Real estate investors – an increasingly potent force in the Bay Area market during the housing downturn – are rushing to lock up deals before rising home prices wipe out their chances for profits.
Droves of cheap foreclosed homes are drawing serious investor money. From mom-and-pop folks seeking retirement income to Wall Street-backed funds with hundreds of millions to spend, investors buy distressed homes to either fix and flip or, increasingly, to hold and rent out, mainly focusing on the most-affordable areas – those most devastated by the downturn.
“There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit.”
But for now, many distressed homes – foreclosures and short sales – sell for about a third off their peak values, and often for less than it would cost to build a new home.
Investor impact in the Bay Area was magnified during the downturn. That’s because for many years, the Bay Area’s stratospheric prices made buying homes to rent out a losing proposition, so investors bought elsewhere.
“Historically the (sales) price-to-rent ratio for California single-family homes has never made sense to hold houses at any scale,” said Brian Burke, managing director of Praxis Capital, a Santa Rosa real estate investment company. “But the market dynamics have completely changed and opened up an opportunity for us to buy, hold and rent, as well as buying to fix and flip.”
A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share. Absentee buyers are defined as those who have property tax bills sent to a different address than the house they just bought.
Absentee buyers
Absentee buyers were most common in Solano County, where they accounted for almost a third of sales. Solano has by far the lowest median home prices in the Bay Area, weighing in at $200,000 in September, for instance.
Flipped homes – those resold within six months of purchase – went from about 2.5 percent of all Bay Area sales in 2007 to about 4 percent of sales currently, with the biggest bump coming this year. Again, bargain-basement Solano had the most activity, with around 6 percent of sales being flipped homes.
Investors played a big role in helping the market start to recover, experts say.
“The real estate market hit a floor sooner because of investor appetite, so it plays into a stabilizing housing market and overall economy,” said DataQuick analyst Andrew LePage.
But there’s a downside, too. Deep-pocketed investors paying all cash often elbow out prospective homeowners. “It makes it awfully frustrating for first-time buyers who have to compete with them,” LePage said.
Big draw for investors
For now, market dynamics continue to lure investors.
“There are a lot of investors out there, large and small, who continue to relish residential real estate in a market where many people either don’t want to buy a house or cannot buy a house and so are renting,” LePage said. “For a lot of these investors, it’s still penciling out at sometimes-record levels.”
Praxis Capital is a case in point. In 2009, Burke, who had 20 years experience buying homes at foreclosure auctions, partnered with Rivendale Homes, a large private builder, to form Praxis. It started buying about 100 to 120 homes a year to fix and flip in 12 northern California counties, including the East Bay, North Bay and Sacramento area.
Click here for the complete story by Carolyn Said on Investors rushing into real estate deals.