The South Florida of today is not the South Florida of 2004 when buyers of new properties put down, at most, 20 percent of the purchase price and then flipped properties before construction was completed. After what some consider Florida’s worst real estate collapse, traditional construction financing is not available for many developers. In contrast to a declining national trend where cash home sales have fallen to their lowest levels since September 2008, South Florida leads the nation in cash real estate transactions, with the Miami Herald reporting that 51% of house closings were paid in cash. In the post-bubble South Florida, traditional lenders are reluctant, unwilling and some unable to finance new residential construction. In addition, strict underwriting, regulatory constraints, and other requirements that can take several months, if not longer, to complete, are an impediment for developers to access debt financing required to acquire and develop property. Thus, developers have turned to alternative financing methods.

The new wave of residential development, both condominiums and master planned communities, vary from studios to palatial units and homes, but, as a result of lenders’ skittishness, many new developments share a common financing strategy – buyer financing – financing construction through funds coming from buyers. Developers are requiring and successfully persuading buyers to pay large deposits of 50 percent and up to 80 percent on new homes and condominium developments long before the developments are completed. Although Florida law requires 10 percent of a deposit on a new condominium unit to be held in escrow, the rest is available for construction. With the large deposits, buyers are essentially financing the construction of new developments, interest and collateral free, and helping developers build new projects.

Developers have also turned to another source of funding – private equity firms. Private equity is taking the place of traditional lender financing and providing the funds for construction financing that is not being provided by banks and traditional lenders. Private equity firms are not constrained by the federal regulatory environment which traditional lenders are now faced with and can provide financing for real estate development without the documentation and underwriting required by traditional lenders.

As a result of the newly tapped financing methods, South Florida real estate is buzzing, new projects are continuing to transform South Florida, and developers are weeding out speculators who upended projects during the last boom hoping to flip units. The question remains, how long will the trend of non-traditional financing and shifting the risk to the buyers continue? When the deep pocket buyers are no longer buying, will we go back to highly leveraged projects that attract speculators? Only time will tell.