Coronavirus Impact on South Florida in Q2
We are now seeing the beginning of the housing market impact the Coronavirus pandemic is causing. The current pandemic is causing unprecedented fear in the marketplace. The fear is manifesting partially as logistical issues and partially as pricing pressure. Florida real estate attorneys are already reporting a huge uptick in business due to these issues. Buyers are wanting out of contracts, Sellers are wanting to enforce the contracts, and HOA & Condo Associations won’t play ball.
When the Coronavirus pandemic quarantine first set in earnest mid-March, multiple investors reported that properties that were under contract had buyers trying to back out. One of our investors Frank Garlington, reported out of five contracts that were pending sale, three buyers asked to cancel without losing the deposit and a fourth wanted a reduction in the sale price due to the pandemic. With the help of Garlington’s attorney, he was able to enforce the closing on two of the properties, he kept the deposit on the third and the fourth one is still being negotiated to a later closing date.
The Covid-19 Pandemic has caused a flurry of legal and logistical issues that recent history has no real precedent for. Many Buyer Attorneys are arguing the Coronavirus has created a “force majeure”, a Latin Term meaning an unforeseeable action that prevents a person from fulfilling a contract. The FAR BAR contract (Florida Association of Realtors and the Florida Bar) that is used in most Florida closings has a provision called “force majeure” and this is the legal loophole nervous buyers are trying to jump through to get out of their contract and keep their deposits.
Negative Coronavirus Issues Hampering current Real Estate Sales:
- Inspection Issues: Many buyers that were under contract before the quarantine in South Florida are purchasing second properties from up North and out of town. The buyers are pointing out that they cannot travel to do final walkthroughs of properties due to the lockdown. Buyers are also finding that many HOA and condo associations where their properties are located are not allowing Real Estate Agents, inspectors and other professionals into the community to do inspections, showings and other things needed to sell a property.
- Fear of Property Value Loss: Many buyers are fearful that the market is now in decline and the value of the houses they are buying have already decreased since they went into contract. They are hearing non-stop bad economic news, and it doesn’t take an degree in economics to figure out that the housing prices are going to take a hit even if it’s only in the short term.
- Personal Economic Changes: Many buyers are experiencing economic shifts either at their jobs, or at the businesses they own. What happened to the airline worker in contract for a new home who just got laid off. Business owners, such as owners of restaurants and other non-essential places have been closed during this emergency. These people might not have enough to pay their bills over the next 90 days, let alone close on a vacation property in a place they cannot access. They would rather have their deposit back then have to pay a second mortgage, insurance, taxes, and other monthly fees.
- Banks are trying to back out loans: Currently, we are hearing reports ranging from lenders raising locked-in interest rates, to completely withdrawing from the deal altogether. As the ecosystem for loans has had a titanic overnight shift, banks are quickly finding that the market for them to sell their loans to bigger banks has come to a halt in many cases. Banks are trying to get out of their obligations to close on some of these deals. Jose Garciapa an investor out of Miami told us his lender tried to delay funds for his closing and they only funded after his attorney stepped in with a threatening letter insisting on the funds they were contractually obligated to provide. JP Morgan Chase has just announced a minimum credit score of 700 or better with a minimum of 20% down. This is a huge shift from their other programs of 600 score and 3% down.
- Buyers are getting stuck with two payments: We have heard reports of Buyers that are stuck making payments on two properties. People arranged move in dates for short and long-term rentals in anticipation of a closing date made before quarantine started. Now that quarantine is here, many cannot travel to the rental they reserved as they were moving out of state and interstate travel is not possible. Others have had their move dates pushed back due to their buyers being unable to inspect or other quarantine related legal problems. Now these “Inbetweeners” are stuck paying a mortgage on the property they are selling, and a second payment to a rental they were supposed to be moving into. An even worse case scenario still is some of these “inbetweeners” were selling the house they were living in, and they cannot travel to move into their newly rented property, but their buyers are pushing them to close anyways under threat of legal action. So now they have put down deposits on a local rental, keep paying on the out of town rental they secured months ago in order to not lose it, and hope their current property closes so they don’t have to also make a third monthly payment, a mortgage payment!
- Cities are not doing their code enforcement and permit inspections: Fix & Flip Investors have reported that completed projects are delayed waiting for inspections that don’t seem to be coming soon. Most municipalities have shut down their offices and scheduling an inspection is simply not possible. Without city inspections code violations cannot be removed, permits cannot be issued, job sites will just have to wait until this is over. This is a major issue that won’t go away during this emergency.
Coronavirus Legal Issues Need to be Solved
Can buyers and banks use the current emergency to back out of contracts legally?
This is the question that is currently being pontificated on across the country and globe. There is no real precedent to examine in modern law. Although there are provisions in most real estate contracts for “acts of god” like storms, earthquakes, flood and other acts of nature, there’s nothing in contracts about pandemics. Lawyers are arguing that the current pandemic is an act of god and this issue will be the subject of many lawsuits over the next year. Standard contracts will most likely include specific wording for pandemics and other medical emergencies going forward.
Without answering this legal question the market will be in turmoil and confusion. Once this legal issue is dealt with there will be a confidence restored to the market place and fear of these legal issue will melt away. Confidence is the key to a healthy real estate market.
Property Values Begin to Decline Due to Coronavirus
As we enter into unknown territory, we can already begin to see listings close at below asking price. Clearly, some sellers are happy to give a quick 3% shave off the listing price to just close the property during this emergency and avoid a legal battle. The emergency quarantine will inevitably lead to DOM (days on the market) stats growing longer, and
prices trending lower for new listings as sellers become more motivated. The only real question for most real estate experts is this: Is the market in a real down cycle or is it a small bump in the road?
South Florida’s housing market like Palm Beach, Broward, and Miami-Dade Counties are unique in that they have large swaths of vacation condo and single family homes. Florida has the nation’s largest second home market that stands at about 15 per cent of the total non-homestead properties. Typically, secondary home markets and vacation properties are the first markets to crumble under economic pressure.
Could there be Motivated Coronavirus Buyers?
There is however one ray of hope, a trend some realtors have been noticing: Motivated Coronavirus Buyers. Northerners in areas heavily hit by the Coronavirus like New York jumping ship and moving down to South Florida to escape the pandemic. Many Northern retirees that were planning on moving to Florida to be with family are accelerating those plans. As grim as it sounds, waiting until next season to move near family might be “too late” with the virus spreading.
“I just had somebody who walked into the office in a panic. He wanted to buy a place here,” said Jeff Lichtenstein of Echo Fine Properties in Palm Beach Gardens. “He wants to be out of New York City.”
John Dimitri, a real estate agent with Dalton Wade Real Estate Group, recently listed a home in Palm Beach Gardens on a Saturday morning.
By the evening, the house was under contract to a woman from Connecticut for $100,000 more than the $399,000 asking price. Dimitri said the buyer never saw the house in person, but she saw photographs, and her agent gave her a virtual tour via the video app, FaceTime.
Dimitri said the woman had been considering moving to Florida to be near her grandchildren, but she couldn’t quite make the decision until now, Dimitri said. With the coronavirus pandemic, “she finally decided she was ready to go,” he said.
Will “Motivated” Florida Buyers Outweigh motivated South Florida Sellers?
Currently, Palm Beach, Broward, and Miami-Dade Counties counties are leading Florida as the highest confirmed cases & deaths. The idea that South Florida is a safe-haven is not really holding ground any longer. It’s hard to be 100% sure, but the job losses and economic impact mostly on the tourism industry will hit Tourism dependent South Florida market hard. How hard will the housing market be hit is the only question now.