Cape Coral, is smiling because business his is up over last year. The former Israeli soldier said he and other Israeli beach store owners in the area are all seeing better sales. He told me that they track every dollar, every week, and they are quite pleased with what they are seeing. Ironically, the beach paraphernalia stores where I own property in North Carolina (Surf City and Carolina Beach) are also owned by Israelis. It's much like the Patels from India owning US hotels and motels, but that's another story for another time.

The owner of Foster's Grille Home Of The Charburger out on SW Pine Island Road, in the newer and even more sprawling part of the Cape, was smiling last Thursday at around 7 PM, as the line of customers was out the door of the large, three year old family style restaurant. The grills were sizzling, and the beer on tap was flowing. Judging from the packed parking lots at nearby Out Back Stakehouse and Carrabba's Italian Grill, those owners had to be smiling, too.

Sunday night, there were a couple of hundred smiling, aging baby boomers, along with those even older pre-boomers, drinking and dancing the night away in the funky, open air Paradise Tiki Hut, located back in the old Cape downtown. It was as if they were reliving their younger days, movin 'n groovin to the do-wop music of The Dupees. There were plenty of Harley's parked out in front, left over from the huge, city sponsored, drunken biker festival that had taken place the night before in a blocked-off section on that same old part of town. It had been a drunk but orderly time for all.

The employees of the Quality Hotel Nautilus were also smiling after finding out that their five-story, 1960s downtown hotel would become a Holiday Inn Express in March, and that they would all be keeping their jobs. Conversely, there are probably few smiles on the faces of the Cape Coral Community Redevelopment Agency (CRA), which has spent years working on getting investors and developers interested in investing in downtown. Their efforts have been seriously hurt by the downturn.

Just in back of the soon to be Holiday Inn Express and Wine and Roses restaurant, sit 8 prime, contiguous, vacant downtown lots, for which the aggregate price has been dropped all the way down to $250,000. I can't recall the last time I saw prices that cheap in a thriving downtown before. Developers, to say the least, are still plenty gun-shy in Cape Coral. Home buyers, however, are not.

The vacation home rental agents were all smiles, as seasonal vacancy dates had been solidly reserved by vacation renters. But the biggest smiles came from Cape Coral realtors and title company workers, who were working overtime to accommodate the 295% year over year increase in real estate sales. A good look at the Cape Coral MLS reveals that over the last six months, there are far more homes listed as sold, pending or under short sale contract, than there are remaining in the active category. Cape Coral is a buyers' market, and the buyers are buying. Many houses are receiving multiple offers, and are selling at over the asking price. This is because the banks are are hitting the market with sub-basement pricing. It's scorched earth as many banks try to clear their balance sheets. A market that ranks number one in foreclosures, inspires fear in the hearts of bankers.

Cape Coral is actually a pretty interesting place. It is full of commercial strip mall centers, ranch houses, networks of intersecting canals, palm trees and people who have not missed many meals. It's a boaters' paradise for the many lemmings who have escaped the northern states only to come to the sea to end their protracted death march in a warmer climate. Actually, the median age in the Cape has dropped to about 40, but there are still many buffet eating, cigarette smoking, 25 mph white knuckle driving, pale faced Anaisazis. The population of the Cape has surged almost 50% since 2000. Sadly, I realize that it may not be many years until I, too, join the ranks of the "oldies but goodies" lovers in search of a warmer, more senior friendly climate.

With all it's chain stores and restaurants, if it weren't for the water and the palms, it could be indistinguishable from much of the rest of the United States of Generica. However, that water, and that lush tropical foliage, make a huge difference. An abundance of fresh fruit grown in the area. A good deal of that fruits is sold in many retail locations around the City. The living is cheap and easy, and the quality of life is high. I've never visited a city like this, before, in which so many residents seem so happy. Of course, I was there in high season. Also, where else can one now own a waterfront, gulf access single family home for as little as $150,000?

Cape Coral is all about the water, but not all water is equal. There are homes on fresh water canals, but those canals are landlocked and will not get you out to the Gulf of Mexico. There are inexpensive homes on salt water canals, but many of them, which lie in the interior of the Cape's canal network, can force boaters to spend hours going through watery mazes, and under bridges, in order to get out to the gulf. Obviously, sailboats won't be parked in back of these homes. The primo homes and lots are on direct gulf access canals (no bridges). They are found in the southeast "Yacht Club" area, and in and around the high-end, far newer southwest Cape Harbor area. Aside from a handful of Cape Harbor, multi-million dollar McMansions, the most highly prized and most expensive homes are found directly on the river in the Yacht Club. In 2005 there were some buyers who paid over $600,000 for lots with "knock-down" houses, where new homes, some exceeding $5 million in present market value, now stand in their places. I ended up concentrating my buying efforts in that area.

