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Sign of the times: Property owners at high-end, high-amenity communities like The Cliffs could wind up owning equestrian centers and other facilities in the event of developer defaults.
In the early years of the housing crisis, homes at the low end of the market got most of the ink as the media tried to rationalize its ignorance of sub-prime mortgage lending and the irrational exuberance it had fed. But now we can expect more and more reports about troubles at the high end, especially in the wake of The Cliffs Communities request to property owners for $60 million in financing, a story we broke here at Golf Community Reviews.
Many of the properties at The Cliffs, as well as at the ill-fated Ginn Resorts and other upscale
Owners of expensive vacation homes may lie awake at night wondering what to do with their under-water properties.
developments, were designed as trophy homes for wealthy families whose incomes and stock portfolios could justify and sustain multi-million properties. During one of my visits to the Cliffs, for example, a sales agent pointed at one 6,000 square foot behemoth and said it was the owners’ third home, and that they planned to use it for family gatherings about four weeks a year. They paid more than $3 million to build it.
Okay, they had it, they flaunted it. Low interest rates made it easier to finance these vacation spots, either through straight-up mortgages or by dipping into the equity in primary homes to make down payments on the vacation homes. But these formerly wealthy owners are in a tight spot now, as the thought of paying for a lightly used, financially under-water property keeps them up at night. This is why the inventory of high-priced homes in the leisure residential market is growing fast, and prices are dropping.
The law of supply and demand, of course, rules the real estate market, and it is hard to see the top end of the market rebounding anytime
Inventories will remain high at the high end as owners of some expensive vacation homes refuse to settle for true market value offers.
soon, what with a growing inventory of McMansions and the loss of appetite for debt and risk in an uncertain climate. Supply at the high end will remain high for at least the next couple of years as publicity about financial issues, such as at The Cliffs, breeds anxiety, and many owners of homes they bought for $2 million are reluctant to price them at true market value which, in some cases, is 50% of what they paid originally.
That reluctance notwithstanding, extreme bargains are starting to emerge in places like The Cliffs and other high-end communities, with a few foreclosures and short sales sprinkled in to put additional pressure on selling prices (a short sale is one in which the owner arranges with his mortgagee to sell for less than the house is worth). Those who have navigated through the down economy in good shape and have an appetite for a big vacation or retirement home could be looking at homes that cost $300 a square foot to build now available at a price somewhere in the $200 range, or even less.
Tempting though that may be, a bargain price of $1.2 million for a property that originally cost, say,
The safest purchases are likely to be in those high-end communities where amenities were turned over to owners some years ago.
$2 million is no bargain if the developer defaults before all the promised amenities are built. That is why those looking to take advantage of bargains at the high end need to proceed carefully and focus primarily only on communities in which all amenities are in and, ideally, where the owners are in charge of the amenities and maintenance costs are easy to understand and stable.
At The Cliffs, developer Jim Anthony has pledged the golf courses, clubhouses and the community’s other upscale amenities as collateral. Anyone who has visited The Cliffs or lives there knows just how tasteful, sophisticated and richly appointed the equestrian centers, clubhouses, wellness centers and other facilities are. But current and future owners at The Cliffs need to consider that the developer has subsidized those amenities for nearly 15 years. One of The Cliffs’ property owners told me that Anthony has opened his books for a full accounting. As they scrub those books, the owners’ representatives should pay careful attention to just how much it will take, in the event of default, to pay for the lush amenities. In that way, they can assure their fellow residents (future Cliffs bondholders) that the “inheritance” taxes will not put them in an even more precarious position. Future owners who don’t ride horses or work out on expensive fitness equipment should consider seriously how much they want to subsidize such amenities. Those amenities and their host communities aren’t worth what they once were.
If you want more information about The Cliffs or any other communities in the southern U.S., please contact me.
I suppose we should all be used to sloppy reporting about the housing industry and its trends, but reports like one on National Public Radio this morning are stark reminders that the mass media can be counted on to make a bad situation more confusing.
In a fevered effort to create some sweeping generalization about human behavior in the face of personal financial catastrophe, NPR reporter Alex Blumberg made it seem oh-so-simple for distressed homeowners to turn their under-water homes over to a bank and then go out and buy another house.
“So,” Blumberg says, “imagine, you buy your house for 400 grand; now, it's worth 200. You might decide to stop paying your mortgage and simply buy another house, similar to the one you already own but for half the price. The old house: the bank can have it.” He adds, too casually for my taste: “You suffer a blow to your credit score on the one hand, but you get a far cheaper house on the other.”
