Housing woes lure back bold buyers

From California to Florida, investors snap up distressed properties, hoping to profit.

The depressed housing market is now attracting buyers who look at boarded-up homes, rising foreclosures, and falling values and see, not disaster, but a rich opportunity.

They have cash so they don't need to go to the bank. The homes they're eyeing are selling at 2004 prices or lower. And they are certain – make that almost certain – that they will profit from the nation's real estate problems.

While the buying doesn't herald the bottom in home prices, nor will it help most people facing foreclosure, real estate experts say it is plucking some "for sale" signs out of the nation's front yards. It's also providing some needed cash for real estate developers. And it's helping banks unload unproductive properties, which might start to free up some of their capital so they can make more loans.

Some signs of lot-buying bravado:

•In Cape Coral, Fla., a developer dropped prices by up to 50 percent on 116 new homes and townhouses and saw them snapped up by lines of eager buyers.

In the depressed California market, an investor is organizing a tour of homes to Anaheim and Orange Grove for those who have the nerve to buy real estate as an investment. His motto: buy and hold.

•Even in the most distressed sections of Cleveland, real estate operators are buying 50 to 100 properties at a time to try to resell them.

"This is a wonderful time to buy," says Steve Dexter, who is organizing the tours in Orange County and owns 27 houses himself.

The buying comes at a time when the number of homeowners facing foreclosure is soaring. On Wednesday, RealtyTrac, which monitors foreclosures, said the number of homes facing foreclosure rose 65 percent in April compared with a year ago. For roughly half of the 243,353 homeowners receiving a foreclosure-related filing, it was their first notice.

"We've never had more foreclosure filings than this past month; we're at historically high levels," says Rick Sharga of RealtyTrac in Irvine, Calif.

It could get worse. Through November, some $20 billion to $25 billion in adjustable rate mortgages will reset each month. As interest rates tick up, many buyers will be unable to carry their monthly payments. Economist Mark Zandi of Moody's Economy.com, estimates there will be 2.25 million foreclosures this year, up from 800,000 at the low point three years ago.

"This assumes we only suffer a modest recession and moreover get some kind of meaningful federal housing policy that helps to stem the number of foreclosures," he says.

In addition, the inventory of unsold homes is still at a high level. According to government estimates there are 2.25 million empty houses for sale compared with 1.25 million in a normal year.

But some housing analysts see some encouraging signs. "We are hearing there is greater foot traffic at open houses and realtors are showing more homes," says Lawrence Yun, chief economist at the National Association of Realtors in Washington.

One sign that there is some selective buying: Blogger Dimitris Ginis (countrywide-foreclosures.blogspot.com) has found the number of foreclosed houses on Countrywide's website has dropped from a high of 15,783 in January to 12,185 as of May 13. This has coincided with a drop in Countrywide's average asking price from $324,000 to $270,000 in the same period.

Mr. Yun says the improvement has been particularly noticeable in areas that have been hit the hardest, such as Sacramento, Calif.; Las Vegas; and Fort Myers, Fla.

But the improvement is coming because of major reductions in price.

In March, buyers stood in line outside a development at Cape Coral (near Fort Myers) after a local developer, O.J. Buigas, put 82 homes and 34 townhouses up for sale. He had purchased the homes from Miami-based Tousa Homes Florida LP, a bankrupt builder. The inducement: price reductions of 40 percent to 50 percent.

"It was like being at the Outback Steakhouse on a Saturday night," recalls Denny Grimes, the realtor handling the sales. "People who bought were actually giddy."

In all of Lee County, Fla., Mr. Grimes says pending home sales in the first quarter were up 29 percent over the first quarter of 2007. But he adds that inventories are still high and prices remain under pressure. "We're not at the bottom anytime soon," he says.

Affordability continues to be a major problem, says Jack McCabe, a real estate expert in Deerfield Beach, Fla. "Turning points have come when median household prices are three to four times median household incomes," he says. "In Florida, they are still six to seven times median household incomes."

Mr. McCabe says investors who hope to rent properties still are not getting a large enough return yet. And "we have to get back to a normal appreciation of 6 to 7 percent per year," he says, instead of, say, the 181 percent that Miami-Dade area saw during the four-year boom.

However, the prospect of buying distressed property is still very tempting for some. McCabe recently spoke at a conference in Miami on distressed property. The organizers expected 250 people who paid $1,500 each. "Instead, they had over 700 people, 95 percent of them buyers looking for acquisitions or opportunities to network," he says.

Mr. Dexter says price reductions in Orange County, Calif., have now become very tempting. "There are listings in the low- to mid-$300,000 range for houses that had been $650,000, and the discounts are getting better and better," he says. But "Are we at the bottom? Not yet, there's still a ways to go."

Not all is coming up roses for audacious investors.

Destiny Ventures of Tulsa, Okla., purchased 115 homes in Cleveland, many of them in dilapidated condition. Steven Nodine, president of Destiny, says he usually resells them to investors, such as Econohomes of Austin, Texas, within a few weeks.

"Econohomes and others like them are reselling them for $500 down, $300 a month," says Cleveland City Councilman Tony Brancatelli.

Mr. Nodine says he buys as many as 2,000 homes a year and then resells them to investors. "I make a marginal profit," he says.

However, in the case of Cleveland, he says he will probably lose "a ton of money" since he is faced with some large fines for housing-code violations. "I am not a slumlord, or owner financier," he says. "They are running the investors out of town."

Jeff Ball, the CEO of Econohomes, sees his company filling a void: providing homes and financing for "deep subprime" borrowers. He says his average buyer has a verifiable income of $35,000 a year and average credit score of 570 (out of 850).

Mr. Ball says his company charges them a fixed interest rate of 10 to 12 percent for a 14-year loan. That's high, he concedes, but points out that the nonprofits that specialize in helping low-income people with housing are addressing only a sliver of the population in need.

"We spend a lot of time to make sure they can afford the home and the payment doesn't change," he explains. "We are trying to do this the right way, but we know there are a lot of unethical people out there."

However, Mr. Brancatelli worries that by allowing outside investors to resell marginal homes, the city will get saddled with yet another round of unsophisticated residents losing money.

"This is the next tsunami of distress – these waves of investors coming in," he says.