Housing woes hot with investors
Speculators, buyers grab foreclosed properties.
Right in the midst of metro Atlanta’s lousy housing market, the bidding was for foreclosed property is just about the hottest game in town.
Sophisticated investors flush with cash and an urge to gamble are swooping in for historic deals, betting on the region’s recovery, or at least a healthy market of renters. The foreclosure sweepstakes also attracts small real estate investors and individual buyers looking for a deal on a new place to live.
Foreclosure sales, many of them carried out at bank auctions or on courthouse steps, are changing the makeup of some neighborhoods – from cleaning up vacant homes to bringing in renters. They also help set what your house is worth, whether or not you have it up for sale.
Purchases of foreclosed houses made up a third of all homes sold in metro Atlanta in the first quarter, and industry observers say investors account for at least half of foreclosure sales.
While some regard speculators with distaste, real estate insiders say they’re a necessary part of the natural, albeit painful, cleansing of a festering wound.
“Anyone who will come in and take the inventory off the shelf, we ought to hug them and thank them,” said Dan Fries, a real estate appraiser based in Cumming.
Unlike the leveraged-to-the-hilt flippers of the boom years, the investors and money funds of today are largely playing with their own cash. It’s a potentially lucrative but still risky play.
At the high end, investment funds nationally are buying pool or distressed real estate – broken subdivisions, houses, even mortgage loans – with some of it in metro Atlanta.
The Atlantic and The Brookwood towers in Atlanta were bought by one such investor group, ST Residential, which won a bid to join a joint venture with the Federal Deposit Insurance Corp. to rehabilitate a series of distressed condo projects financed by a failed Illinois bank.
On the smaller end, individual investors and small firms are buying houses one at a time to flip or rent and land to hold until the market returns.
Some describe the investment as better than gold.
“Gold is too high. You can’t live in gold, you can’t eat gold,” said Steve Palm, president of SmartNumbers, an Atlanta real estate firm and himself a property speculator.
‘Buy yourself rich’
Every four minutes on a recent weekend, John Dixon & Associates auctioned off a piece of some developer’s unrealized dream for pennies on the dollar.
At the Renaissance Atlanta Waverly hotel near Cobb Galleria Center, about 250 potential speculators, plus more online, bid on the assets of two failed Georgia banks.
The auctioneers even sold the main branch of one – Enterprise Banking Co., gone with a bid of $460,000.
Vacant houses in finished and unfinished subdivisions that once listed near $200,000 or more sold in the $50,000 to $80,000 range. Many are destined to be rehabbed and rented out.
“I know some of these developers that went under,” the auction company owner, John Dixon, said. “Of course that affects me. But I blink and I say ‘look, these properties have to be sold. They have to go back to market.’”
Over a three-day period in two cities last month, the Marietta-based firm sold $8 million in empty lots, houses and commercial property for the FDIC.
The auction was similar to many held by Dixon’s firm and others in metro Atlanta over the past four years.
The buyers, who have 30 days to close, typically pay cash, Dixon said. Investors generally outnumber individual buyers about 8 to 1.
The auction staffers – many silver-haired, and all decked in blue blazers, khaki pants, matching yellow checkered ties – slapped backs, hollered “yeah!” with each bid and urged the auctioneer ever higher.
“You’re gonna buy yourself rich,” the auctioneer, Dixon’s son, Drew, told the crowd.“This is your golden opportunity,” he cajoled when the bidding slacked off. “Today’s the day. Don’t wake up tomorrow wishing you’d bid one more time.”
Across metro Atlanta, 57,000 foreclosed homes were on the market or on the sidelines in banks’ inventories as of May, according to RealtyTrac. Foreclosed homes made up 30 percent of all area home sales in the first quarter, RealtyTrac said.
The glut has forced down the medium price of homes sold last year in Metro Atlanta to 1990s levels, according to SmartNumbers.
The inventory comes from many places.
Much of it is houses once owned by homeowners that defaulted; some were part of speculative projects and never occupied.
Another segment comes from banks cleansing their balance sheets and from the buyers of Georgia’s dozens of failed banks, or the FDIC, which is in charge of liquidating the assets of collapsed lenders.
Living banks also must clear the books of bad development loans, leading to a further glut in the market.
But that’s not all.
Fannie Mae and Freddie Mac hold substantial number of foreclosed houses.
Tens of thousands of homes are owned by struggling borrowers who face foreclosure or are trying to arrange a short sale.
Though foreclosure listings and repossessions have dipped in recent months, there’s seemingly no end to the inventory in sight.
At their current pace, it will take banks 33 months just to repossess the nearly 144,000 homes statewide in severe default or foreclosure, according to LPS Applied Analytics.
