from WSJ, hat tip to Mr. T:
The pace of housing sales has been rising in many markets this year, but it is only partly because families seeking affordable housing are returning to the market.
It also is because of investors like former Deutsche Bank managing director Matthew Cooleen, whose firm has spent $30 million buying pools of foreclosed houses from banks.
His newly formed Greenwich, Conn.-based firm, HudsonCross Financial, is betting it can make a profit reselling in beaten-down markets in states like Nevada, Arizona and Florida and in Southern California because it is paying so little for the homes.
Outside San Francisco, a former Morgan Stanley executive director’s new firm is buying four houses for 75% less than they cost four years ago, and is raising $6 million to purchase others.
In Phoenix, Mark Allen, a former division president at D.R. Horton, the nation’s largest home builder, is reselling homes he is buying at courthouse auctions with funding from Gorilla Capital, an Oregon-based firm that targets foreclosures. “It’s the only way to make money in Phoenix residential real estate right now,” Mr. Allen says.
Below: Gorilla Capital’s Mark Allen, center left, attends auction for foreclosed homes in Phoenix on Monday.
After mostly retreating from the housing market after the bubble burst, investors are returning in droves, hoping to take advantage of the distress. In many cases, Realtors say, investors also are outbidding first-time home buyers and other would-be occupants because they often come to the table with all-cash offerings.
Some of the new investors profited while home prices boomed and are now trying to cash in on their decline. Far from their trading rooms and executive suites, some are spending their days looking for deals in far-flung suburbs and staking out courthouse auctions.
While many real-estate trade groups don’t track investor purchasing on a monthly basis, real-estate agents in many markets say investor buying is high. One telltale sign is how many home buyers are paying all cash.
Though not every cash sale involves an investor, the investors often use cash because they can close quicker and get a better return. In the Phoenix area, for example, about 38% of April sales of single-family homes were all-cash deals. In Punta Gorda, Fla., the figure was 67%, and in the Las Vegas area, total cash sales were 39%.
It isn’t the easiest way to earn money. Managing a far-flung collection of houses can be time-intensive and fraught with hidden costs.
Buying houses, rather than apartment buildings or other commercial property, tends to favor small investors who are agile and understand local submarkets. The work often involves replacing carpets, repainting and kicking out squatters. Much of today’s buying is being done by mom-and-pop investors, who are acquiring a few houses to rent out.
But in some markets, where prices have fallen the most, the bargains are difficult to pass up for larger investors.
“Foreclosures are low-hanging fruit at the moment,” says Laurence Pelosi, who helped close big land and housing-development deals for Morgan Stanley before he left the bank earlier this year and joined McKinley Partners, a small investment firm that is buying foreclosures in California.
McKinley and a partner are in contract to buy four homes in Pittsburg, a small city east of Oakland. The firm is buying one house, which was valued at $412,000 near the peak in 2005, for $84,000. McKinley plans to rent out the homes for as much as $1,200 a month. After paying to manage the property and other expenses, it expects 5% to 7% returns on its investment from the rental income and, hopefully, a big payoff from a resale when the market improves.
The firm is paying cash up front, but has a commitment from One California Bank, an Oakland-based community bank, to finance 50% of the purchases after they close. They hope that will free up cash to buy more homes.
The firm believes homeowners losing their houses in foreclosure actions need places to rent.
“It’s tough times in the Bay area, but this isn’t Detroit,” says Paul Staley, who acquired distressed homes earlier in the decade with Fortress Investment Group and recently teamed up with McKinley. “Everyone is going to need a place to live.”
McKinley plans to resell the houses in about five years for double what it paid and is targeting 20% annualized returns for its investors, which include wealthy individuals.
HudsonCross Financial is buying pools of 10 to 200 homes. “It only makes sense if we buy in bulk,” says Mr. Cooleen, who worked in the structured credit trading group at Deutsche Bank that dealt in credit derivatives and mortgage-backed securities.
