Warehouse Condos: When Can A Good, Honest Businessman Walk Away?

Written by smacke01 on February 1st, 2010

Picture This:

Its mid 2005 and your [anything related to residential construction] Business is booming like you’ve never experienced in 20 years of running your company.  You have a sales pipeline clogged with over a $1 million dollars of work filling your schedule well into the end of next year.  You just hired on a 3rd crew and bought them all new trucks, tools and equipment.  Why shouldn’t you right? You are making more money than you ever have, your business is growing and expanding and things couldn’t be better.

Since you are in South Florida in 2005, it’s real estate all the time.  You are watching people sleep on the sidewalks for the opportunity to buy $500k condos before they break ground.  Owning real estate is the only way to go.  You get soo rich.  Renting is for suckers with no money.  You are tired of writing that monthly rent check for your office warehouse unit.  Since paying rent is just throwing money away its time to buy your thriving business a home.

You look around for a few days and find the perfect warehouse condo project that your business MUST have in order to not throw your money renting.  The developer gives you a good deal on one unit, but a better deal for two.  You don’t need both units right away, but your business is growing and you will eventually need it.  In the meantime you can rent it out and become a landlord yourself.  Let somebody else waste the money paying rent.

Everybody is happy, making tons of money.  You have two beautiful, spanking new warehouse units for your business, the real estate and mortgage brokers bought themselves new cars with the commissions they earned, the developer bought a new boat, the banker that made the construction loan earned his bonus and bought a mansion, and the Wall Street guy that packaged and sold the mortgage pool with your loan in it, bought himself a $60m Gulfstream Jet.  Everybody is Happy…..

Fast Forward to Today:

Don’t worry I’m not going to talk about what happened, how it happened, and who’s to blame. (We all are).  All that is behind us.  The question is, How do I reduce overhead and by overhead, I mean the huge monthly payment on these overpriced warehouse condo units I bought?

Since your business evaporated you have layed off 90% of your guys and sold all but one of your new trucks.  You are back in the office answering phones and doing estimates yourself, not to mention chasing bankrupt developers for money they owe you.  Fishing in the middle of the week is done and maybe for a while if you had to sell your boat.  Things aren’t good and you have a HUGE nut to pay each month on your warehouse units that are just sitting there.

You are an honest, hard working, businessman.  You have always paid your bills on time.  You always make payroll and never miss a mortgage payment.  You have an 800 credit score for gosh sakes.  The problem is that your warehouses are worth 40%-50% less now and your business has shrunken 70%.

You are dipping into your personal savings and retirement money to make your warehouse payments because you can’t sell them for the mortgage amount and you can’t rent them and cover the nut.

You have a serious dilemma and the million dollar question is:  When is it okay for an honest businessman stop paying his condo warehouse mortgage and start thinking about capital preservation and personal survival?

I say the time is now.

It’s time to think about your life beyond next month’s mortgage payment.  How are you going to live the Golden Years you imagined if you are still hanging onto the concept of never missing a mortgage payment on a warehouse you don’t need anymore?  I promise you, the value of your warehouse unit is not going up in the next 5 years and based on the total failure of the Home Affordability and Stabilization Act, (the plan to modify loans) the banks are not modifying your loan anytime soon.

Its time to stop procrastinating and thinking that some idiot from out of state is going to buy your unit and make you whole, or even buy your unit for the mortgage amount.  Market rents have dropped so far that investors won’t touch any of these properties because they can’t rent them and make money.  The small businesses that usually buy them have been crushed and most are trying to unload their own condo units as well.

As an investor here is what you are thinking about: The going rent for a 2,000sf warehouse condo in Palm Beach County is somewhere around $12/sf (gross amount).  Subtract out your $4/sf of expenses and you are left with $8/sf NNN.  That 2,000sf unit will generate $16,000 in net income for you annually and if you are looking for a standard 8%-10% return on your money, you will pay $160,000 – $200,000 for that warehouse unit.  As you can see, an investor would be a buyer anywhere from $80-$100/SF.

A single user can afford to pay a little more because they aren’t looking at the unit as a cash flowing investment.  However, these users are not going to take on a mortgage payment that is much more than a rent check would be.  I can guarantee you that.  So even a user is only going to buy in that range as well.

Since the market collapse all the rental rents have readjusted down causing the values to drop as well.  The new market is anywhere between $80-$100/sf for a fully functional, well-located, fairly new warehouse building.

If you are way underwater based on these market numbers and you need to sell because the payments are killing you, strap on your helmet and battle gear because its time to get in the ring with that once friendly banker.

You can’t keep throwing your retirement money into this warehouse that’s lost so much value.  You need to think about your life and business beyond this little hiccup in your otherwise successful and honest professional career.  Once you have mentally accepted the idea that the problem is not going away, its time to figure out your options.  You might want to seek some professional or legal advice to help you.  If there’s one thing I’ve learned in this Meltdown, it’s that bankers are definitely not your friends.

Whether you negotiate a short sale, loan modification, or just stop paying and let the bank foreclose on you, don’t go down without fighting.  By this I mean protect as many assets from the bank as you can and make sure that if you agree to a friendly foreclosure or short sale the bank releases you from any deficiency amount on the mortgage that they can come after later.

I don’t want to get into the details of exit strategies now because that’s not the main point of this post.  The main point of this post is to alert all those underwater warehouse condo owners out there that the time has arrived to stop throwing good money after bad.  Its time to address the problem, assess what the damage will be, try your hardest with professional help to minimize the damage, and then get rid of that dead weight warehouse unit that is keeping you from moving forward in your life.  Its time to start building again and if it has to be from the ground floor, so be it.  That’s where you started years ago and you can do it again.  Buen Suerte!

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This entry was posted on Monday, February 1st, 2010 at 12:36 am and is filed under Warehouse Condo Units. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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