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How to get rich in Florida real estate (hint: it involves time travel)


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September 28, 2006

How to get rich in Florida real estate (hint: it involves time travel)

Peter Coy

In his stage act, Steve Martin used to promise people a foolproof plan for how to become a millionaire. "First," he would say, "get a million dollars ...." In that spirit, I would like to offer my own foolproof plan for how to get rich in Florida real estate. "First, acquire a time machine, take it back to 1980, and buy land. If for some reason you can't acquire a time machine, then be Aubrey J. Ferrao. If for some reason you can't be Aubrey J. Ferrao ... sorry, go home to Dubuque."

Aubrey J. Ferrao (pictured) is the fantastically successful president of Gulf Bay Group of Cos., a company he owns that develops housing in and around Naples, Fla., across the peninsula from Miami. Because he owns the company outright he doesn't have a stock price to thump the drums for. He visited BusinessWeek this week largely to defend Naples against a recent economic analysis that said it was the most overpriced community in the United States. I will get to that dispute in a moment. But first I want to pass along Ferrao's story of how he got rich in Florida real estate.

Ferrao bought land in Naples before it was expensive, in the mid-1980s. "I'm very lucky," he says. "Twenty years ago people thought I was crazy. When I bought beachfront property just outside Naples, people said, 'Why would people want to live that far north?'" That became Pelican Bay, on which the company has built 16 major condominium complexes with a build-out value of more than $2 billion. He scored big again by acquiring a 3,700-acre parcel southwest of Naples from Deltona Corp., whose plans for building there were hamstrung by environmental objections. That is now Fiddler's Creek, where Gulf Bay plans to build 6,000 housing units by 2020.

The secret to success in real estate development, says Ferrao, is smart land acquisition, not construction profits. "I wouldn't get out of bed for builder's profit," which he estimates at 8% to 12%. He buys land in big chunks, wholesale.

Having watched overleveraged developers blow up, Ferrao played it safe from the start. He never got deep in debt and he never built on spec. He says Gulf Bay's loan-to-value ratio is around 20%, all construction debt. And he says that he demands non-refundable deposits from homebuyers of 30% to 35%. That pretty much guarantees the people won't walk away from the closing.

All this means that Ferrao is weathering the slump in Naples just fine. Sales at Fiddler's Creek are off about 30% from a year ago, but he's still getting steady cash from houses that went under contract a few years ago and are being delivered and paid for now.

Don't think you can duplicate what Ferrao did now. He says there are no big parcels of land left in Naples, and the small ones are overpriced. His last big land buy was about a decade ago. (Steer your time machine back to 1991 and you'll find some good bargains.)

I don't know exactly how successful Gulf Bay is, since it doesn't disclose its financials, but the company bills itself as one of the biggest private developers in Florida. Ferrao lives in a house where the homeowner's insurance payments alone come to, he says, "a couple hundred thousand dollars a year."

Now a few words about the dispute over whether Naples is overvalued. On Sept. 20, Naples was declared "the most overvalued market in the country" by National City Corp., a Cleveland-based financial holding company, and Global Insight Inc., a Waltham (Mass.)-based economic data company. They said it was overvalued 101.5%, which means prices would have to drop by half to be fairly valued.

Ferrao says National City and Global Insight got it wrong because their formula compares house prices with local incomes, which is inappropriate because the people who buy in Naples aren't locals. They are rich out-of-towners from places like Chicago and New York, whose incomes, he says, aren't always counted in the Naples data. And even if their incomes are counted, says Ferrao, they underestimate the buyers' wealth (many are retired so they have investment income but no salaries).

I asked Richard J. DeKaser, National City's chief economist, for his response. He said his formula already addresses for the issue Ferrao raised by taking into account that price-to-income ratios tend to be higher in some cities than in others. As a resort community with lots of second homes, Naples has always had a high price-to-income ratio. DeKaser says the formula compares Naples today to its own historical price-to-income ratio. The problem, he says, is that the ratio has risen a lot recently from its 20-year average.

My take: DeKaser is probably right that Naples is overvalued. Ferrao is probably right that it's not overvalued by 101.5%.

10:31 AM

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I agree with Mr.Ferrao.