When time comes to try to sell those houses, buyers may be in short supply.
Many remain on the sidelines, worried about the precarious recovery and their own financial security. Getting a loan is also tough.
According to the Wall Street Journal, the major banks denied 26.8 percent of mortgage loan applications in 2010, up more than 3 percentage points from 2009, and a reversal from the anything-goes days of the housing boom.
Add it all up and “the American dream of home ownership does not seem quite so dreamy anymore,” said Brian Olasov, an expert in distressed real estate and a managing partner with McKenna Long & Aldridge.
With fewer traditional buyers around, speculators – particularly those with cash – are taking advantage.
“Right now it you’re a lender [holding repossessed homes] you’re going to take a sure thing,” said Rick Sharga, senior vice president with RealtyTrac.
A jump in activity
Activity among major investors is picking up, said Andy Ulsh, vice president of real estate with Atlanta-based Batson-Cook Development Co. Ulsh hooks up real estate investors and banks with troubled assets.
“There is a ton more sale activity now [from major investors] than we’ve had in years,” he said.
Probably the least noticeable investors to the average consumer are large investment funds. These tend to be sophisticated foreign or out-of-state funds that buy up bundles of mixed assets, which might include raw land and unfinished subdivisions with only plastic utility pipes jutting out of the earth – sometimes jokingly referred to as PVC farms – as well as finished houses.
Other large investment funds are buying pools of defaulted loans, often foreclosing and flipping the houses.
Some major home builders also have acquired broken subdivisions, either completing the homes – which they can sell at reduced prices – or holding the land for the market’s return.
Other pockets of speculators include small groups who team up to rehab vacant homes to flip or hold as rental houses. There are also scores of independent land investors who will hold the property until the market rebounds.
These investors often compete, directly or indirectly, with first-time homebuyers and homeowners looking to upgrade or downsize, real estate experts said.
Investors of all stripes have to know that they’re doing, Ulsh said. Vacant houses need retrofitting, and disturbed land for subdivisions need environmental maintenance.
“You can spend a lot more than you bought it for, keeping it up,” Ulsh said.
Tom Powell, Jr., who works in large equipment sales, moonlights buying foreclosed lots and raw land in Georgia, Alabama and Florida. He said he plans to hold the land for at least five years before selling to builders or developers.
Powell said taxes, storm water mitigation and erosion control can be expensive if an investor isn’t careful. But some prices are too good to ignore.
On one parcel he bought, a 25-lot, 10-acre subdivision in Carroll County, the developer owed the bank $250,000. Powell bought it outright for $15,000.
“I tell people I’m investing in myself,” he said.
As word of the auction scene has spread, prices have started to stabilize, say those in the know. Would-be first-time homebuyers and novice investors have started to push up prices, at least a little bit.
At a recent auction run by John Dixon’s firm, a brick split level in Stockbridge that might have been worth $100,000 or more before the recession, went for $43,000.
“That’s high,” said Charles Nash, a former Henry County builder and current speculator who didn’t buy that day. “On the courthouse steps that house might have gone for eight.” As in $8,000.
Nash, who stopped building homes in 2007 when he saw mortgage lending drying up, started buying foreclosed homes with a group in early 2009. He said some flippers jumped into the market too soon and got burned holding onto houses.
For every 20 foreclosed houses he visits, he said he might buy one. He keeps his lawyer and real estate agent on speed dial.
Foreclosed houses can have title issues, back taxes and other problems the average consumer isn’t prepared to handle, Nash’s lawyer, Craig Long, said.
“There’s really very few people who have the capacity, the skill sets, the financial capacity and the assets you need to execute and do this,” Long said.
The houses Nash buys often need substantial repairs costing tens of thousands of dollars that he has to pay out of pocket. It’s not a business for the faint at heart, he said, and the margins aren’t huge.
“If I was the average person, and I ha$50,000 that I was willing to gamble, I’d go to Vegas,” Nash said.
Jude Rasmus, president of Rasmus Real Estate, which specializes in foreclosed properties, said many of the investors she aids are from out of state; many local outfits are tapped out.
These days, she said, she’s working with more individual buyers who are looking for a residence. Many are dipping into their retirement plans in order to pay in cash.
One beneficiary was first-time homebuyer Patrick Gaunt, 26. Gaunt and his wife bought a Freddie Mac-listed two-story brick home in Powder Springs in May. The house, with five bedrooms, was much larger than they expected to buy when they entered the market.
“We did really good,” he said.
Rasmus said her firm has sold more than 100 houses a month on average this year, and she only expects business to grow.
“I think Atlanta is still ripe for the picking for deals,” she said.