The Higher They Come, The Harder They Fall, One And All

The Santa Maria "Luxury Suites" Interior Courtyard . . . Just Steps Away From The Ocean In Key West Florida

Key West High End Real Estate Equity Vanishes

A few years ago one of the highest banking strippers I knew at work (I was her DJ and she was knocking down at least $5,000 a week) bought into a "can't miss" Key West Real Estate opportunity which opened my eyes to how insane the world had become. This dancer was introduced to this deal while giving some big shot Realtor lap dances up in our Champagne Room.

Now this woman was already an experienced "Flipper" of Real Estate and prided herself as a modestly wealthy woman who had made hundreds of thousands on her first "flip" up in Key Haven, an upscale area just outside of Key West with expensive homes.

This gal had bought a home in 1998. In 2 or 3 years time the house doubled in value and she sold it at a large profit. She bought another Key Haven house, let the equity grow, and then she hit up the bank for a Home Equity Loan for $250,000. The banker who approved this loan was also one of her clients in the Champagne Room of our stripclub. And she told me the banker thought she was on the right track with the following deal I am about to describe to you:

The Big Spin On The Housing Bubble Wheel With A $200,000 Throwdown Of Chips All Bet On Black

So this dancer put down $200,000 on an not yet built condo unit at what was once the Santa Maria Motel . . . which in its day was a throwback to a cool, seedy place with 60's hip go-go style marquee and swooping entrance.

Most of the Santa Maria was demolished. A noted architect, Jose Gonzalez, was put in charge of designing the originally priced $8,000,000 renovation/conversion from a run down motel into a new Condotel with luxury suites. Gonzalez designed one of the most beautiful new projects in my 18 years of living in Key West.

But there was one big ass problem with the plans for this new project from the beginning: the units were to be "Condotels". The thinking was the new owner/buyer would contract with the developer of the units to manage the rentals of the units, and everybody would become wealthy millionaires in the process. At least this is how it was explained to my dancer, and how she relayed it to me.

The "Luxury Suites" would be marketed to mainlanders (and Key West speculators) who were flush with EZ cash from whatever teat they were sucking on in the FIRE Economy Cash Cow. (FIRE, for those not used to the acronym, stands for Finance, Insurance, Real Estate.) Keep in mind this was about the beginning of 2005 when the Bubble was still being blown in Key West, and the Real Estate Maven/Writer for the Key West Citizen was telling blue collar workers to make a deal happen even if they had to use credit cards (I kid you not) to make a small down payment on a place.

Build An Assumption Of Future Profits On A House Of Cards And You Set Yourself Up For Failure

Now when these Santa Maria Condotel units were being constructed, I remember this stripper doing the following math for me built on the faulty assumption that her unit would rent at the preposterous rate of $440.00 per night! (So help me, ask anyone in town how empty the parking lot of this Santa Maria was night after night upon first opening at a non-negotiable rate of $440.00 per night). But she said this Realtor who turned her on to this great deal did say, conservatively, rates could drop down to $400.00 nightly during the weeks of Off Season. Still, he assured her, she'd make money month in, month out.

Anyway, here's how this woman figured this would work:

Cost of one luxury Condotel unit: $1,295,000

To arrange to buy one of these, she had to put down a $200,000 non-refundable deposit which would be used as a downpayment on her loan, once the unit was built and the purchase was closed.

Hence, she would be financing $1,095,000 at what was then higher lending rates than today. I distinctly remember her telling me her monthly mortgage payment would be in the vicinity of $7,000 and that with mortgage payments, maintenance, taxes and management fees for 90% occupancy, she'd be paying something like $9,000 a month while raking in at least $11,000 - $11,500 revenue for every 27 days out of every month it was rented out.

And to make more money monthly, she planned to leverage into one condo after another with her bank and tip money (keep in mind both her Realtor and Banker were spending thousands on her company in our champagne room during the go-go years of the Housing Bubble), and eventually own 5 to 6 units which would give her enough cash flow to quit dancing and go into Real Estate flipping full-time.

In Which I Become The Doom And Gloom Devil's Advocate

The first thing I asked this dancer upon hearing this math and her breathless excitement was, "Did you really give the developer $200,000 as a non-refundable deposit?"

She confirmed she had. I was thinking to myself, "Holy shit. Is this woman aware of how many condos are breaking ground these days and which will be empty for ages as the Housing Bubble finally crashes?" But I did not tell her what I foresaw. This woman had already tossed 200,000 chips on the table for the dealer to pocket without even spinning the wheel.

I asked, "Do you really think people are going to be able to pay $440 a night, every night? Or will the rental agents at the front desk have to eventually negotiate on price?"

She replied, "Rocko, these are luxury condominiums. I've seen the plans for the grounds, I've seen the plans for the interior. People will come from all over the world and want to taste Key West's finest luxury project. Besides, as people make more money from Real Estate, I can always sell my places for higher prices and move on to the next deals."

What Went Wrong With The $1,295,000 Condo Unit

No more than six months after discussing her $200,000 deposit for a yet to be built Santa Maria condo, this woman strapped on her high heels and came back to work full-time, (instead of just working part-time the busy weekends of Boat Race Week, Bike Week,) etc., for some quick easy money for shopping and living expenses. Her dabbling in Real Estate was coming to a fast close.