A couple months ago Forbes.com voted Tucson, AZ as one of the ten most overpriced cities in the nation. Tucson was lumped together with NY, SF,LA and others of that ilk. Come on, Tucson.

Anyway I did a post on my blog responding to that in much the same way as Mr.Ferrao has.

>http://thetucsonfoothills.typepad.com/thetucsonfoothills/2006/07/tucson_in_top_1.html<

At the time I said, '...like it or not, a lot of the value in Tucson home prices is driven by demand for second homes and retirement homes. These people come here because they want to, because Tucson is beautiful, has a great climate and an easy lifestyle. And none of it has to do with jobs & salaries

Posted by: John Schneider at September 29, 2006 06:27 PM

Naples has seen quite a bit of appreciation in the past decade, but the real question is how much of this was speculation? Naples has some of the most beautiful luxury homes and if the owners are financially well off then no worries. Most are second homes and the owners are can wait it out without concern for price fluctautions (if any) in the near future.

Posted by: Henry at September 30, 2006 04:59 PM

Florida Real Estate is the Diamond in the US field that remains undervalued. Mr Ferrao's has insite in what Florida has to offer when others looked else where.

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This is a man who did not speculate, instead he worked hard at showing Real Estate investors why Florida is the True Sunshine state.

Robert Muchel

Posted by: Robert Muchel at October 12, 2006 04:19 PM

Robert,

How can you say Florida real estate is under valued????? What rock have you been hiding under? Do you live in Florida? Do you see the mess that has been created by rhetoric such as yours??? Yes, Mr. Ferrao's bought at a time when land in Florida was undervalued! Did you read his last land purchase was TEN years ago???? He is smart, he knows that Florida real estate is over valued!!!! Of course, we don't know the true financials of his company as they haven't been disclosed. Who knows, he could end up being like every other greedy developer in Florida. Hey Robert, hope you sell your investment properties, or you start selling some homes or your mortgage business starts doing better as you are an investor, realtor or mortgage broker to be making such idiotic comments in this market! The party is over! Now the wonderful state of Florida can get back to the business of being the sunshine state. Of course it will take quite some time with taxes, insurance.......

Posted by: Lizziebeth at October 16, 2006 09:26 AM

To Lizziebeth:

Your post is quite informative, yes I do Live in The Palm Beach's and spent a great deal of time Traveling. You really need to read more and get involved in developing your community.

Florida has been rated in the top 5 most know states in the US by Foreigner's.

Overvalued land? Take a look at NY, NJ, Conn., and Mass. and what a single family home is selling for there.

The party is over? Owning property is not a party its an investment, and there are cycles in property values and investments.The population growth is declining in the aforementioned states and is increasing in Florida.

Economist's have stated florida will be one of the first markets to rebound...so living under a rock is what you are doing...

Posted by: Robert Muchel at October 19, 2006 06:28 AM

Hey Robert,

thanks for the advice. I am very involved in my community, church and children's schools, probably more so than most. I do lots of reading on my community as well.

"Owning property is not a party it's an investment" Oh my gosh! You poor,poor man! You did fall for the get rich quick in Florida real estate! That's okay, I got a little burned in the dot com when I bought Cisco at the height of that "investment" frenzy(cycle). I sold most of the stock for the tax write off. It still hasn't come back to what I paid. Let's see the last investment hysteria was the dot.com mania and subsequent bust. Yes, it's a cycle! Let's see, it's been five years since that down turn and Cisco hasn't come back yet. So yes, you're right there are cycles. You prove my point. It will be years before the housing cycle(bust) makes it's way up. Housing is a bit different. Hairdressers, bartenders...every Tom, Dick and Harry, Europeans.....didn't invest hundreds of thousands of dollars(that's not even theirs to begin with) in dot.com stocks.

This is bigger than, and deeper than the dot.com bust! Oh, by the way, when I said the party is over, I meant that the hey day of making a quick buck by doing absolutely nothing except sign a few papers is over. At the time there was a greater fool waiting in line to buy the property for much more. Unfortunately, there are no more greater fools! Thus, party over!

