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Story of the Month
Published on March 15, 2011
By Our Community Network

Cash and Carry: Investors Scooping up Distressed Housing

Published on Wednesday, July 01, 2009
By San Gabriel Valley Tribune Staff Writer, Ryan Carter

Wendy Morales and her husband, Thomas, bad a first home in their grasp last week. They’d made an offer — “the highest and best” as it’s called in the real-estate world — on a bank-owned house in San Bernardino.

It was perfect for the Covina couple and their four children. But then an investor swooped in with ready cash and bought it — beating out the young couple’s offer by $15,000.
“It hurt,” Wendy said. “It was a big gap, and just more than we had.”

That experience is more common these days, as investors begin stepping back into a market they’ve been away from while they waited for the housing market bust to subside.
Jim Martindale, owner of Martindale Commercial Real Estate Inc. in Glendora, has waited long enough — about three years, But over the last several mouths, he’s been back in, buying homes that have dipped in value and fixing them up to rent.

“There’s loads of cash out there,” he said. “There’s a turn in the mood. When you see the fundamentals so good, you say, ‘I can buy something for about 20 percent down, get a renter in there and get a much better return on my investments.”

Advantage, investors

Martindale saw the housing crash coming about three years ago. With the frenzy of home buyers flooding the market with adjustable-rate loans, he got out of the local market. At that point, the median price of a house in Los Angeles County hovered around $600,000.

But now that the housing bubble has popped, the remnants have attracted armies of first-time homebuyers — and Investors.
And the county’s median price? That has fallen to $299,000.

At the lower end of the market, bidding wars are flaring tsp between couples who want homes and investors.

Unfortunately for the first-time homebuyers, investors are more likely to have ready cash available. That gives them an upper hand in the bidding wars.

Other factors giving first-time home buyers a disadvantage against some investors are Federal Housing Administration standards limiting the kinds of homes they can buy. For instance, FHA financing won’t cover homes with high fix-up costs, which a first-time homebuyer with limited funds can pay for.

Thus, a home priced at the lower end of the market would likely go to an investor who could fix it up and rent it rather than to a first-time buyer who could buy it but couldn’t afford to maintain it, said Tom Adams, a Monrovia-based real estate agent.

Adams estimated that about one-third of the offers he’s seeing on lower-priced homes in the San Gabriel Valley are coming from investors. In the Inland Empire, that rate could be much higher; given the areas high rate of foreclosure, Adams said.

Most investors are buying the homes, fixing them up and renting them in hopes they can sell them for more when the market recovers.
“From an appreciation standpoint, they have more room to grow,” Adams said.

Investors Gone Wild

Many in the business see the re-emergence of investors In the housing market as a sign of health and a driving force to recovery.

Indeed, buyers at the lower-priced end of the market are beginning to halt the price slide.

Martindale is confident that by buying and fixing up homes, he’s actually boosting the market, and in turn helping the economy.

"We’re directing real money to upgrade an area,” he said.

Others see investors as a vital force of demand, who along with first-time homebuyers will help buy up large volumes of foreclosed inventory.

What some economists worry about is investing gone wild. The return of investors may be a sign of health, but If they get too confident, they could get too speculative.
A can’t-fail mentality is what helped fuel speculation arid house-flipping during the housing market boom earlier in the decade. That may fuel buying, but buyers who lack a longer view could be surprised by risks that still plague the economy, such as tenants who lose their job.

Among worst-case scenarios would be the ill effects of investors who buy only to turn housing stock into absentee-owned multi-family housing, said John Husing, a Redlands-based regional economist who specializes on the Inland Empire.

Without a stake in the community, distant property owners lack incentives for keeping up their homes and resolving tenant Issues, he said.

The result is dilapidated homes that bring down property values, high. turnover of students in local schools because tenants are always moving from city to city racing for the best deal, and difficu1ty for police who have a hard time resolving disputes among tenants without a nearby property owner.

“It's destroyed San Bernardino,” Husing said.

“It’s a recipe for urban disaster.”

But an era of too much confidence may still be a ways away. The housing market may be nearing a bottom, but prices are still falling, and more foreclosures are still on the way.

“Nobody’s super-confident,” Martindale said. “And you’ve got to have confidence before you can be too overconfident.”