In Blumberg’s example, that owner had better have $200,000 in cash to pay for the next home, says a mortgage specialist at the Connecticut Credit Bureau. “Your credit rating takes an especially big hit when you default on a mortgage,” she told me. “It is unusual for people who default on their mortgage to go out and buy another with credit.”
Any time I have heard this story about folks walking away from their homes and mortgages, the add-on is that they rent their next place. And even renting may be difficult if a landlord checks credit ratings. For NPR to imply that people are walking away from mortgages because they can with impunity is to do yet another disservice to the public, and to the rule of logic.
The fallout from a bad economy that is wreaking havoc on the high end of the leisure residential market, as well as an unfortunate bet on Tiger Woods, may have caught up with upscale Cliffs Communities in North and South Carolina. According to a Cliffs property owner, developer Jim Anthony is testing residents' and club members’ appetite to commit $60 million in debt financing, or about 40% of what The Cliffs has reportedly invested in its High Carolina community, including land and Woods’ alleged $20 million design fee.
The $60 million would be raised in the form of bond notes that will pay a minimum of 12% interest
The Cliffs is putting up its legendary amenities, including golf courses, wellness centers and restaurants, as collateral.
over seven years, according to the Cliffs homeowner. Minimum participation is $100,000 per owner, and The Cliffs is putting up its impressive roster of amenities, including golf courses, wellness centers and restaurants, as collateral. Non-owners will not be eligible to participate.
The Cliffs investigated outside debt financing but their payments would have exceeded 12%, according to the owner. Such interest rates imply great risk and, if anything, compromise The Cliffs' well worked public image of sophistication. That image, however, has taken a beating courtesy of the Woods scandal and the ill-timed placement of embarrassing billboards around Asheville.
By offering ownership of the debt to residents, The Cliffs avoids the potentially unpleasant publicity of a “junk” rating. It also avoids the potential that, in the case of a default on the loan, outside investors would likely rush to liquidate their investment, an especially unpleasant scenario for owners of Cliffs properties who could see their property values plummet along with the value of their club memberships (for which they paid as much as $150,000).
According to our owner contact, who says he is inclined at this point to buy into the bond note, The Cliffs has opened its books to residents, and Jim Anthony has put up his personal assets, along with The Cliffs amenities. Cliffs owners and club members, some of them lawyers and financial experts, are proceeding with due diligence, but no matter what they decide, they appear to be between a rock and a hard place. They can either support The Cliffs with the requested $60 million or risk outside investors carving up their communities in the event of default.
Give Jim Anthony and The Cliffs organization props for coming up with an offer owners can hardly refuse.
It has been a cold and long winter without golf, and I was looking forward to a March trip to South Carolina. But my wife, bless her heart, has convinced me to head south next week to attend the annual meetings of the property owner association and golf club at Pawleys Plantation, where we own a vacation condo. Along the way, I intend to visit and review a golf community each day and, if weather permits, play golf for the first time in three months. And I will still get to play golf in the Myrtle Beach area in March.
Here is the tentative list of golf communities I will review on my drive south:
Bayside Plantation, Shelbyville, DE
This will be my first visit to a Delaware golf community, and even though many people will not consider a community so far north as a place for retirement or a vacation home, the Jack Nicklaus Signature Course has received positive reviews and the community's proximity to the ocean makes it a solid summer vacation venue. Although New Jersey is an entire wide bay away, the ferry from Cape May, NJ, to the charming town of Lewes, DE, provides excellent and frequent service and cuts out more than hour of time and the many headaches of traveling the awful New Jersey Turnpike.
Kilmarlic Golf Club, Powell's Point, NC
In my 20s, I played Outer Banks golf for the first time, in Kill Devil Hills, site of the Wright Brothers first flight. It whet an appetite for coastal golf that is now four decades old. I don't know much about Tom Steele, Kilmarlic's architect, but I do know the course was good enough to host the North Carolina Open championship twice in the last five years. Being chosen for that honor in a state that boasts the Pinehurst courses and so many other great ones says something about Kilmarlic.
To be determined (Raleigh area)
I have asked a local real estate agent who specializes in golf real estate to suggest a location for me to visit on the east or south side of this growing metro area. There are many to choose among.
River Landing, Wallace, NC
This will be a return visit to the community, which was built and continues to be owned and developed by a local family. Against the tide, they have continued to add amenities including 18 more holes of golf in the last couple of years. Some of the 36 holes by respected architect Clyde Johnston roll along the Cape Fear River. River Landing's proximity (about an hour) to both Raleigh and Wilmington, two interesting but very different cities, is another plus.
I will be in the Myrtle Beach area next weekend. If anyone has a particular course or golf community they would like me to check out, send me a note.
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