Real Estate is an investment. Since when? For developers and builders, yes. But I don't know anyone in my parents generation, grandparents generation....that bought properties to flip for a profit! Yes, they paid their mortgages and at the end they owned their house. Yes, it usually went up in value but not double digits annually! Some had vacation homes, but those were for enjoyment, not investment! We've even had busts before. Look at Texas, how long it took them to recover! Residential real estate has had one purpose and that's to provide homes for families! If one wants to be a landlord and have the mortgages of rental properties paid by renters to have at the end of many years, that's a different story! Flipping property for a profit, as was done all over Florida, is just a recipe for disaster! Now we have thousands of empty homes that many fools bought to sell at a huge profit for sale! They aren't selling because a. there aren't anymore greater fools standing in line to buy it off of them and b. the builders are offering more for the same or less money! GREAT INVESTMENT!

AHHH, the europeans! Yes, we have been inundated by the europeans, especially UK! There was an article in the Sarasota Herald recently(yes I do read up on my community)that one real estate firm(owned by europeans) are marketing more over there. Funny thing is, they've already been marketed! Those that bought their investment properties in 2000-2002 had great investments. You could get a decent home in a resort community for $200k with a pool. They rent it out for over a thousand dollars a week to other europeans who come over vacation and then decide to buy their own investment property. But there's that little thing called supply and demand! Damn thing! Prices go up on new construction(demand), too many investors with their rental properties competing for the vacation rentals(too much supply)....If you don't believe me, check out vacation rentals.com. Since I am involved in the community, I have met many of these folks from the UK. I've heard from those that bought early as well as recent investors. Yes, at one time Florida was a good investment for europeans, americans and everyone who bought when there wasn't a ton of supply and costs were reasonable!

Real estate in New Jersey, New York, Conn.... are also experiencing a decline in prices. Their prices are high because people want to live close to work. Work in Florida is either investments, tourism, or construction! Palm Beach is wonderful, but if you live in Florida, you don't need to be within an easy commute of Miami or Palm Beach.... You can live farther out, even though they aren't making any more land, there's still plenty to go around. Last time I was up in New York, there wasn't any land!

Okay, I haven't been under a rock, but boy you sure have! "The population is declining in the aforementioned states and is increasing in Florida"! Buddy, what real estate seminars are you attending! Keep drinking the Kool Aid! I read, read and read! Check out the one way rentals of Uhaul. It's typically double to leave Florida than to move to Florida. Again, supply and demand! More people leaving Florida(thus higher costs) than moving to Florida(thus lower costs)! There was an article recently that real estate in Charlotte, NC has seen it's first decline in three years because people from Florida, New Jersey, and New York can't sell their homes to move there. So, you may be right that people aren't moving to those states anymore. There is spillover from the bubble of Florida and the northeast to the "aforementioned states".

Let me say that I hope to help the "developing of my community" by preventing any further speculation! I hope we can get back to the business of being the sunshine state and not a commodity that a bunch of outsiders invest in! There is one lot that some guy from California bought for $300k with out even seeing it. He is trying to sell it for a million dollars. It's been on the market for over a year. It's that absurdity I hope to see end!

For your sake and others that are highly invested in Florida real estate, I'm truly sorry! However, the rhetoric has to stop! If the fed had just let the dot.com bust play out with out feeding another bubble, we wouldn't be here. Many made a pretty penny in the process. Many more are getting burned!

Posted by: Lizziebeth at October 19, 2006 05:27 PM

Robert,

I noticed on another post that you are indeed a realtor. What a surprise. You may want to look into another profession. Oh, but there does seem to be the demand for realtors to manage rental properties. Good Luck!

Posted by: Lizziebeth at October 20, 2006 02:44 PM

do people run from you when you walk in the room lizzie ,

I can see you investing in cisco when its on top and losing (not losing its a tax right off??)but to compare realestate to stocks whats the word im looking for..............

Posted by: Lee at October 27, 2006 04:29 PM

Lee,

What is the word you are looking for?????

Posted by: lizziebeth at October 27, 2006 06:33 PM

Lizzie makes me dizzy. A sentence without an exclamation point is fine, Lizzie. They lose their value when overused, just like adjectives and emotions.

Posted by: ann at October 28, 2006 05:09 PM

Yeah but she has some sense to know the difference between "investing" and investing and learned from her mistakes in the past. More than I could say for many out there ;)

Posted by: Matt at December 2, 2006 06:15 PM

Lizzie,

You're use of the U-Haul rental statistic misses a very big point. I believe that the vast majority of new Floridians are coming from South America, Latin America, and the Carribean. U-Haul has yet to invent a floating trailer.

