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28 Mar, 2012

Wanted: Young, Hip, Homebuyers

The flip is back. Despite a sluggish housing market and tight credit, hordes of short-term investors are once again raking in the profits, after scooping up, sprucing up and reselling properties. But this time, these sales aren't so quick, and investors are doing a lot more work to earn their cash.
     Unlike the quick-turnaround sales made during the housing bubble, which most experts blame for inflating it, today's flips require more than just a fresh coat of paint and new landscaping to justify a much higher price.
In many cases, investors are practically rebuilding severely damaged foreclosures and other distressed properties to guarantee a return. In the process, they're restoring some credibility to an investing niche that had become a dirty word during the bust.
"It's not like it was before, when you could buy something, sit on it for six months and make a profit," says Matt Manner, owner of Extraordinary Real Estate, an investment firm in northeastern Los Angeles. Now, he says, he spends three to six months actively fixing up a property to get the 20% return he's after.

For the past two and a half years, the boyish, Prius-driving 35-year-old and his financial partners have been scooping up dingy properties — such as the 400-square-foot shack with dangling fixtures and weed-choked front yard they recently acquired on Bank Street in northeastern L.A. — and turning them into three-bedroom, two-bath Craftsman bungalows with chic décor and modern, horizontal fencing that sell for between $400,000 and $500,000.
Manner and other flippers have "raised the bar on what things should look like," Los Angeles real-estate agent Tracy King says. "It's having an effect on regular sellers. They are really needing to step up." On our blog, 'Listed': The future of housing may be in your basement
Where do they find their bargains?
Manner and other investors, with names such as Better Shelter, Modern Bungalow and Urban Element, comb through listings in a particular area looking for a house with the right location, lot and structure to improve. Most concentrate on one area that they can get to know well, so they don't overspend on purchases or renovations.
While many of the homes they purchase are foreclosures, short sales and trustee sales, they also purchase badly beaten-up standard sales — properties that are so outdated and dingy that they can't find a buyer willing to take them on.
Find bargain homes for sale
"Most buyers can't see the potential of these houses," Manner says. "I can. I can take something and make it cool."
Most of these properties aren't in prime neighborhoods with award-winning schools and chic restaurants but are in emerging neighborhoods that are a short drive from employment centers and entertainment and that may have higher crime rates, says Steve Jones, owner of Better Shelter, which used to employ Manner as an agent. "My real-estate agent, Courtney (Poulos), who conducts the open houses, tells me, 'I don't have to sell the houses, what I'm selling are the neighborhoods,'" Jones says.
Indeed, for some of their clients, it's the first time they've heard of many of these neighborhoods, let alone thought of purchasing homes in them.
When Mike Van and his wife bought one of Manner's flips in the Glassell Park neighborhood of Los Angeles last year, they weren't familiar with the neighborhood, having rented in pricier areas near the beach and in Hollywood.
"I had lived in L.A. for 12 to 15 years and had never been to this part of town," says Van, 35, a digital advertising sales representative. "We knew that this was an area that was changing and shifting."
He also says the neighborhood had a gang problem before the city stepped up law enforcement in gang-heavy areas.
But, he says, "It reminds me of the way Venice used to be" before it was gentrified with tony restaurants and shops.
The buyers
Van is a perfect example of the buyer whom this new breed of flippers is targeting in Los Angeles and many other markets, including Phoenix, South Florida and Houston. These buyers want a home that looks as if it was ripped from the pages of a magazine, Manner says, but at a price well below what it would cost to purchase in a more established neighborhood. These are the early adopters, who are ready to move in and wait on the trendy restaurants and shops.
"I think who's buying our houses are people who have a proclivity to our design and have been priced out of the market for such homes," says Jones, a former store designer for surf company Quiksilver who is known to hit flea markets to find just the right casually chic objects and midcentury modern décor to stage his homes. "I mean, where else can you find a house that's done, done, done in the $400,000 range (in this area of L.A.)?"
On a recent day, Manner and his staff brought in 300 of these buyers to an open house, by pricing one of his made-over bungalows at a gimmicky $99,000 — well below his purchase price and less than a fifth of what he hopes to get for it. The taco "dude" catering the open house ran out of supplies in an hour, he said, and there were 12 offers on the property. The property, which was eventually relisted at $525,000, received three offers and is now in escrow for more than that amount, Manner says.
msnNOW: Are Americans becoming less polite?
Another spruced-up property went into escrow recently without hitting the multiple-listing service, despite its location next to a city sanitation facility.
Still, Manner's investments are not without risk. He lost money on two of the 17 properties that his firm rehabbed and flipped in the past year, and there have been delays that have cost him some of his profits. But he said the rewards generally greatly outweigh these risks.
Manner and his team of architects reach their hip, style-conscious buyers by restructuring the design of some older, cramped bungalows, putting in additions and other features that buyers can't or won't do themselves.
After taking a survey on social media, Manner added a walk-in closet and bigger bathroom to one of his properties in L.A.'s Highland Park neighborhood. "I think this is the biggest closet in Highland Park," he says, walking through the rehabbed house recently.
Other buyer must-haves in this creative area include home offices or studio space. And often, flippers such as Jones or Manner will create a larger master bedroom or knock down walls and put in more windows and French doors to create a brighter, more open floor plan than the home had previously.
Short-term investors such as these succeed, Los Angeles stager Michelle Drewry says, because they do what buyers think is impossible.
"Buyers don't really want to do a lot of work," she says. "If everything they see isn't how they would like, they think it's going to cost them three times as much (to change) as it probably would."
That's true, Van says. "As a first-time buyer, you don't know what the scale of work is going to be. It's very intimidating. These are turn-key homes."
After the makeover is complete, many flippers bring in a stager to add the art, couches, tables and other little touches that will sell the lifestyle, because staged homes can look bigger than an empty space, Drewry says.

