As featured in The Wall Street Journal, Money Magazine, and more!
     

Florida’s Beach Property Boom: A Real Estate Lesson

This article was written by in Real Estate and Home. 29 comments.


This is a guest article by Dr. Dean Burke, author of The Millionaire Nurse Blog. Many years ago, someone I knew was fascinated with the real estate market in Florida, and he set up an investment company to allow others to invest through him. He promised his investors 20% returns. Needless to say, I didn’t participate and I thought he was a little nuts, but this is what the market was like during the bubble. Thanks to Dr. Dean Burke for sharing his experiences and lessons learned.

Unless you were there, it is impossible to visualize the Gulf Coast of Florida’s beach property boom just a few short years ago.

The Redneck Riviera was making a lot of people rich beyond their imagination. This area known for Spring Breaking bikini babes and beer-buzzed bozos was hotter than a teen at his first wet t-shirt contest.

Realtors were flipping or subdividing tracts of sand and scrubby shrubs and making hundreds of thousands in profit. To hell with 6% commission!

Everyone I knew was playing the game. The talk from the beauty shop to the coffee shop was not about Millionaire Housewives, high school football, or American Idol, but about 1031 property exchanges, setback zones, and building codes…

You might be saying, “Where were the grown-ups?”

Well the bankers were lending money to anyone with a pulse and a signature. In this case, “no doc” didn’t mean being without a physician, it meant no paperwork or proof of income required to qualify for a mortgage. “Step right up!” the carnival barker yelled!

My story

I had been visiting the Gulf Coast since I was a kid. My family rented a small concrete block home for a week every summer. My brothers and I had great fun digging fox-holes, waiting 30 minutes after eating to swim so we wouldn’t die of cramps, and building bonfires at night. When I was teen I kissed my first girl and had my first sip of Boone’s Farm while strolling these same beaches.

When I was able 15 years ago, I bought a vacation home in the same area, and I traded up three times since then.

The property boom hit in the early to mid 2000s. Prices began rising overnight. All my friends were making spectacular money! After watching their success, I wanted a piece of the action. The lot across the street from my beach place went up for sale and I jumped on it. No money down, interest-only, baby! Just a couple of months later with prices rising daily, I put that lot up for sale.

Later that same day, while I was nursing a cold one on the beach, a real estate agent trudged across the sand with a contract in his hand. With only the sweat equity involved in digging two holes to place the for sale sign and a signature, I had a pile of money! As I wanted a place on the bay so I could dock a sailboat, I tripled my money by selling my beach front home. (Sorry kids!)

Six months later I had three other properties, nearly worth a million bucks in all. One of these was my dream lot, a bay-front, with deep water dock — a perfect sailboat parking place!

Flexo suggested I include the details of my thought processes, whether there were any financial calculations that went into my purchases and how the decisions were made to sell. I laughed when I read that. The only calculations were greed on my part, making money. The idea that the lots might go down in value never even entered my mind.

Most of you are probably thinking, “I know how this ends: The Lehman Brothers bankruptcy and a spectacular crash.” You’d be wrong.

The needle that pricked this bubble was born in a little low-pressure weather area off the western coast of Africa. Once the levees broke from the Category 5 power of monster Hurricane Katrina, the nation’s spotlight was on how fragile the man-made dwellings on the Gulf coast were. We were 300 miles from the storm, but it might as well have been in our back yard.

Property values plummeted and the lives of everyone connected to that area of the country were changed forever. Businesses closed. Bankruptcies, foreclosures, and shattered dreams were common stories, all a couple of years before Lehman Brothers fell. The subsequent second-round real estate body blow was like pouring alcohol on an open sore.

I was only a bit player in this theater of the absurd and the sand. I had not mortgaged my future on my real estate venture. I learned many valuable lessons from those heady times. I’m reminded of it every month when I make my payments on land that is worth 30 cents on the dollar now.

I’m not looking for sympathy. I’m a big boy. The more cynical among you will think, “He got what he deserved!” I’m glad to say I have survived those days, and I am a much smarter investor today because of it.

Now I ask myself these questions before any major investments, particularly in real estate. They’ll help you too if you will let my pain be your gain.

  • How does this investment relate to my overall goals? If buying a home in two years is your top goal, investing in gold futures may not be the safest place for that money. Make sure you weigh your time horizon and risk tolerance when you are saving for a large investment.
  • Is this investment low-risk or speculative? If speculative, make sure it is only a very small portion of your net worth. In my case even with a 60% loss on the value of land I was and am able to make my nut as they say. Make sure your speculative investments won’t take you down with them if you suffer a total loss.
  • Who will I sell to? When everyone seems to be making the same investments around you, stop and think who the next buyer will be. If you encounter people making the same investment or gamble as you are, that normally aren’t a part of that world, your alarm bells should ring. You owe it to yourself and your family to consider potential negative outcomes. Can you say, “Bubble?”
  • What are the steps and potential outcomes during each step of the project/investment? If large investments makes you nervous, when you consider the investment, create a mind-map on a whiteboard outlining your potential good and bad outcomes. Do this for each step of the project. Get expert help. You can’t predict hurricanes or tsunamis, but when you live on or near a coast, they need to be considered. When you purchase a rental, consider the possibility of a fire or going months without a lessor. When you are investing in an oil company, what happens if oil prices drop or rise by 50%, or in the worst case, there is an oil spill? Think of as many outcomes as you can and weigh them appropriately.
  • What is the reward potential? Make sure you understand the possible gains and compare them to possible losses. Is that risk worth taking?
  • When will I divest myself of this investment? Know when to cash in your gains or minimize your losses. You know the old saying: Bulls make money, bears make money, but pigs get slaughtered. Don’t be a pig. (Oink oink!)