I had also looked in Ft. Myers, but the prices of homes on canals or on the river, south of the desirable Edison Historic District, are approaching those stratospheric Naples, Fl. prices. Here is an example of one of those communities that I visited: It's should be obvious why I concentrated on the Cape, instead. Cape Coral is only a few minutes away, but house prices there can be a million dollars less.

Although there seem to be real estate offices and title companies on every commercial block in the Cape, not everyone is sharing in the bounty. It appears that there are a handful of realtors that have a monopoly on the best bank listings. A bank listing is considered good when the bank knocks 60% or more off its mortgage liability amount in order to get the home sold. By the way, if house prices are cheap, condo prices are even cheaper.

A manager from Cape Coral Title told me that the banks consider Lee County a distressed area, and are starting to keep owner-occupying homeowners in their homes by cramming down mortgage balances, rates and terms, in order to revalue those mortgages to reflect true, current market prices. She hears about these transactions all the time, but since there is no title work necessary for these loan modifications, she hasn't seen any copies of agreements. I can only speculate that there is some sort of equity sharing agreement in which the bank gets a piece of any future profit, if there is a future profit, from any future sale of the home.

It is the short sales that make up the bulk of the MLS listings in Cape Coral. Unlike many other areas of the country, these short sales are actually closing. Most banks are willing to work things out. Deutch Bank, now with a 20% currency advantage, has been the best to work with. Indymac and Countrywide have been, notoriously, the worst.

Before I made my Lee County trip, I had put a contract on a bank owned property in Ft. Myers.. It was a 1,500 house and guest cottage. I thought I was the world's greatest negotiator when I got the price down to a little over $60,000. To cement this deal, I had to sign the bank's addendum. It basically stated that I had no recourse against the bank and/or the listing realtor, but that once I signed, the bank owned me. My only way out of this contract was death. My heirs, however, would still be on the hook. The listing agent told me that any good attorney would advise me not to sign it. I signed, of course, because the beautiful tropical yellow house in the picture was the deal of a lifetime (and I do mean lifetime), and, of course, because I was such a great negotiator.

Unfortunately, that yellow paint had been applied over asbestos siding. An asbestos tile ceiling was also there to greet me in the interior of the house. The agent had disclosed none of this. The next-door neighbors were clones of "Hi, I'm Larry and this is my brother Darryl", but not from the old Bob Newheart Show, but rather from the hills of Kentucky. Larry and Darryl had given up their phone a few years back, because nobody called them, so Larry began to follow me around as if he were a seagull, and as if I were made of fish. By the time he got done describing the neighborhood, I know I would have been better off buying next door to a toxic waste dump (unless, of course, I had been interested in taking banjo lessons).

Before I could confront the real estate agent, he sent me an email stating that I had made the earnest money check out to the wrong party, and that I needed to bring him a new check. As far as I was concerned, that was check, and checkmate. So, quoting the terminator, I said, "astalavista baby", and terminated the contract. No earnest money, no foul.

The other mail order bride house I had put under contract , was the reverse of the asbestos house situation. It turned out to be beautiful on the outside, and the neighborhood was so good, that if I ever move into this stucco home with a tile roof, the neighbors will probably be putting bars on their windows. I'd estimate that some of the houses there were worth well over $5 million. There were, however, two problems with this pool home that I have under contract for $100,000. The interior looks like it was done by Martha Stewart, after she had gone through her Fred Sanford design transformation period, and, the defaulting owners owe an additional $200,000 over and above our contract price. If the bank signs off on this, it will be one heck of a short sale.

A male friend and I met a realtor at another house that appeared to be the worst pool home in the one of the best Yacht Club neighborhoods. The houses across the street had selling prices of over a million each, but I planned to be less generous with my offer (understatement). The realtor turned out to be a tall, beautiful German lady, and, after watching her smile as I described how I would redecorate the house, I had to say, "my friend and I are not gay". She replied, "Vell, I juss assumed.............not zat dare's anyting wrong wit zat". Consequently, I asked her to call the defaulting owner to see if he'd sign a contract for $60,000. He agreed, but told the agent that she was wasting her time, because the bank would never take that price. Nothing ventured, nothing gained.

