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%.