Rising interest rates and hurricanes may have
caused Florida's real estate market to peak.

    Florida's hot real estate market is cooling and the pace of transaction volume appears to be decelerating. Before your clients invest or think of buying a second home in the Sunshine State, consider the risks.
    Values throughout the state over the last five years, on average, increased two to five times. Florida property in 2004 and 2005 alone appreciated between 22% and 47% annually, notes Jack McCabe, owner of McCabe Research and Consulting in Deerfield Beach, Fla.
    But last August, the real estate market sprang a leak. Sales began slowing and prices dropped due to rising interest rates and a rash of nasty hurricanes. The Florida Association of Realtors reports that the median price of a Florida home dipped from a peak of $246,500 in August 2005 to $244,200 in February 2006.
    McCabe is a paid consultant to a private fund that plans to start buying distressed properties around mid-year. His forecast: The oversupply of real estate in Florida will be absorbed in the next four to five years. Then, Florida real estate prices will skyrocket much higher.
    But investors who frivolously bought into high-rise condos may have difficulty. The reasons: Association maintenance costs make individual condo rentals more costly than long-term apartment operators' expenses. Condo investors may have to rent a unit for $1,800 per month to break even. By contrast, a long-term operator could rent the same unit for around $1,400. "The problem for most investors is to rent these units out at a break-even or positive cash flow to compete with the long-term operator," McCabe says.
    McCabe is predicting downward pricing pressure of 20% to 30% over the next 30 months on new condo segments in Florida. Already, he says, he has seen price cuts of $60,000 in at least one major new west coast development. "Condos are falling fastest," he says. "In Southeast Florida, we estimate 70% to 80% of the (condo) sales in the last three years have been to speculators-not to end users."
    Speculators represent as much as 50% of the condo conversion market and 40% of the buyers of single-family homes, he says.
    In Fort Myers, which escaped the wrath of the recent barrage of Florida hurricanes, there's no demand problem, maintains Denny Grimes, principal of Denny Grimes & Co. real estate. "We have a supply problem," he said. "Two years of a binge of buying is leading to the morning after. It's like buying stock at $20, watching it go to $80. Now they can sell it for $60, and they're upset!"
    Time for your clients to take the plunge? That depends. Florida is known as the national retirement haven for a few reasons besides warm weather, signature golf courses, beautiful sunsets and miles of sandy beaches. It has no state income tax or inheritance tax. The state sales tax is 6%, or a bit more in certain counties.
    The state levies an "intangible tax," which Gov. Jeb Bush has said he would like to eliminate. The annual tax, levied January 1 of each year on stocks, mutual funds, bonds, loans, notes and accounts receivable, works this way: The first $250,000 of total taxable assets, $500,000 for joint filers, are exempt. Assets above those thresholds are taxed at 50 cents per $1,000.
    Another major Florida benefit: Its homestead exemption. Provided that your client has title or record to a property on January 1, and he or she keeps it as a primary residence, $25,000 of its assessed value may be exempt from real estate taxes. More important, property tax increases are capped, currently at 3% annually. Plus, there are added exemptions: $500 each for disability, a widow or widower and blind persons; and a $5,000 disability exemption for an ex-service member.
    Florida has been considered the best state in the world for persons seeking to protect their home from creditors, notes Alan S. Gassman, Clearwater, Fla. board certified estate planning attorney. "Our (Florida) Supreme Court has ruled that our fraudulent transfer statute is trumped by homestead protection," he explains. As with other homestead-protected states, clients who live in Florida for 730 days can claim the state's homestead exemption-even under the newer bankruptcy laws.
    But to get the full homestead exemption, your client must live in a Florida home for more than three years-1,215 days, to be precise. Those living in Florida between 731 days and 1,215 days can only protect $125,000 of a home's equity. Questions, Gassman says, remain as to whether a creditor can force someone into bankruptcy.
    Meanwhile, the advent of business to the area, spearheaded by a deal expected to bring the Scripps Research Institute to South Florida, bodes well for future growth.
    Real estate prices in other parts of the state besides Southeast Florida are appealing. An existing home in picturesque Ocala can be purchased for a median price of just $156,500, according to the Florida Association of Realtors.