You will never bat one thousand when it comes to being successful with your money. Losses will happen. The secret is minimizing your catastrophic losses that take you down or take decades to overcome.

I have been an active investor through two investment bubbles. The dot-com bubble of the late 1990′s and the real estate bubble.

Investment bubbles are like being a married guy at a party without the wife, and having J Lo and Katie Holmes all over you. Resisting temptation can be almost impossible, but not giving in is what makes a successful marriage. Resisting the siren call during the peak of a bubble will make you a more successful investor, but it’s damn hard!

With luck maybe I’ll have those lots paid off by the time my future grandkids are grown. They will enjoy their beach property. When I get sand between my toes hopefully I’ll be able to remember the good times I had as a kid and not let my adult stupidity get in the way of those great memories!

Published or updated April 21, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦120
Rank: Cent
About the author

View all articles by .

{ 29 comments… read them below or add one }

avatar Ceecee ♦53 (Newbie)

Thank you for this honest and educational article. It can be applied to any speculative investment, there is always risk—-and the risk factors may be rare and unheard of.

Reply to this comment

avatar Dr Dean

Thanks Cecee. I am just trying to help!

Reply to this comment

avatar Paula @ AffordAnything.org

Thanks for sharing this story!! During the real estate bubble, I desperately wanted to join the party but I was only a college student and therefore felt like the only person in America who couldn’t qualify for a loan. (Although if I’d searched harder, I probably could have). I’m glad I didn’t join the party, but I’m acutely aware that I WOULD have, if I could have.

Reply to this comment

avatar Dr Dean

That’s the problem with bubbles. When the world’s experts don’t see trouble, what chance do us amateurs have-slim to none!

Reply to this comment

avatar JT McGee

Fantastic story, Dr. Dean!

Just curious, have you ever considered just walking away from the property and taking the credit hit? Is there any way to generate an income with undeveloped beachfront property? Dr. Dean’s campgrounds, maybe? :P

Housing seems to run hot and cold, with markets booming every 10-15 years. Maybe the next cycle in real estate will allow you to exit at a profit, or at least at break even…

Reply to this comment

avatar Dr Dean

JT, I have not really considered walking away for a whole host of reasons. But mainly I couldn’t live with myself. I made my bed and will sleep in it. (actually pretty well most nights…)

Reply to this comment

avatar krantcents

Real estate has always been cyclical, but we forget that when there are boom times. There is a group psychology or frenzy that takes over and influence to do things we normally don’t do. Your points are great questions to ask yourself and keep in mind the whole time you own the real estate. These questions can be applied to other investments as well.

Reply to this comment

avatar Dana

Thanks for the reality check Dr. Dean and in sharing your hard earned wisdom.

We almost jumped on the house flipping bandwagon just before the hurricanes hit Florida back in 2004. Our house did sustain damage from the 3 hurricanes that hit our area (we’re not even near the beach) and it was nearly impossible to find a licensed contractor to do the repairs (because so many other homes needed repairs and the backlog was something crazy). We would never have thought this could have happened and it was then that we realized that you had to plan for the totally unexpected. We had been considering buying fixer upper type homes and had we gone ahead with that plan we would not have been able to find contractors to finish the work because of all the hurricane related damage. This caused us to take a hard second look at the speculative nature and decide that it wasn’t for us.

Reply to this comment

avatar Dr Dean

Thanks Dana for sharing your story. It just reinforces that “stuff” happens. And it can make a pleasant dream turn into a nightmare overnight. I remain comfortable with speculating. I am just much more careful than in the past.

Reply to this comment

avatar shellye ♦107 (Cent)

Good article, Dr. Dean. I was a house flipper for a while, and got out a couple of years before the economy went south. I would love to get back into it, but banks just aren’t ready to hand out loans like they used to. Reading your article brought back some good memories!

Reply to this comment

avatar Harm

I remember, as a kid, reading a book on crime stories….one of the stories didn’t
have a lot of bloodshed and violence, but a certain amount of swindling, LoL.
It was the story of a guy named Wilson Mizner, and one of his cons was selling
Florida real estate to northerners….
.
.
.
.
in 1919. The more things change, the more they stay the same. That boom went
bust, too. You can look up Mizner’s story on Wikipedia http://en.wikipedia.org/wiki/Wilson_Mizner

Reply to this comment

avatar Harm

Oh, yeah…..if you like the Marx Brothers, look at “The Cocoanuts”, that was also
set with the backdrop of a Florida land boom/swindle. Hilarious, but there are
lessons to be learned……

Reply to this comment

avatar Lorie

I don’t think you ever really lose on beachfront property. It may be worth less than you paid for it right now, but it will come back. People (and businesses) LOVE beachfront property and if we go a few years without a major hurricane in that area, they will be flocking to the oceanfront again. Love that it has a deep water dock (I’m a sailor, too), sounds like a nice place. If you amortize the value of your enjoyment of the area over time, the cost is less – much like a sailboat, lol. Thanks for sharing; good story and good financial tips.