About 40% of the banks and lenders Mr. Cooleen deals with are agreeing to sell homes in bulk, but the others are reticent, he says, because they believe they can get better prices if they wait to sell them individually.
“It’s a shame. The sooner we clear the inventory of foreclosure the sooner the housing market can recover,” says Mr. Cooleen.
The competition for the houses is intensifying as the supply of foreclosed homes in some places has fallen in recent months.
But the inventory is likely to rise later this year as banks end their moratoriums on new foreclosures and begin dumping additional houses on the markets.
Barclays Capital estimates that banks and loan investors owned 765,500 foreclosed homes as of April 1, up from 629,100 a year earlier. The inventory is expected peak at about 1.3 million homes in mid- to late 2010, according to Barclays.
The investors are no panacea to the nation’s housing woes. When the market improves, many of them could put their houses up for sale, reinflating supply.
“All this investor buying isn’t depleting supply, it’s only shifting it around,” says Mr. Allen of Gorilla Capital.
Jim,
This piece definitely needs the “psycho-babble” tag.
I mean really…
“Everyone is going to need a place to live.”
… and…
McKinley plans to resell the houses in about five years for double what it paid and is targeting 20% annualized returns for its investors, which include wealthy individuals.
That’s a powerful mix of housing bubble / hedge fund Koolaid!
But come on, they include wealthy individuals…..?
(I added the P-B tag.)
I used to work in Pittsburg. $84K could even be considered overpriced for that area.
You’re looking at a 60+ mile commute into SF (80min by BART, but you have to drive to BART, as it’s in Bay Point.) Most folks in that area work in Walnut Creek, which is still a good 40min away in traffic.
Highway 4 is hellish; a few years ago, they put in a couple more lanes, but it gets incredibly clogged with traffic for 6+ hours a day. I know approximately 0 people who would ever want to live there. Everyone I know who lives there wants to leave.
Did I mention that one day I came into work and the receptionist said, “Hey, don’t you bank at Wells Fargo?” I said “Yep” and she said “Well don’t go there today because they’re bein’ robbed! HA HA HA HA.”
Scary as f—, that area.
-Erica
I should mention that as Pleasanton/Walnut Creek/Pleasant Hill/Concord prices come down (let alone Richmond), people will just move inward. Especially renters.
Also, didn’t these guys get the memo that 70% of foreclosed homeowners AND renters who got their rental foreclosed on move in with other people? East Bay has no shortage of gigantic McMansions that multiple families can and will move into. Just drive 680 into Pleasanton at the 580 interchange and look east. Hills full of clone-stamped stucco, all being foreclosed on.
Let the stampede out of Pittsburg begin.
-Erica
Jim ~
*Wiping Away a Tear* I’d love to respond but I’m still in mourning. Multiple offers? I’m still in shock 24 hours later…
The wisdom of this kind of investing is really dubious to me. As Erica Douglass intimated, you shouldn’t compare to what the price *used* to be and conclude it’s a great deal. You should compare to what prices *should* be and evaluate based on that.
So big multi-state investors want to get in on renting out bottom end properties to low-income people? Somehow I don’t think the dentists and lawyers are going to find it quite as painless or lucrative as they think. And expecting prices to go back to their previous levels (adjusted for inflation) is just fantasy. The prices were never sustainable, they were just fueled by the idiotic lending that was going on. After a trillion dollars in taxpayer bailouts I’m extremely skeptical the regulatory agencies will be so lax that it’s going to happen again in the next 30 years.
Ha! Look where these dudes come from. Sure some guy who headed this or that on wall st is in RE. They have no where else to go.
The sad fact is its easy to take someone else’s money and gamble than it is with your own. Some of these people’s entire career, the whole career, has been doing just that.