02 Mar, 2012

Fannie Mae's rental partnership program

The Miami Real Estate Club learned that Fannie Mae waded further into the foreclosure pool on Monday as it released new details on its plan to sell its repossessed homes as rental properties.

The pilot program, first announced in August as an effort to clear the mortgage giant's backlog of foreclosures, is launching with an initial offering of 2,490 residential properties in some of the hardest-hit markets. The largest percentage of homes (23 percent) is located in Atlanta, with Los Angeles/Riverside and West Florida rounding out the top three. (View a breakdown of the properties below.)

Buyers can include corporations, investment trusts and even individuals, so long as they meet eligibility requirements and agree to rent the properties for a set number of years.

An Underwhelming Debut?

But after months of anticipation from REO investors and market analysts, some experts were unimpressed by the program's first offering.

An analysis of the available properties by analytics company Capital Economics found that 85 percent of the units are already occupied.

"Frankly, it doesn't really address what we hoped the REO scheme would address," Capital Economics analyst Paul Dales told AOL Real Estate. Namely, he said, their goal should be twofold -- to reduce the number of vacant homes on the market, which drive down home values, and to help lower the cost of renting by providing new rental units to the market. Neither of which is really tackled by the initial REO offering.

He does give the program the benefit of a doubt, though -- they may be trying to sell off the low-hanging fruit first. Selling properties with tenants already in them ensures a steady stream of income for the investor. Dales says that he suspects the strategy will shift toward moving more vacant properties, as soon as the program feels out its investor base.

Will Investors Bite?

Donna Robinson, an Atlanta-based REO specialist and consultant, doesn't think offering occupied properties is necessarily a bad thing -- it just leaves a lot of unanswered questions for investors.

"Most landlords aren't big, highfalutin investors," Robinson said, but those who do qualify for the program will have several questions about the quality of their inherited tenants, and the terms on the leases. And for those purchasing larger pools of properties, trying to standardize lease terms only becomes more involved as the distance between properties and the number of tenants grows.

The FHFA said it will make more details available -- presumably answering some of the above -- to prospective investors who pass through a "rigorous" qualification process and sign a confidentiality agreement.

What remains to be seen is the typical size of the foreclosure pools that the program hopes to unload on investors, and at what rate of discount. The nearly 2,500 properties released for sale in the initial offering represents only about 1 percent of all foreclosures owned by the government sponsored enterprises, which include Fannie Mae and Freddie Mac, according to Capital Economics. In August, there were nearly 250,000 foreclosures owned between Fannie Mae, Freddie Mac and the Federal Housing Administration.

Even under optimal conditions, an analysis of the program by Goldman Sachs suggested that the project would have "positive but modest" effects, with maybe a 0.5 percent increase in home values within the first year.

But if more buyers share the same zeal for the prospect of single-family investing as renowned investor Warren Buffet, the program could be off to a great start. Buffet recently told CNBC that he would buy up "a couple hundred thousand" single-family homes if it were practical, and for the right price, going so far as to say that houses are a better investment than stocks at the moment.

Whether or not his peers will pony up to clear the more-than-200,000 inventory of FHFA-managed home foreclosures remains to be seen, but the market waits for no one. The New York Federal Reserve Bank predicted another 3.6 million foreclosures nationwide over the next two years.



 


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