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Monday, April 30, 2007 | Eight floors in, the building changed course.

New downtown condos were gold in 2004. Real estate countywide had exploded, giving decades-long homeowners some equity — and a dangling carrot — to invest in another property. Buyers rushed to deposit thousands of dollars to secure their spot and, in turn, their visions of a comfortable life, or perhaps retirement.

And so the company building apartments on Little Italy’s West Beech Street decided, eight floors in, it’d be better as condos. The project, called Acqua Vista, was sold to K. Hovnanian Homes, which would finish construction on the two towers and change the project to condos. It was the first downtown project to be converted for sale before the apartments could even be rented, a deal that landed the 2004 Editor’s Award from the San Diego Daily Transcript, a local business newspaper.

But now, 14 of the building’s 383 units are in foreclosure, according to RealtyTrac. Thirty-eight units are on the market, some listed at a loss. A few brightly colored “for sale by owner” and “for lease” signs stand out against the neutral beige and peach building. Some analysts and Realtors familiar with the project say its appeal is dimmed by its apartment-like qualities, such as white refrigerators instead of stainless steel and a flooring option called “marnoleum” instead of tile in many units floors eight and below.

And because apartment projects have fewer required parking spots than condos, fewer spots were planned by the original builders. Now, because when you buy a condo you’re guaranteed at least one parking spot, the residents of the building have to have their cars ushered into an underground lot by a valet. And they pay for that valet in their homeowners association fees, which top $500 a month, even for a one-bedroom unit.

“It’s the black hole of condominium values,” said Anthony Napoli, a Little Italy Realtor, of the building.

The real estate market in downtown San Diego has been watched by housing analysts nationwide as a sort of microcosm of the housing boom, where builders flooded the market with supply, buyers fought tooth-and-nail to own a unit at any price, and now dropping prices mean many investors are upside-down, stuck in their mortgages. As the region, and the country, monitors the progress of its sluggish real estate market, the way in which downtown proceeds in the coming months could serve as a bellwether for overstocked markets nationwide.

That’s why the 14 foreclosures in one complex stand out so starkly. The number of units for sale in Acqua Vista is more than double that of the building with the next largest pool of units for sale, said Lew Breeze, a downtown Realtor.

Whether they effect fire-sale prices or not, foreclosures dampen a housing market. The addition of nearly 6,000 condos and apartments-turned-condos between 2001 and 2006 upped downtown’s residential quotient by almost half, welcoming investors and first-time homebuyers alike to a neighborhood undergoing a dramatic facelift. But as these distressed owners — and the lenders who enabled them to buy — try to recoup as much of their debt as possible, the owners of the surrounding units could see their own values drop. Not much can distinguish one one-bedroom unit from another in a condo tower, so owners are often at the mercy of what price their neighbors’ units sold, or auctioned, for. That could worsen the foreclosure trend in Acqua Vista and in similar projects in the region.

Housing market bloggers have also paid close attention to San Diego downtown properties. Acqua Vista’s dramatic foreclosure trend was reported by bloggers recently in Piggington, a forum started by voiceofsandiego.org columnist Rich Toscano, and Bubble Markets Inventory Tracking.

At least half of the owners currently in foreclosure eschewed down payments and used mortgages to cover the whole purchase price. For many in the project who financed 100 percent, it is proving difficult or impossible to refinance or sell without losing money. Buyers countywide since 2004 increasingly took advantage of low-payment options like paying only the interest on the loans, assuming a near-immediate equity boost would let them sell or refinance scot-free when the loans’ principal-and-interest larger payments kicked in.

That equity boost was shorter lived than many were hoping. Now, prices in much of the region are stagnant or dropping. For many, the time to start paying higher amounts each month is here, bringing home the pain in the housing market.

By summer 2004, the season in which the San Diego Padres baseball team christened downtown’s Petco Park, many of the choosy buyers who wanted downtown condos had already invested. The housing market hit a peak near the end of 2005 and has been slowly losing ground since.

“The people that bought (in Acqua Vista) came late to the party,” Napoli said. “They thought, like everybody, that things were going up. They thought they would make a killing.”

One distressed unit, No. 1703, is a 1,249 square foot penthouse. The owner, Carlos Espinosa, is a real estate agent himself and purchased the unit for $983,000 directly from the builder in June 2005, covering the entire cost with mortgages from Deutsche Bank. He also owns another unit in the building, No. 1701, which he has listed on the Multiple Listing Service for $1.6 million.