While I agree with you that the residential real estate market is probably in trouble in Florida I think that even you should acknowledge the very real possibility that it might not be that bad. The population trends are an important consideration, especially since builders have already dramatically cut production of new housing. In 18-24 months certain areas could once again experience a housing shortage.

Posted by: Josh at December 4, 2006 03:42 PM

This ideally should be a platform of shared ideas and information. Not one caustic menopausal repressed school marm writing down our throats how moronic we are for investing our lives and resourses into this beautiful State. Ohio beckons Lizziebeth, please heed her call!

Posted by: pamela at December 4, 2006 04:43 PM

Ann,

I just noticed your comment!!!!!! I'm so sorry!!!!!!!!!! I just like to make a point!!!!! Hope your not too dizzy!!!!!! Seems like all the exclamation points were necessary!!! Market is tanking!!!!!! many are screwed!!!!! Know of at least one suicide as a result!!!!! Just waiting for someone to go postal out there!!!!!!!!

Posted by: Lizziebeth at December 4, 2006 06:37 PM

Lizziebeth, FYI I am not a realtor. I come from a family in medicine. I went into Nursing and worked with mentally challenged children and adults. I now am a homemaker and community volunteer. Also, a Florida Native. Investing in land and homes here afforded me this luxury before the boom and after.

Posted by: Pamela at December 5, 2006 08:48 AM

Pamela,

Hope you sold all your real estate investments. Obviously you have a vested interest in keeping the bubble going. I know many folks like you that found real estate investing to be a way to get ahead. I also know many more who have been screwed. For your sake, I hope you socked it away. Investing in our beautiful state doesn't mean buying property to flip to someone else for profit. Why not help with beach clean ups, Rotary Club, adopt a highway.... You invested for your profit only, not this beautiful state. Good Luck!

Posted by: Pamela at December 6, 2006 03:56 PM

Pamela,

I did not invest in this State for profit only. This is absurd. Becoming a Nurse was not for my profit only. Volunteering in schools was not for profit. Working and volunteering with mentally challenged children and adults was not profit motivated. Adopt a highway?? Beach cleanup???My property taxes helped accomplish that. I assure you.

Posted by: Pamela at December 7, 2006 12:27 PM

Hey Pamela,

It's great to hear you concede that we are "after the boom". Now we can meet on some middle ground. The boom is over. Now where do we go from here? How does Florida recover from all the specuvestor building?

lizziebeth

Posted by: Lizziebeth at December 11, 2006 12:34 PM

Lizziebeth:

In your hood, (Manatee County) I would pay 20-25 percent less than their asking price. We moved on to the Villages area and purchased in a gated equestrian development. Prices are 25,000-30,000 an acre and the Villages is ten minutes away. We invested in the luxury community concept. I do not see Florida dropping 50% but call me madcap. Old coots do not like the cold. Neither do the young coots. This is your time Lizziebeth, to go for the deal....You were groomed for such a time as this.

Posted by: pamela at December 11, 2006 06:00 PM

Boom or Bust in Florida Real Estate Market?

Is that even a question? This is a serious bust time. At least for awhile.

I used to track the large investor apartment purchases in a given market to help gauge a markets potential. This would give me a pretty good indicator as to how the real estate market was doing. When I would see many purchases after a relatively stable market time period, I would smell a boom comming. Lots of sales after a flurry of price run-up activity?... Well, something else comming.

People seem to lose sight of one of the most fundamental aspects of investing when it comes to real property. The Income Approach to Valuation. The large institutional investors usually do not overlook this. Unless they are outright frauds or incompetents.

Short of an investment being able to produce a definitive capital return, I see pure speculation playing thru inflated values as the only way remaining to profit. Kind of like the greater sucker Ponzi scheme. Risky.

In times of a diminishing value to our currencies I can understand the need to rid cash. The dollar becomes worthless via inflation. Time to purchase assets. Perhaps this is fine to a point. But, when asset inflation kicks in and incomes stay stagnant and lag far enough behind to make the ownership of property prohibitive, Beware.

