Tuesday, July 22, 2008

Flush Americans bought condos to 'flip,' now they and developers are hurting

By MARLA DICKERSON
LOS ANGELES TIMES

last updated: December 14, 2007 09:12:10 AM

PLAYAS DE ROSARITO, Mexico -- The ripples of the U.S. real estate boom began washing up on the shores of this beach town a few years ago. Californians, feeling flush from the steep run-up in housing values stateside, pulled equity from their primary homes and snapped up vacation properties in northern Baja California as if they were buying $10 lobster dinners.

Ground zero was this midsized community about 20 miles south of Tijuana, where developers sold hundreds of condominiums on spec. Most jacked up their prices as their projects filled, fueling a sense of urgency among U.S. buyers to get in while the getting was good.

"We nearly had ... fistfights" over choice units, said Michael Coskey, sales director of the Residences at Playa Blanca, a 274-unit development under construction north of Rosarito whose average condo is priced at $500,000. "We were all appealing to people's greed."

Greed has turned to regret for some investors who now can't sell their Mexican properties.

Upward of 40 percent of the condos in some northern Baja projects were purchased by flippers who intended to resell them before construction was completed. Their aim was to pocket a fast profit in an area where prices had been appreciating 20 percent to 30 percent annually in recent years.

But with contagion from the U.S. subprime mortgage debacle spooking many would-be purchasers and credit drying up, the Baja real estate market is flagging. Speculators are starting to sweat.

Californian Chris Romero's biggest worry two years ago was missing out on the action. He had his eye on a $200,000, two-bedroom condo in a project called La Jolla Real in Rosarito.

But by the time the then- Diamond Bar resident was ready to commit, the developer had raised the preconstruction price to $250,000.

Instead of folding, Romero doubled down, handing over a $120,000 down payment to lock up two units -- one for $238,000, the other for $270,000 -- before prices increased again. The retiree and his wife reckoned they would sell the less expensive one just before closing and use those profits to help finance the other.

"The market was booming," said Romero, 60.

No more. With the development nearing completion, he's finding buyers scarce and competition fierce. Rosarito is littered with so-called "resale" units whose owners are looking to unload them.

Romero is offering a $5,000 bonus to anyone who can bring him a buyer.

His $290,000 asking price is "negotiable." And he's willing to provide financing.

It's going to get worse

More inventory is on the way. About 7,000 condominiums are in the pipeline from Tijuana to Ensenada, with an additional 5,600 in the planning stages, according to the Association of Resort Developers of Baja California. The average price is about $300,000, but some luxury units run into the millions.

Developers say that's still a bargain compared with oceanfront property in the United States. Still, some people say prices here soared more quickly than was rational in an area known for budget motels and cut-rate seafood.

"Everybody was going for the $500,000 condo, the Bellagio," developer Ramon Toledo Arnaiz said . "The fuel was from speculators."

Flippers who can't find buyers will have to come up with the cash to honor their contracts or secure Mexican mortgage financing at rates as high as 12 percent.

Those who can't close the deals risk forfeiting their down payment , often 30 percent of the purchase price.

"The ones who bought multiple units are going to be in real deep doo-doo," said real estate agent Roberta Giesea, owner of Baja4U Properties. "The market has slowed way down."

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