More memories of the housing bubble

Saturday's Wall Street Journal report on condo hotels brought back memories from a couple years ago when million dollar Malibu mobile homes were for sale and there was a nascent cruise ship condo craze which, for all I know, may still be going gangbusters because they can just steer clear of the U.S. and other countries where housing bubbles have already burst.

The story also brought back memories of the Martin family in San Diego who Money Magazine found digging out from the rubble left behind by last year's Southern California wildfires, assessing their household balance sheet that contained the line item "condo hotel suite" with the large and dubious dollar amount.

The fire also exposed the cracks in the solid financial foundation the couple thought they stood on. They earn a comfortable living: Kevin, 38, an industrial engineer with Qualcomm, and Nicole, 37, who runs a home-based window-treatment business, make $145,000 a year.

But the couple had borrowed heavily against their house, in part to pay for a risky real estate venture, leaving them with loan payments that eat up more than two-thirds of their net income.

And while they do save steadily for retirement, they have little cash on hand for emergencies. As Hal Schweiger, a financial planner in San Diego who reviewed the family's finances, put it, "They're right on the brink".

How optimistic might that $523,000 value for the "condo hotel suite" be today?

Here's the latest news on condo hotels, many of which are still under construction setting up many new rounds of tense discussions between builders and buyers who both probably look back on the papers they signed a couple years ago and wonder what the heck they were thinking.

For many investors, the condo hotel may go down as the Pets.com of the real-estate bubble.

Many buyers purchased the hotel rooms from developers hoping to get paid every time the room was rented. But condo hotels, which account for as much as 10% of all hotel rooms under construction and a much greater percentage in resort markets such as Orlando, Fla., and Las Vegas, are coming back to haunt many of the people who bought the units, the developers that constructed the buildings, and the operators hired to run the hotels.

Some projects also are being brought to the attention of regulators by investors.

"It's been a very bad investment," said Moji Adekunbi, a 47-year-old engineer, who bought a $550,000 condo-hotel unit in the Signature at the MGM Grand in 2005 in Las Vegas, where one of every four hotel rooms being developed is a condo-hotel unit. Mr. Adekunbi counted on the cash flow from renting out his unit more than covering his $3,000-a-month mortgage payment, leaving him with a tidy profit.

He said the developer's sales staff led him to believe that the hotel would have 94% occupancy and $350-a-night rates, Turns out, he said he is netting only between $400 and $1,800 a month before his mortgage payment.

"I am in so much debt. I don't know how long I can sustain this," Mr. Adekunbi said. Making matters worse, many markets for these rooms are weak, meaning owners might lose much of their investment if they sell.

Representatives for the developer and the hotel operator said hotel-rental projections weren't discussed with customers before they bought their units, and some buyers made their own assumptions about rental income. "Some people's assumptions didn't pay off, and they are trying to find someone to blame," said MGM spokesman Alan Feldman.

Yeah, you know what happens when you assume.

Then again, there were probably a fair number of winks and nods about rental income from highly motivated sales people. Like when the mortgage loan reps would say, "Don't worry, you'll be able to re-finance in a couple years and pull some money out".