Short of some outside variables such as a majority of a given areas owners being very wealthy, or a large group of wealthy pensioners and investors that are willing and able to afford to forgo the income approach to valuation and accept zero or less returns on cash invested, I cannot see how a valuation bubble can sustain itself in any given area.

With rare exception, if the income approach does not hold true, values must necessarily be at risk, (and probably overvalued as such).

It is not location, location, location...It is Income, Income, Income. Pros know this. Those are the more astute, stable, and successful real estate investors. Their numbers usually work even in a market slump. If they can weather the slumps, rents will eventually extinguish their mortgage debts and they own the property.

The location players are the real gamblers. Fine if you already are rich. If not? Who are you going to sell to? Do you believe that you will outrun the already wealthy? Hard to do.

So, Which type of investor are you?

Posted by: gus at February 20, 2007 01:17 PM

well how do i begin: where was all these people back in the 40's 50's 60's and 70's and 80's. all of a sudden high taxes home insurance yes home insurance these are the same companies that did this same stuff time over> they got kicked out of flroida for over charching floridians and giving flase claims about flood insurance and they still do it.i/m 4 generation native ive seen this state in the state of dismis. florida was always based on how much a person made $$ affordable. 78% of all floridains live on pay check to pay check. now we have out of towners running this state that is why we are in a constant disater waiting to happen.the homes are now 500% over market value more expensive than europe where id did live on own a house and the mortgage rates are at a 1.8 percent. there is reasons why they never built in certains areas due to disasters. and flroida was always prepared. the large cooperations dont pay taxes here very little and the burdon is place on the resident. if you think florida is doing good i will sell you some great swamp land. florida is on the verge of total colapse if somthing isnt dont quick. ive seen it befrore in the 60's and 70's whith the condo's they couldnt sell and all went bankrupt and turned to rentals . florida natives do know what works and doesnt work we-ve been doing for decades with out know porblems before.i keep hearing about this water shortage dont belive it it will take florida 100's of years to go dry it goes from the guld to the atlantic it is a stratgy so you have to pay for more water.so if you paid if you paid over 300 or 400$ for you're home you just got screwed found out how much the city has it valued than if a disater hits you're screwd out of 1000S becuase the insurance is only going to give yoy all what the city has it apprasied for value wise.please people wake up i see the truth ty gary.

Posted by: gary at March 11, 2007 12:43 AM

You people bagging on liz are morons, She is right, people got greedy and now some are losing their a$$. I moved away from florida as a teen, I want to get back, and soon these suckers are going to be dumping properties cheap. I refuse to pay the sucker price of 500-900k for a beachfront studio, but will gladly pay 200k. Get ready because its coming.

Posted by: Sponkos at March 17, 2007 12:56 AM

Thanks Sponkos! Hey, most of the folks that disagree with me have quietly disappeared. The market is eerily quiet here. Real Estate has become a taboo topic. Realtors are busting their butts to rent out their listings. Better to get something than nothing. Prices are leveling off. Builders are now saying make an offer. It's just crazy!

Posted by: lizziebeth at March 21, 2007 06:04 AM

While highly successful, this Ferrao character is just that. Having had business dealings in Naples and the SW coast, I can tell you first hand that real estate and all associated taxes are absurd.

Additionally, those of you who have brought attention to the mess here in the FLA are right on the money. Prices are ridiculous, for the first time EVER, Miami has a higher cost of living index than New York City and LA, yet wages are wickedly lower. At best, Miami is a city of the the future, meaning it has potential, but the theiving real estate developers and politicians have somehow managed to fool stupid people with money that it is an established entity.

For the first time in recent history, more people have moved out of state than have moved in, Assuredly, this trend will continue until housing becomes reasonable, I am not talking affordable but reasonable for professionals with a minimum six figure household income. Not until property taxes that have sky rocketed as much as 200% in some cities and insurance premiums become managable.

I am fearful that Florida is beyond reproach as the crooks have created an environment that has almost eliminated the middle class. You have the arrogant rich and the uneducated poor in many markets with little industry statewide.

Despite the slump in the market, people are still wlaking away with double digit profits yet still that is not good enough. What is sad is that Florida will crash as a large majority of the crooks are not from here and have zero concern what transpires aside from their profits. They will move on to the next area and ruin it as well.

Posted by: Marshall at March 27, 2007 09:57 AM


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