I wasn't done, because I put a contract on a FISBO owned by a 90 year old man who had left the state. I convinced his daughter to take a $100,000 cash offer. The house has three bedrooms, three baths and a beautiful caged pool. The interior is great, but the exterior is so mundane, that I'm not sending out pictures until I've transformed it somewhat (if the old man signs). It is in that same great, million dollar neighborhood as is the house I wrote the $60,000 offer on. Unlike the other two houses I have under seller executed contracts, this house is not a short sale. As well as realtors are moving houses through short sales in the Cape, the process can still take six months to get to the closing table, if the buyer ever gets there at all.

And he posted another comment:

As for what I found in the Cape and Ft. Myers, I have no doubt that the traffic is seasonal, but the good news is that retail sales are up and home sales are way up year over year, and not just quarter to quarter. That is not a seasonal thing. I sent in a post the other day that showed the quarterly sales numbers for all the major Florida metro areas. Most of them were still dropping dramatically. Only Lee county and one other county were up. Lee County sales were up 43%. Sales in the Cape are up 295%. Real estate sales and prices, even in the same state, are still local.

Has it bottomed? It's hard to tell. I believe that there are many more foreclosures to come, but I have Listing Book and it shows that the sales are happening a lot faster than the foreclosures. Please understand all the research I put into buying a house. No realtor will know as much as I do about his/her own market. It's very similar to what a stock broker knows about the stock market. Most brokers only care to know enough to make a commission. Brokers do not do research, they generate commission.

Lee county is one of the few areas in the country that has Listing Book. Listing Book is a tool that enables me to map an area, find every listed property within that area, and get a good look at the property's listing history, and, more importantly, get a full sales history of the property. It also gives me the property tax info that is so important in determining cost as well as price.

No place in the country was hit as hard by foreclosures as the Cape Coral/Ft. Myers area. The Cape was hit a lot harder the Ft. Myers. Even in the Cape, real estate prices differ greatly by location. The location I am trying to buy into is called the Yacht Club. During the boom, people would pay as much as $600,000 for a knockdown house, and build something in it's place for millions. Although all house prices have dropped at least 50%, in the Yacht Club area it is still not uncommon to find homes at $300 per foot (they were once far more expensive that that). I'm paying a little over or under $50 a foot. I don't expect to lose money, and, if I do, I don't expect it will be much.

Again, this guy is really, really bright. But I think he's nibbling early - a vice I am well versed in!

Yes, fortunes have been made, in fact, most fortunes have been made in real estate, BUT, I'll bet no one ever made any money in real estate buying when mortgage rates were low. I wouldn't buy anything until:

1) RE has crashed nationwide.


2) Mortgage rates are above 8%.

However *cheap* stuff looks'll only get cheaper as NYC, Boston, San Francisco, etc. dump and borrowing rates levitate. Why shoot your wad (of money) now?

Buying *extra* homes today is like buying Cisco Systems at $30 per share after the stock market darling fell from $72. Sure it looked cheap; AND you had been itching for years for an entry point....BUT, it still fell to $10, and 8 years hence it's still merely $16 per share!

And note that Black Swan almost got really burned on the asbestos house. In fact he was quite lucky to get out of it. This is why I am watching homes very closely in my neighborhood. I research them on and try to assess the possibility of a *distressed* sale down the road. When a house is listed, you can pretty easily get access and spend $300 on a basic home inspection. That's money well spent, well invested when faced the with prospect of an *as-is* foreclosure sale.

I posted this because this guy is pretty bright and because I thought some may find it interesting to take-in the rationale of a speculator risking their capital.

I asked my Naples real estate agent buddy what he thought about Cape Coral to which he shook he head, "It's landlocked....there are no jobs there....little commercial."

I'll bet it's a good place to scoop up one's own retirement pad - that is if (s)he doesn't need restaurants and craves relative peace and quiet. But I seriously doubt the area is where one should be *investing*.

I believe Florida has a real hidden over-supply issue in terms of housing and condos. Most units are owned by 'old coots' who haven't the slightest idea how to rent them out via As time goes on, more and more of them will figure it out, most likely by the prod of some younger relative.

Furthermore, as you go inland in Florida, there is still essentially *unlimited land*.

Remember, it took over 20 years for the Empire State Building to even get fully occupied. Expect the same for Florida housing and its oversupply problem.


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