    Prices of Fort Walton Beach condos dipped 53% in February over the prior year. The median price of a condo is $219,100, down from $469,000 a year earlier. And Pensacola condos were down 40% from the prior year to $135,000 from a median sales price of $225,000.
So what's to keep your clients up north? Hurricanes for starters. In their wake have been reports of developer bankruptcies, preconstruction delays, construction materials shortages and an insurance crisis. Moreover, forecasts indicate tough hurricane seasons could be in Florida's cards for a number of years.
    In fast-growing Palm Beach County, for example, there often is no activity around some unfinished concrete high-rise structures. One major developer of several luxury high-rises has filed bankruptcy, and preconstruction deposits are being refunded to buyers as higher construction costs force developers to reprice. And the market hasn't even turned really miserable yet.
    Roy D. Oppenheim, an attorney, real estate investor and president of Weston Title & Escrow in Weston, Fla., says skyrocketing taxes keep those who locked in property tax caps years ago from moving. "I have a friend who bought a house for $250,000 a few years ago," he said. "Now it's worth $750,000. He can't move into a $1.5 million home because property taxes would go from $8,000 to $30,000." Oppenheim says residential properties in the $500,000 to $1.5 million range mark the only truly weak spot of the Florida real estate market.
    Meanwhile, whopping hurricane assessments-as high as $6,000 annually or more-are just beginning to be levied by condo associations and homeowners associations from the state's rash of hurricanes. The Tiara, one of the most majestic high-rises on Singer Island, in Palm Beach County, was condemned due to hurricane damage. Following a legal battle with the state's now bankrupt insurer of last resort, Citizens Property Insurance, owners became embroiled in a controversy with its contractor.
    So what should you know if your clients decide to relocate to the Sunshine State? Homeowners insurance is hard to get. Citizens Property Insurance, at this writing, ran close to a $2 million deficit, and lawmakers frantically seek solutions-two months prior to the June 1 start of hurricane season. Nationwide Insurance Co. of Florida and Allstate Floridian, two of the state's largest insurers, have stopped writing new homeowners policies. Nationwide was planning to "non-renew" 35,000 existing homeowners policies. For those buying property in Dade, Broward and Palm Beach counties and in the Tampa Bay area, the troubled Citizens Property Insurance is said to be about the only game in town.
    The off-season summer might seem like the ideal time to buy property. But once a warning for a named hurricane is issued for Florida, insurers typically stop writing binders. This can wreak havoc on pending real estate closings.
    National flood insurance anywhere in Florida is a must-regardless of whether a client is in a flood zone, many warn. Beware of the latest rage: condo hotels. These newfangled luxury high-rises often come with upscale concierge services. Management takes care of the unit and rents it while the owner is away.
    But these ownership arrangements could jeopardize Florida's coveted homestead exemption. "It can't be an income-producing property and be your residence," maintains Palm Beach County property appraiser Gary Nikolits.
    Courts have issued liberal rulings involving single-family homes on this issue, he says. One court ruling, for example, allowed a resident to leave a home on January 1, when called out of the country on business, return before year-end, and claim the homestead exemption.
    "So I suppose you could do it one time," Nikolits acknowledged. "But you can't lease it in the subsequent year." Also, he warns, anyone renting out property likely will need a municipality's occupational license.
    Buying preconstruction can be risky. The developer has two years from the date your client signs the contract to finish a single-family home, Oppenheim says. However, buy a condo, and federal law generally lets the developer take as long as seven years-regardless of what is promised.
    Currently, shortages of roof tiles and workers already have left some buyers in a lurch, and forced developers to refund deposits and raise prices significantly. Construction must be examined extra-carefully. The roofs on the most recently built homes withstood hurricanes the best, according to a study by the Palm Beach Post. Inspectors, though, actually should go on the roof to check for cracked tile and roof damage.
    Be sure your client also checks for pending hurricane-related assessments and increased maintenance fees. Certainly these are an important consideration in price negotiations. 

Gail Liberman, co-author of Rags to Retirement (Alpha Books), is a Florida-licensed real estate agent and mortgage broker.