With fewer foreclosed homes to buy, investors move to standard sales
Investors who pounced on foreclosed homes now compete with
regular buyers. Some economists warn that house flipping will hurt the market.
By Alejandro Lazo
September 13, 2013
Just last year, policymakers turned to real estate investors to
rescue the housing market.
Fearing the foreclosure crisis could drag on for years, the Federal Reserve
advocated renting out foreclosed homes as a market-based solution.
Government-controlled mortgage titan Fannie Mae
experimented with selling big pools of them to deep-pocketed buyers.
Few realized then that investors would respond with overwhelming
force: Big and small players have injected billions into the market, racing one
another to buy up foreclosed homes in post-crash markets. Wall Street launched
a sophisticated industry based on buying and renting out homes in bulk. The
suburbs of Southern California, Arizona and Nevada saw a virtual land run,
creating frenzied demand that has pushed up prices more than 20% in a year.
Now the foreclosed homes in those markets are almost gone – yet
investors have kept buying, competing with individual buyers in standard sales.
The number of so-called absentee buyers, usually cash investors,
has dropped slightly in Southern California since hitting a record in January.
But they still account for more than 1 in 4 home purchases in the region. And
just 8% of those deals were on foreclosed homes in June, compared with 25% a
year earlier and a peak of 55% in February 2009.
“Everybody and their dog is an investor,” said Dick
Caley, a Long Beach real estate agent. “It has gotten to the point where I
do not even return the call.”
As it turned out, housing investors needed neither the prodding of
the Federal Reserve nor the bulk foreclosure sales from Fannie Mae, which never
materialized beyond the pilot phase. The single-family rental industry now has
several major players in multiple markets, with some recently created companies
The mix of investors and their strategies are shifting, with large
financial firms starting to pull back and smaller players moving in, looking to
buy, fix and flip homes for a quick profit. But rapid price increases are
making it harder for people to afford a house and qualify for a home loan.
And the short-term mentality worries some economists.
“Flippers are selling to other flippers, who are selling to
other flippers, until there is nobody to flip the home to,” said John
Burns, a housing industry consultant in Irvine. “And that is when you have
a big downturn.”
The investor interest in regular home sales means everyday buyers
are more likely to pay a premium for a house. But shoppers could benefit from a
retreat by the institutional, buy-and-hold investors, who tend to compete more
directly with regular buyers and pay higher prices than home flippers. Flippers
need to buy homes below market value; investors planning to rent and hold the
home can bank on long-term price appreciation.
“The buy-and-hold investors are the ones who really pose a
threat to first-time buyers,” said Sean O’Toole, chief executive of data
firm PropertyRadar. “The buy-and-hold investor is leaving, and the flipper
is in right now.”
Flipper Jonathan Zadok still sees upside in the suburbs despite
the lack of foreclosures. Zadok quit his job as an equity trader three years
ago and plunged into the business of buying, renovating and reselling
foreclosed homes in the Inland Empire. With the foreclosed bargains nearly
gone, Zadok has started shopping in more established neighborhoods and buying
more expensive homes, which carry more risk but add profit potential.
For now the work is exciting and interesting enough for Zadok to
keep at it, he said.
“I love it, it’s nonstop,” he said. “Trying to find
that next deal, selling that next house.”
U.S. corporations, private equity firms and foreign investors
remain a driving force in real estate, said Anthony Sanders, a professor of
real estate finance at George Mason University.
Those investors have been lured to U.S. real estate because financing costs
have been so low.
But that could quickly change.
“This is not your father’s housing recovery. In other words,
this is not household-related; this is more of an investor recovery,”
Sanders said. “If interest rates keep rising, we will inevitably see the
stock market pop, meaning go down, and with it will probably come the housing
Norris Group in Riverside – which holds regular, sold-out
symposiums on real estate investing – begs to differ. The firm’s president,
Bruce Norris, recently told a packed room of investors at the DoubleTree hotel
in Ontario that home prices had plenty of room to run, and that investing in
California real estate was still a good bet. Housing has moved quickly from
bottom to boom, but Norris believes prices in California will keep climbing
because housing remains affordable to a large percentage of buyers.
Aaron Norris, marketing director for the group, said investors
were doing more dramatic renovations to unlock the value in homes. Rather than
cosmetic upgrades, they are adding square footage and in some cases even
looking to buy land for new construction.
With the continuing shortage of home supply, investors are getting
even more aggressive, knocking on doors and sending out mailings to attract
sellers, Norris said.
“We’re purchasing from people directly,” Norris said.
“We’ve been teaching people for the last few years this is where the deals
would come from.”
There are other signs of the shift in investors’ focus. O’Toole
recently expanded his company and changed its name from ForeclosureRadar to
His firm started out as a data service
marketed directly at auction investors, those tracking sales on the courthouse
steps. PropertyRadar has expanded features for real estate agents and investors
hoping to find properties before they hit the market.
Experienced flippers say the increased competition is forcing them
to change tactics.
Brian Coomans, owner of investment company GGB Properties Inc. in
Long Beach, said he considered himself a “production investor” when
he first started, finding cheaply priced foreclosed homes and fixing them up
for a quick profit. But that’s an easy business to enter, and Coomans soon
faced a lot of competition. So, like Zadok, he has been hunting for select
deals in pricier neighborhoods, buying homes that have just been inherited, for
He tries to forge tight relationships with real estate agents to
get an inside track on sales.
“The margins are still the same, but you have to hunt harder
for them and you can’t count on a certain volume of deals,” Coomans said.
Zadok remembers 2009, when there were lots of properties and not a
lot of buyers. The next year he hopped into the business, choosing San
Bernardino because of the high number of foreclosures there.
Homes were boarded up, lawns were overgrown or dying, and pride in
homeownership was gone, he recalled. Those days are over, and now he sees a
short window of time left to make money.
“I know I am not going to be doing this forever,” he
said. “I have maybe a one-year window, a two-year window to be flipping
homes like this.”
Source: Los Angeles Times