We’ve Seen This Market Cycle Before — Here’s Who Wins and Who Loses
In 2011, the market for vacation rental properties here at the beach was a mess. Banks lost confidence in “investment” homes and condos and would barely lend on them — understandably, given the wave of short sales and foreclosures they were facing. Houses took a hit. Condos got pummeled.
When the cheap, easy financing dried up, demand dried up with it, putting a ton of downward pressure on prices. A lot of “investors” couldn’t afford their properties and started bailing out. Too many sellers, too few buyers. So sellers lowered their price. And kept lowering it. Soon it became a game of how low can you go — which killed the “normal” sellers just trying to get a fair price.
On top of that, a lot of owners were upside down and couldn’t or wouldn’t pay HOA dues, which piled onto the reasons buying or owning a vacation rental at the beach was “crazy.” The market collapsed. I remember more sellers than I can count telling me, “I wish I never bought this place.” That was 2009–2011.
But it could be today as well.
Bottom Line Up Front
We’re seeing early signs of that same setup in today’s beach real estate market — mostly in condos, where high rates, special assessments, and softening rents are pushing some owners toward the exit. Houses are holding up fine. That’s real risk for owners without a plan, and real opportunity for buyers who can move fast with cash.
Below: what it means whether you’re hunting for a deal, sitting on a condo you’re not sure about, or managing a rental that’s feeling the squeeze.
This is this week’s Smart Beach Investor market report — subscribers get it first, every week
They’re Back
Today, many of those same conditions are back — especially for condo owners. High mortgage rates have all but shut down financing on vacation rental condos.
Stuck carrying a property with a high cost-to-own environment, potential expensive special assessments, and a soft rental cycle, some owners are deciding they can’t afford to keep their condos. But they can’t afford to sell either. On top of that, they can’t afford to pay their HOA dues, which ratchets up the pressure on the HOA and the other owners in the building to carry the extra weight.
The result? A ton of downward pressure on sales prices — and here we go again.
Houses, meanwhile, are doing pretty good. High mortgage and insurance rates along with softening rents are still problematic, but demand has held and even picked up. Home owners are doing… fine.
It’s the condos we need to keep an eye on. I don’t think prices are going to crash the way we saw during the Great Recession, but the Milestone and SIRS (Structural Integrity Reserve Study) inspections are going to play a role in a lot of buildings going forward. What I’m seeing: buildings where the Study has resulted in high estimated repair or replacement costs — some in the millions — with reserves sitting at only a few hundred thousand dollars.
The owners have to make up that deficiency with a special assessment. If the assessment is significant enough, some owners won’t be able to pay their share. What happens then? Distress sales. Add in banks becoming hesitant to lend in buildings with reserve issues, and there’s even more pressure on prices. The likely result: some folks will have to get out at any price.
The Reality, Part 1
This isn’t all bad news. Once a building gets its financial house in order, what was a liability becomes an asset, and the building is stronger for it. Banks feel comfortable financing there again, and buyers regain confidence investing in the building — all situations that generally lead to increasing prices. Getting from where we are now to there is the trick owners, sellers, and buyers need to navigate.
The Reality, Part 2
If your building is in the clear — no special assessments needed — you have a valuable asset. There’s still demand for gulf-front properties, and owners in “clean” buildings can look for stable pricing in the short term and rapid appreciation when the market shifts.
If your building has a report indicating future work will be required, take a hard look at what’s needed and whether a special assessment will follow. Sometimes current reserves cover the work. If an assessment is needed, find out how expensive it’ll be per owner, and when the money will be required — knowing what’s ahead lets you prepare instead of getting caught by surprise.
If your building is already in the throes of structural maintenance or underfunded reserves requiring a significant special assessment? I’m not going to lie — you’re in a tough spot.
→ Not sure if your building’s numbers still work? Get your SaleAbility Score
Reality, Part 3
Regardless of your building’s situation, investing is a math question. If the numbers work for you, buy or hold the property. If they don’t, get out. If you’re upside down, consider limiting your downside. If you have equity that’s underperforming, consider where you could get a better return on that money — then move it there.
The Near Term Future
There will likely be distressed sellers over the next several years who have to get out, and that will cause a disruption to property values. I can see a time where there are sales at a “normal” level, then out of nowhere a distressed seller comes on and sells at a steep discount.
The Winners
Cash buyers with confidence in the future can win in this market. They don’t need bank financing, they have deep pockets to ride out the storm, and they have the patience to stay the course until price appreciation comes back. They just need to sit back and wait for the right deal to show up — and be ready to jump when it does, because there’ll be a lot of competition for these deals.
I’m already tracking several buildings and specific units that may be in trouble. If you want access to these deals, get on our “Distressed Property Deals” list and I’ll give you first shot at them.
The Long Term
We’ve been here before, and when the smoke clears, people realize the beach is still there. Our wonderful little beach communities are still here. The weather is still amazing. All the things that made investors want to buy here before will still be here.
Like corrections in the past, the math got out of whack — once it gets back into shape, look out, we’ll be off to the races again. Remember how we started: the days when sellers were running around lamenting, “I wish I never would have bought that place”? Back then, I took a leap of faith and bought one of those deals. And ever since, I’ve been running around saying, “I’m so glad I bought that condo at the beach!”
Now I own several, plus a beach house I bought last year — even though people told me I was “crazy.” The cash flow from these properties funds my life. I love ’em.
See the Current Numbers by Market
This week’s report takes a closer look at Destin, where condos and houses are telling two very different stories:
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Final Thoughts
Whether you’re buying, selling, or holding, our job is to help you see your real position clearly — not guess at it.
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Committed to your success,
John Moran – CEO The Smart Beach Investor | Keller Williams Realty At The Beach Team