No. 1703, the unit in foreclosure, has been listed on the MLS for 250 days with an asking price of $999,000 to $1.15 million. He also listed it on a subletting website, apparently to recoup some of the mortgage costs by charging $2,750 for a monthly rental, $1,000 for a week or $500 for a day. Espinosa received a notice of default on March 29.

After the project opened, the market saw many months of appreciation before it hit its peak near the end of 2005. Anyone selling in that time likely made a profit. But as buyers have started thinking twice before making a deal, Acqua Vista has a few too many deal-breakers for units to sell at the same prices they garnered two years ago, Napoli said. The hallways, in sleek yet stark grays and muted tones, look a bit “institutional,” he said.

“When a market turns, quality can still get you some value,” he said. “But poor quality will plummet.”

And the valet factor doesn’t help, said Breeze. He said the $500-plus fee is at least $150 higher than the fees for comparable units in the buildings close by. The 38 units for sale in Acqua Vista constitute about 10 percent of downtown’s total available resale condo stock, giving the complex by far the lion’s share of units for sale, Breeze said. Even though he’s shown his buyers Acqua Vista units hundreds of times, he doesn’t remember anyone ever buying one.

“Aside from the aesthetics, let’s say you like the building,” he said. “The two things that are going to kill it are valet parking and the high high HOA fee. They try to tout valet parking as an amenity, which it may be for some people. But for most people, it’s not.”

Some investors pull in less from the rents they charge than they pay in their mortgages.

“They’re lower-quality units, nice views, but small, basic,” said Peter Dennehy, vice president of the Sullivan Group Realty Advisors. “A lot of people who live in there are renters.”

Among the 14 distressed units, two have received notices of default, the first stage of foreclosure. Eleven of the units have been repossessed. One unit, No. 206, was scheduled for auction April 4. The County Assessor’s Office said it has not yet received the details of that auction.

The project attracted real estate professionals in droves. Dennehy said many people who worked with or for K. Hovnanian were given the chance to be on the VIP list for the units. Dennehy himself put a deposit on a unit, but pulled out of escrow on the advice of a fellow analyst.

But Adam McAbee, also vice president of the Sullivan Group, bought a 648-square foot unit for about $350,000 in July 2004, right as the first tower was completed. He rented it out right away, intending to sell it the next year, as soon as the resale restriction imposed by the builder to prevent undercutting prices was lifted.

McAbee listed the unit for nine months in 2005 and early 2006, eventually renting it out again. Now, he and his parents, with whom he invested in the property, are thinking about putting it back on the market.

“I still stand by the unit,” McAbee said. “If things hadn’t gone the way they did, we’d have kept it for a year, put it on the market.”

McAbee’s experience underscores the advice of many real estate professionals, that houses are risky short-term investments. But the accessibility of financing for a first or second or third property meant many people who wouldn’t have qualified for traditional loans were granted nearly free reign of the real estate market, and many looked for quick profits.

In fact, the owner of No. 421, which is scheduled for auction at 10:00 a.m. on Thursday, financed 100 percent of the $515,000 purchase price with New Century Financial Corporation when she bought her condo in January 2006. That company recently folded after a collapse of the subprime mortgage market.

Catherine La Femina works for Hanley Wood Market Intelligence, a real estate analysis firm. In December 2004, La Femina was highlighted in several local media outlets as the 5,000th buyer of a downtown condo after she purchased her unit in Acqua Vista.

La Femina actually lives in Acqua Vista, and disagreed with some of the local Realtors that the building was less-than-desirable. She cited quick light bulb changes, regularly cleaned carpets and other maintenance as evidence the building is doing OK.

“I think it all comes down to the way the builder has serviced the residents and they’ve done a very good job,” she said. “I personally think it’s a really nice, convenient option.”

Mark Mills is another downtown Realtor whose client is trying to sell one of the Acqua Vista units. He agreed that the high HOA fees and the apartment feel in many units discourages would-be buyers.

“The finishes are really not that great, and there’s just a lot of competition out there,” he said. “It’s a tough sell. Add ’em all up and it’s a tough job for any Realtor.”

Please contact Kelly Bennett directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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