I have family that lives out there. My Uncle and Aunt bought a house down the street from them in Oakley at the end of 2007 because it was such a “steal” My cousin nearly bought a trailer out in Pittsburg in 2007 as well. I swear that people out there were seriously drunk on their kool-aid thinking their 4/2 house in the middle of nowhere was worth $800K.
I wouldn’t try to make money flipping houses-I would find places with high rents but low house values and rent the damned places out. My neck of the woods (Riverside) has some such deals. Rents are extremely high compared to the cost of buying a house. Even factoring in things like repairs, taxes, insurance, and vacancy, one could probably make a 50% profit if one bought the correct house (in terms of size, condition, price, and location). For somebody looking for a place to live as opposed to an investment, the equation is even better. My monthly payment (principal and interest, not counting taxes and insurance) on my newly purchased 4 bedroom, 2 bath, 1750 square foot house is $75 less a month than my rent on my 1 bedroom, 1 bath, 475 square foot apartment that I’m moving out of. That shows a serious imbalance in the rent vs. own equation in favor of owning.
Now, in more desirable locations, such as San Deigo, the equation still favors renters. But it won’t for long.
What Dwip said.
Also, what makes them think prices are going to be higher in five years? From what I’m hearing, many of these loan mods are just going back into the 5-year ARMs. People have learned **absolutely nothing** from all of this.
These hedge fund/banking/specuvestor idiots will be putting these homes on the market at exactly the same time these ARMs reset again. Who knows what the bond market will do, but it’s entirely possible rates will be higher then than they are now.
…not to mention the flood of rentals that are hitting the market precisely because of all these specuvestors — the same people who caused all the problems during the bubble are trying to cause the same problems all over again, and the govt is giving them all the incentives to do so.
Are our “leaders” stupid or evil?
Are our “leaders” stupid or evil?
Yes.
@Geotpf: “That shows a serious imbalance in the rent vs. own equation in favor of owning.”
It’s a good deal, but not any better than anyone in the Midwest has been getting all these years. I grew up in Indiana, where you could buy a house on an acre for $40K or so or rent it for $400/month. The equation has always favored buying there.
Historically, I think you’d find that before 1997, this was the case in any part of California too.
I’d just caution against thinking it means prices can’t go down further. That ~$40K in Indiana is steadily dropping even though it’s already cheaper to own. Reason? Just too many houses for the population. Wouldn’t be surprised if Riverside runs into something similar.
-Erica
Can you spell “False Bottom”. If these are the same geniuses that bought into your housing bubble using real people’s money, and are now spending Government “TRAP” money, this can only end one way…
As much as I love my American cousins, there are times when I thank God I live in Canada. Just sold $65,000 US this morning for good olde Canadian Monopoly money; you know, the bills that are soaked in oil, rubbed against gold bars, and then polished with North West Territories Diamonds.
I Know, Canada’s boring, it snows, and commodities are so much less sexy than ipods, but hey, the Chinese seem to pay on time. I think I’ll go stare at my Canadian made drywall walls.
Wassup,
Don’t be so sure about Canada. I travel a lot for work and the last time I went to Vancouver BC the housing mentality was alive and kicking. It was actually weird the way everyone was talking about their houses it felt like 2004 in San Diego. This was about 8 months ago.
> Are our “leaders” stupid or evil?
>
> Yes.
> ……………………………….tj and the bear
I LOL’d.
And regarding why buying can be cheaper than renting, traditionally, this was partly because of the difficulty of saving up for the 20% down payment. Little surprise that effectively removing the down payment requirement was one of the significant contributing factors to the bubble.
Getting 20% can be difficult. Getting 3.5% for an FHA loan is easy, especially if you get eight grand back on your taxes after you buy your house. Now, getting 0% is easier than either, but 3.5% ain’t hard for most people with something vaguely resembling steady employment.
I am stumped where all the shadow inventory is going…
I think it may be getting gobbled up in pooled purchases like these before it hits open market.
Is this feasible? Low end areas are dry of inventory now, and very few have been coming on in recent weeks. Low end areas will have the operating perfomance ratios that will facilitat pooled investor purchases.
