Lennar Finding Florida Market Not So Sunny

In red-hot housing markets around the country, most homebuilders have enacted strict anti-flipping clauses to deter speculators from buying in their new communities. Now, Lennar ( LEN), one of the country's largest builders, has quietly taken the unusual move of dropping the restrictions at several of its South Florida developments.

Local brokers say the decision shows just how much Lennar needs the flippers to keep order numbers up at certain communities.

Over the past year, speculators have been portrayed as the cockroaches of the housing industry. These pesky investors who buy homes with the intent of flipping them for a quick profit have been blamed for much of the supposedly irrational pricing in markets such as Miami, Phoenix and Las Vegas.

Much of the speculative activity takes place in the condo market, where investors used risky interest-only mortgages to buy condos before they were constructed.

In the greater Palm Beach, Fla., market, Lennar recently dropped the stringent anti-flipping clauses at several of its townhome communities: Martins Crossing and Whitemarsh Reserve in Stuart; Newport Isles, which also offers single-family detached homes, in Port St. Lucie; Cielo, in Jupiter; and Central Park in Boca Raton, according to Lennar's local sales offices.

The clauses, inserted in sales contracts beginning in August, aimed to deter speculators by requiring owners to pay 10% of the resale price to Lennar if they sold the home within a year of purchase.

"When you go from making sales to making no sales, you've got a problem," Mike Morgan, broker-owner of real estate brokerage firm Morgan Florida, says about Lennar's decision for its Palm Beach properties. "With the investor policy, there was no way they were going to make their next quarter numbers."

The Palm Beach market, like the rest of South Florida, has seen booming housing prices over the past few years. Port St. Lucie has been one of the fastest-growing cities in America, according to Census Bureau data. But lately, the market has slowed down a bit, local brokers say. Morgan says Lennar recently boosted its commission to outside brokers like himself back to 3%, after dropping it to 2% earlier this year. The company has also been offering more incentives -- such as $15,000 off certain new homes -- to move product, he says.

Lennar spokesman Marshall Ames wasn't aware of the move to drop the restrictions at certain properties. "We have long had a policy for discouraging speculators," he says, explaining that it is not a uniform policy but rather a market-by-market decision by the company.

Public homebuilders began enacting anti-flipping clauses for several reasons. One was the public relations factor, with builders saying they would rather have buyers inhabit their homes rather than immediately hang for-sale or for-rent signs across the community. Builders also don't want to compete with the resale market when selling their own homes. Many flippers are selling homes in communities where builders haven't finished selling their own stock.

Calls to Lennar sales offices in Miami and Orlando confirmed that one-year anti-flipping clauses are still in place for properties there.

"You don't want the investors because they ruin your market. The investors are driving pricing unrealistically, we believe," says Ray Gilbert, a sales consultant at North Shore at Lake Hart-Mallard Landing, a Lennar property in Orlando. Gilbert says the anti-flipper policies for Lennar's Orlando properties were enacted a year ago and require that owners selling a home within a year pay 50% of the profits to Lennar. In Miami, like the former Palm Beach policy, if you sell your home within a year, you pay 10% of your resale price back to Lennar. It's not clear when the Miami policy was enacted.

In the Palm Beach market, Lennar was one of the last of the builders to enact anti-flipping policies, according to Morgan, the local broker. But the policy ended up being a bust for sales, he says.

Centex Homes ( CTX), which is also very active in the Palm Beach market, has kept its strict investor policy in place. If you buy a Centex home and sell it within a year, Centex keeps all of the profits, according to the company's local sales office.

Greg Gieber, an A.G. Edwards analyst who wasn't aware of the Lennar move, says he hasn't heard of any homebuilders reversing clauses like Lennar has. He expects speculative activity might be dying down nationally but remains concerned about its influence on the national market. "If it's in the condo market, I'm less worried than if it's in the detached single family market," he says. Townhomes lie somewhere in between condos and single-family homes in terms of his concern, Gieber says.

Rebecca Adams, a Realtor with Re/Max in Stuart, Fla., says speculators have accounted for a good portion of the buyers of newly constructed homes in the Palm Beach market over the past year. Once builders starting deterring them more, inventory piled up, she says.

"Now because they've said 'no more investors,' now they have to offer the incentives," Adams says. "I think things are slower than they had anticipated."

Adams says some builders are now offering everything from free appliance upgrades -- like a $250 to $500 sink upgrade -- as well as agreeing to pay a percentage of the closing costs (about 3%), and paying for title insurance (which on a $400,000 home amounts to about $2,400). Adams says offering to pay for title insurance is new, and that the percentage paid on closing costs has risen lately.

She also says the anti-flipping clauses were never a great deterrent for speculators, who are still hanging around looking for properties to buy. If speculators can sell for a $100,000 profit in under a year, they'll happily give builders a percentage of that -- even as high as 20% -- she says.

With speculators now welcome at the Lennar properties once again, perhaps demand will shoot up. If anything, the move points to how certain areas in South Florida have cooled off compared to 2004 as homebuilders attempted to drive away speculators. "A year ago, this was an order-taking market," says Gieber, the A.G. Edwards analyst. "I think things are slowing. Things are not falling out of bed."

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