Reply to this comment

avatar Dr Dean

Thanks Lorie, It’s true that property values on the coast run in cycles as mentioned above. Hopefully I’ll be able to get to that point if I live long enough. Appreciate the positive vibes!!!

Reply to this comment

avatar Jonathan

Any thoughts on today’s market? My wife and I bought our first rental house late last year (in Southern California) and currently have a second one in escrow. We have every intention of continuing to buy in the same area as long as the fundamentals of our approach stay consistent – 20% down, 80% bank-financed, plus several thousand in fix-up costs (REOs and short sales) and then rent for an average $400 positive monthly cash flow after mortgage, insurance, and tax payments.

We’re clearly not in a speculative bubble in real estate right now, though as always there are still risks. My biggest concern is the possibility of the whole area’s population contracting over the long term, making tenants (or buyers) hard to find and pushing down rents and prices for good. Short of that happening though, there seems to be few major risks in relation to the upside potential since we have no intention of selling the houses anytime soon (and a “double-dip” in the housing market would make it easier for us to buy more rather than concern us about our current property values).

Reply to this comment

avatar Dr Dean

Hey Jonathan, as the disclaimer somewhere around here states: I can’t give personal financial advice
.
My off the cuff thoughts about concerns i would have in a similar situation would be cash flow for prolonged vacancies, adequate insurance for fires, or earthquakes, and the real stresses involved as a landlord.
And what return is involved for your $4,800 positive cash flow. Is that 1-10-20%. Obviously the lower the number the more risk for less reward….

I would also not be doing this without a significant liquid cushion to handle the above issues if they occurred. I’m sure others here will have an even more astute opinions.
Good luck.

Reply to this comment

avatar Pat S.

Excellent analysis. As a current resident of the Gulf Coast, I consistently wonder about when the next big hurricane will roll through and eliminate even more property wealth in the region. It’s just a matter of time.

Reply to this comment

avatar Dr Dean

No doubt we are overdue. Sad to say…

Reply to this comment

avatar tbork84 ♦1,867 (Half-Dollar)

Hopefully the next big one can hold off long enough for people for forget about it and drive up property values in the area again. I wish you the best, but I would be very hesitant to own a rental property or even my own home on the Gulf Coast. Like you say its really only a question of when, not if.

Reply to this comment

avatar DonnaFreedman ♦75 (Newbie)

I appreciate your honesty. You didn’t have to show the entire warts-and-all picture — but you did, so that others could learn from your experiences. Thanks for that.

Reply to this comment

avatar Marie @ familymoneyvalues

Excellent post. Good for you for not even considering walking away from your land payments!

Reply to this comment

avatar Dr Dean

Learning from others is difficult without at least a small emotional twinge of a connection.

Thanks for feeling my pain, I sure did!

Reply to this comment

avatar KNS Financial ♦404 (Nickel)

Thanks for sharing your experience and being so candid about it. I love that you didn’t just write about the bad investment, but you also shared what you learned in a way that can help others.

As you said, no one will bat 1.000, so we need to be prepared for losses, and be able to survive them!

Reply to this comment

avatar Jonathan

Dr. Dean,

We put in about $30k, so by my calculation that’s a 16% return before considering principal paydown (another $100 monthly) and any eventual property appreciation. We don’t in any way depend on the income, and could easily cover the expenses if necessary. We have insurance coverage for well over the replacement cost.

Reply to this comment

avatar GM

sooo……in hindsight, say 10 years from now……. will NOW have been a GOOD time to invest in Gulf Coast real estate? THAT’S what I want to know?

Reply to this comment

avatar skylog ♦368 (Nickel)

when you find out the answer, be sure to give me a call…

Reply to this comment

avatar Dr Dean

GM and skylog, Property is actually selling like hotcakes at firesale prices right now. But the inventory of foreclosures and short-sales are just about cleared out. They are probably a little ahead of the rest of the country-as the bubble burst there earlier…

My opinion is it’s a good time to buy, if you have speculative money and a moderate time horizon-3-5 years…..Not investment advice!!!

Reply to this comment

avatar Forest

I may well never hit the big time when it comes to investing because I think you should only by a property if you want to live in it and never for investment…. I’m not clever enough to ride the waves and it seems like too much pressure to me!

Seems like you have benefitted from all this though and I guess it also means you can relax on the beach in relative seclusion these days!

Reply to this comment

avatar MR ♦295 (Nickel)

Sad to hear, but sound investment advice! Financial advice is always worth more from someone who had tried and had solid experience.

Thanks for sharing, and here’s to hoping it comes back in a few years!

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: