Investing in Lots in Gated Communities - Understand the Added Risks
For many Florida real estate investors, private or gated communities have been a good place to invest.
They offer more amenities and are extensively hyped with classy marketing collateral.
In the recently active Florida real estate market, pre-release lotteries often determined who was in the game.
But investing in lots in a private community exposes speculators to additional risks.
Association fees, deed restrictions, and club memberships will increase carrying costs and can reduce selling flexibility.
Non-Ad Valorem assessments: Private communities typically have Homeowners Associations and Community Development Districts (CDD).
They are responsible for architectural integrity, enforcing Codicils, Conditions, and Restrictions (CCRs), security, common area and community center maintenance and operations.
They assess each property owner equally for the costs associated with these activities.
These are called Non-Ad Valorem assessments because they are not based on real estate values.
Assessments are in addition to real estate taxes.
In Flagler County, FL, the fastest growing county in the U.
S.
for the last five years, the typical annual private community assessment is between $1,400 and $2,000 per year.
In Palm Coast Plantation, a gated community in Flagler County, the annual assessment was approximately $600 per year when lots were first offered for sale in 2001.
But when the developer relinquished control of the Homeowners Association to the residents in mid 2006 it was discovered that the developer had been subsidizing the association.
To make up the shortfall, the homeowners association found it necessary to increase the annual assessment to over $1,400.
Making some basic assumptions on commission, closing costs, down payment, and carrying costs, the buyer of a $255,000 lot in Grand Haven, another Flagler community developed by LandMar in Palm Coast, would have to sell the property for approximately $325,000 to break even (net) after two years.
To do this, the property value must increase by 13 per cent annually.
Each additional year adds about $20,000 to the cost basis.
And lots, unlike dwellings, can't be rented to offset carrying costs.
Build-out Requirements -- Another factor often overlooked by novice speculators is the common practice of having build-out requirements in the CCRs of planned communities.
Most speculators plan to flip their lot investment soon, so a three or four-year build-out requirement is perceived as inconsequential.
But, if the market sags, the upcoming requirement to build can loom large, placing additional pressure to sell while, at the same time, limiting the potential buyer pool to those willing to commence construction immediately.
When one developer sold lots in a new section of a successful gated community, they required buyers to close 18 months before roads and other infrastructure were in place.
By the time potential buyers could actually visit the lot, only 2 ½ years remained in the build-out time frame.
Club memberships -- Most gated communities offer one or more featured amenities on an a la carte basis - not included in the annual assessment.
Examples are memberships to golf, tennis, or beach clubs.
Typically, those buying property directly from the developer are offered a finite time period after the original purchase to exercise their membership option.
If the enrollment period lapses, future membership may not be available, reducing the property value.
Buying a membership to protect the value and future saleability of a lot could require a large additional investment (membership initiation fee) plus substantial monthly dues which increase carrying costs.
They offer more amenities and are extensively hyped with classy marketing collateral.
In the recently active Florida real estate market, pre-release lotteries often determined who was in the game.
But investing in lots in a private community exposes speculators to additional risks.
Association fees, deed restrictions, and club memberships will increase carrying costs and can reduce selling flexibility.
Non-Ad Valorem assessments: Private communities typically have Homeowners Associations and Community Development Districts (CDD).
They are responsible for architectural integrity, enforcing Codicils, Conditions, and Restrictions (CCRs), security, common area and community center maintenance and operations.
They assess each property owner equally for the costs associated with these activities.
These are called Non-Ad Valorem assessments because they are not based on real estate values.
Assessments are in addition to real estate taxes.
In Flagler County, FL, the fastest growing county in the U.
S.
for the last five years, the typical annual private community assessment is between $1,400 and $2,000 per year.
In Palm Coast Plantation, a gated community in Flagler County, the annual assessment was approximately $600 per year when lots were first offered for sale in 2001.
But when the developer relinquished control of the Homeowners Association to the residents in mid 2006 it was discovered that the developer had been subsidizing the association.
To make up the shortfall, the homeowners association found it necessary to increase the annual assessment to over $1,400.
Making some basic assumptions on commission, closing costs, down payment, and carrying costs, the buyer of a $255,000 lot in Grand Haven, another Flagler community developed by LandMar in Palm Coast, would have to sell the property for approximately $325,000 to break even (net) after two years.
To do this, the property value must increase by 13 per cent annually.
Each additional year adds about $20,000 to the cost basis.
And lots, unlike dwellings, can't be rented to offset carrying costs.
Build-out Requirements -- Another factor often overlooked by novice speculators is the common practice of having build-out requirements in the CCRs of planned communities.
Most speculators plan to flip their lot investment soon, so a three or four-year build-out requirement is perceived as inconsequential.
But, if the market sags, the upcoming requirement to build can loom large, placing additional pressure to sell while, at the same time, limiting the potential buyer pool to those willing to commence construction immediately.
When one developer sold lots in a new section of a successful gated community, they required buyers to close 18 months before roads and other infrastructure were in place.
By the time potential buyers could actually visit the lot, only 2 ½ years remained in the build-out time frame.
Club memberships -- Most gated communities offer one or more featured amenities on an a la carte basis - not included in the annual assessment.
Examples are memberships to golf, tennis, or beach clubs.
Typically, those buying property directly from the developer are offered a finite time period after the original purchase to exercise their membership option.
If the enrollment period lapses, future membership may not be available, reducing the property value.
Buying a membership to protect the value and future saleability of a lot could require a large additional investment (membership initiation fee) plus substantial monthly dues which increase carrying costs.