Due to a slowing national Economy and burgeoning inventories of Real Estate on the mainland, the Housing Crash trickle down began in earnest in Key West. This woman had finally read enough on the Internet about what was beginning to take place on the mainland (Miami already had 25,000 condos For Sale with another 45,000 - 60,000 being built). She read more and more about home prices falling, despite the pounding on the table by the National Association of Realtors that Real Estate would always go up.

The flip of her second Key Haven home (the one she took a HELOC on for $200,000) was not going as planned. She sold it (luckily in my opinion) with only $20,000 grand profit. She saw Real Estate pricing hit a wall in her old neighborhood, and she saw the first Reductions In Prices start to take place in many lower priced Key West homes.

So this dancer became really nervous. She sensed this Housing Bubble/Housing Crash story had legs. She walked away from her $200,000 deposit!

This lady smartened up real fast and figured if she got stuck with a $1,095,000 mortgage and room rates for hotels were beginning to stall, she would never make her monthly nut of $9,000 built on a 90% occupancy at $400 to $440 a night. So, she never took possession of a condo as it was a few months from completion. She could see the handwriting on the wall: the majority of Key West tourists were no longer going to be able to afford $300 a night rooms at a chain hotel, much less a $440 a night luxury condo. (This dancer also had concierges and Hotel managers as her clients in our Champagne Room who were warning her about the coming Recession in Tourism.)

To rub salt into the wound of her giant $200,000 loss, about the beginning of 2006 there was less tip money being tossed around in the stripclub and fewer champagne rooms being sold as money got too tight to mention with former "Masters Of The FIRE Economy Universe" who were selling fewer loans, homes, appraisals, insurance and construction came to a grinding halt everywhere on the island.

Meanwhile, the local NAR reps were still trumpeting "There has never been a better time to buy a home!" in their ads. The new thing was rates were lower, so the local Real Estate cartel was assuring people . . . "you can buy more home!"

Dodging The $1,095, 000 Hangman's Noose Was The Right Thing To Do

Months after this dancer came back to work, the new Santa Maria condotels opened for business. Night after night, I would go by the empty parking lot (2 to 5 cars were parked there on weekends in the beginning) and follow the slow awakening of the management of Santa Maria on hotels.com. About three months after their opening, I finally saw a crack in the rates they were charging. The $440 a night rate dropped to $420, then $400, and finally dropped to $390. Within a year's time, the rates dropped another 25% or more.

Keep in mind that to make money off these units, an owner needed 90% occupancy at $400 minimum.

Also, during this time was a big article in the Key West Citizen which covered the travails of a half-dozen or more people who walked away from their deposits on these overpriced condotels. Some of them were wanting to sue the developer for being too slow on the building or some other excuse, but my dancer told me she had washed her hands of a brewing class action lawsuit as she didn't want to tie up her time and emotions in a negative slugfest. She was determined to move on and bank all her tip money in CDs and start anew whenever the Housing Bubble Crash ended.



It's Not The Fall That Hurts, It's When You Hit The Ground

Make no mistake, Real Estate is still falling in Key West. And it's now happening quickly on the high end.

Remember those $440 a night stays at the Santa Maria? I just tickled this from http://www.hotels.com/: $279.36 for a three night stay. (You may see a higher or lower rate show up as special weeks such as Lobster Week, Hemingway Days, Fantasy Fest, etc., come and go.) This is a far cry from the $440 a night needed at 90% occupancy to make one of these condos profitable at the former price of $1,295,000.

But wait have the condos finally shown a crack in pricing if you want to buy one? Yes, they have. And in a very dramatic way.

Are you ready for the latest "Reduction In Price" for a Santa Maria condotel?

MLS#:108510
Status: Active
Original Price: $1,195,000
Listing Price: $499,000
Price Per Sq. Ft. $550.17
Address: 1401 Simonton St 18
Key/Island: Key West
Neighborhood:Old Town-S of Truman
Subdivision:Filer Boyle Sub
Mile Marker:1.0
Prop Type: Condo
Days on Market:399
Bedrooms 2
Bathrooms: 2.1
Square Ft. 907
Lot Sq. Ft. 0
Year Built: 2007
Taxes: $1,658 (subject to change)
Tax Year: 2007
Exemptions: None

So there we have it. On the market for 399 days (as of today June 7, 2009), this luxury condo is now selling at a price that is cheaper than a dodgy downtown condo circa 2005, or similar sized condo uptown in an undesirable location and building circa 2005 which sold for $600,000.

The drop from the original price of $1,195,000 to the listing price of today at $499,000 is a drop of 63% in less than 16 months time. Does that sound like a bottom in Real Estate prices to you?

Keep in mind these are the nicest Condotel units on this island. Really, truly, if I can snag one at at $200,000 to $250,000 in the future, I wouldn't rent it out, I'd live there. I'd rate the design for the interior courtyard five stars.

Dogged condos in my building (built in the early 80s with very poor infrastructure design) are selling for 66% off their 2005 prices ($500,000 to $600,000) and are going to drop more as tons of foreclosures enter the system. Thus, high-end will follow the low end off a cliff.

There are currently 17 homes and condos in around Key West which cost their mortgage holders $1,000,000 or more and which are now in some stage of foreclosure. I have heard time and again from wishful builders, Realtors and lenders that Key West high-end properties would weather this Financial Tsunami much better than the low end stuff. How wrong they were . . . again.

And these are the same Real Estate cognoscenti who would have you believe the bottom in Real Estate prices is here?

As always,

Caveat Emptor,

Rock Trueblood in Key West