I appreciate your perspectives.
Skeet
So if investors are buying up all of these bank owned homes so that they can rent for a few years and then resell when the market goes up, aren’t they creating their own downfall?
Too many rentals on the market drives down the price of rents. If cost to own and maintain becomes more than the rental income, then these investors will be looking to dump their under performing investment. Won’t that just stall any price appreciation down the road?
Plus, can’t you just see these newbie all-cash investors experiencing all the joys of being a landlord for the first time? What are those rental applications going to look like? Probably like the sub-prime loan apps — NINJA + “I just walked away from my mortgage now let me rent your investment and I promise to pay *if I can or even want to*“. Gee, sounds like a top quality renter right there.
Can TARP for renters be far behind?
You all are rather cynical. Chances are high that these pooled investor purchases will yield well.
These are purchases underwritten by some of the smartest minds around – the minds that lead to the rich getting richer and income inequality continuing to hemorrage our world.
Annulaized returns in the 15-20% range, maybe, but with 7-9% cash on cash from the get go, a little rent appreciation down the road and fixed rate positive leverage go a long ways. Add in a helping of sexy real estate allure and I suspect return expectations per purchase price will drift down again – meaning high sales price could skew the returns upwards down the road. Our return per price (CAP rate) expectations in residential real estate right now are at the conservative margin of what history has brought us.
Put it this way, if it does not play out pretty like this, it will be because our economy is in deep crap and then competitive returns elsewhere are unlikely to be better.
Skeet Frazee
PS- I have central San Diego deals to show you if you want to invest. I have a couple in escrow with room for participating equity.
PPS – Can I solicit here like this Jim?
No, but because you asked me nicely, why don’t you lay them out here for review?
Yow, got me on the spot. Southeast san diego, 8-10% unleveraged cash on cash. A stones throw from downtown… conservative underwriting (in my opinion)
Skeet- a website?? “PS- I have central San Diego deals to show you if you want to invest. I have a couple in escrow with room for participating equity.”
Jim said lay them out…
then Southeast San Diego. A stones throw from Downtown. I hope you all up in North County know “Southeast San Diego”
Erica Douglass- Anywhere near Fountain County?
Don’t know what you are after “just a broker”.
Southeast San Diego is central, and it is cheap. It may not be pretty, though I argue that some of it has the bones and architecture for first class redevelopment, and indeed it’s western margin is headed that way.
This is a discussion of investment returns. I think it is smart money going to 9% unleveraged cash on cash in central San Diego today.
OK, that’ll end it.
It seems more like you’re looking to skim readers off the blog, than discuss a particular investment opportunity. I don’t want this to turn into a RE swap meet, so I’ll remove your website.
What happened the last time investors were busy outbidding each other. I guess some people will never learn.
Yes there is a lot less at stake, but considering most of these homes has never held interest to people as owner occupied perhaps expecting large price increases is not justified.
Also interesting is that once they finish outbidding each other they will need to:
*Pay closing costs
*spend an average of $5,000 on carpet, paint, appliances, and landscaping
*Cover vacancy while they hope to rent
*Pay closing costs (including real estate agent commission) in 5 years
I am probably a little to risk averse, but when you are paying 10% more than any owner occupant would currently pay, when most of the neighborhood is sitting vacant (no demand), and there is work to be done on the home this just does not sound like a good investment.
Jim what do you think?
Skeet wrote:
Annulaized returns in the 15-20% range, maybe, but with 7-9% cash on cash from the get go, a little rent appreciation down the road and fixed rate positive leverage go a long ways.
——————–
With so many investors doing the same thing, where is said “rent appreciation” expected to come from? Additionally, where is the capital appreciation supposed to come from when all the specuvestors want to “sell for a profit”?
Sounds like a **very** crowded trade to me. I like to stay away from crowded trades, but that’s just me.