Archive for June, 2013

Luxury Real-Estate Flippers

Posted: June 30, 2013 in Uncategorized

WALL STREET JOURNAL

  • June 27, 2013, 9:30 p.m. ET
  • Luxury Real-Estate Flippers

Foreign buyers and executives from other industries, chasing big returns, get in on the act of real-estate flipping.

There is a new breed of quick-change artist on the real-estate front: luxury flippers who focus on high-end properties.

Million-Dollar Flips

Stephen Voss for The Wall Street Journal

FLIPPED OUT: Jordan Ghrist bought a four-bedroom in Washington, D.C., for cash, gutted it and resold it after three days on the market at an estimated 28% profit.

Popular before the housing bust, house flipping—where a property is bought, renovated and sold quickly to make a profit—is seeing a comeback nationwide. Rising prices and tight inventory are driving more investors to the upper end of the market. Flips of homes priced at $1 million or more shot up 35% in 2012 compared with 2011, according to market researcher RealtyTrac.

“Investors have actually run out of inventory on the low end of flips, and now they’re moving to the higher end,” says Daren Blomquist, vice president of RealtyTrac. The million-dollar homes are “the untapped market.”

Some new players are behind the uptick: foreign buyers, institutional investors and professionals who have made money in other industries.

Source: RealtyTrac

“In this market now with these numbers, everyone thinks they’re going to catch the next wave,” says Zar Zanganeh, a real-estate broker in Las Vegas, adding that he gets three times as many requests for homes to flip now than a year ago.

Patricia Delinois, president and chief executive officer of Century 21 Premier Elite Realty in Miami, facilitated a flip for a 6,255-square-foot “complete fixer-upper,” she says.

The property was purchased in January 2012 for $1.2 million by an investment group led by an American and backed by Venezuelan, Brazilian, Colombian, Russian and French investors. They renovated the kitchen and bathrooms, installed top-of-the-line appliances and lighting, and decked it out with luxury finishes.

The renovations cost almost $1 million, she says. Now it is on the market for $2.98 million.

In Washington, D.C., Beth Hughes, a real-estate agent with DCRE Residential who finds homes for flippers, last summer found a 2,000-square-foot house in Columbia Heights for Jordan Ghrist, president of Level One Development LLC. He bought the four-bedroom, 3½-bathroom house for $461,500 and gave it a “total gut job,” he says. Mr. Ghrist has a $2 million fund so he can pay with cash.

The house went under contract for $805,000 about a month ago after a mere three days on the market. The sale is expected to close this week—netting about 28% in profit, he estimates.

Flipping high-end homes can be particularly challenging. Selling a luxury property can take longer than a midprice home, and renovation costs can be steep, because high-end buyers expect to be wowed. Plenty of flippers have lost money. RealtyTrac data show that in Naples-Marco Island, Fla., for example, flippers who purchased homes for $1 million or more lost 14% of their investment when the property sold within six months.

Ideally, the purchase, renovation and sale should occur within six months to maximize profits, says Bruce Bartlett, managing partner at Sequoia Real Estate Partners, a private-equity firm in Los Angeles.

“These aren’t paint-and-lipstick jobs. Basically, you have to re-envision the entire house,” says Mr. Bartlett, who flips single-family and multifamily homes with a team of partners, including Eric Sussman, senior lecturer at the Ziman Center for Real Estate at the University of California, Los Angeles.

Mr. Bartlett recently bought a 1,850-square-foot modern house in Los Angeles’s Hollywood Hills for $690,000. He then spent $50,000, mostly on cosmetic changes, adding walnut flooring and railings, maple cabinets and granite counters in the kitchen, a new wet bar, and fresh paint. He expects the house to close this week for $888,888—at a 20% profit.

When buying a home to flip, Mr. Bartlett says he first considers the foundation, roof, electrical system, plumbing, and heating and air-conditioning. “That’s where you really drop all your money when you fix a house,” he adds.

For materials, Mr. Bartlett shops at outlet and wholesale stores. He looks for sales and asks for deals. In the Hollywood Hills house, he wanted a white-patterned decorative tile, but designer-name versions were too pricey, from $40 to $77 per square foot. Instead, he opted for a generic wall tile that cost $3.82 a square foot. For the wet bar, he chose a generic black tile that cost $1.99 per square foot and a porcelain tile in sea-foam green instead of glass.

For items that people see, such as appliances and fixtures, he’ll buy brand names. Sometimes he buys in bulk. “Costco COST -0.83% had really, really great Hansgrohe bathroom faucets for $70 each. I took 20,” he says. “I don’t know yet where I’ll use it, but I know I’ll use it. And when a buyer comes into the house, he’ll see Hansgrohe.”

High-end flips are particularly gaining traction in the markets hardest hit during the downturn. Investors could scoop up homes at big discounts in areas that now have some of the highest home-appreciation rates. Some metro areas have seen more than a sevenfold increase in million-dollar flips over the past year, although million-dollar homes make up less than 1% of all flips, according to RealtyTrac data.

The million-plus flips offer more room to make a profit. The high demand means investors can take bigger risks in rehabbing—and get higher prices.

In Atlanta, property appraiser Dan Fries says the $1 million homes he appraises are typically valued for $250,000 more after they are flipped, depending on whether the changes improve the house functionally or are purely cosmetic. Sometimes, he says, investors earn back five times the amount they put into renovations.

In recent months, high-end flippers have had to be creative in finding homes. Mr. Bartlett, the Los Angeles flipper, bought a house in Rancho Palos Verdes after a friend told him the owner had died, and his family, who had inherited the property, lived out of town. The property had been vacant for six months and had water damage. He called the family’s real-estate agent, who sold the property to him for $825,000.

He plans to spend $200,000 to create an open floor plan, reconfigure the master bedroom, redo the landscaping and put in air-conditioning. Normally, he doesn’t take on houses that need a complete overhaul, but he expects this one to sell for $1.4 million, a 37% profit, he says.

Lloyd Segal, a house flipper himself and author of “Flipping Houses,” a guide to buying and fixing houses, finds homes through bankruptcy courts, probate courts, courthouse auctions and people in his network, to whom he’ll pay an assignment fee.

Sometimes he just drives around Los Angeles to scout properties. That’s how he found one of his latest homes, which he bought for $2.85 million. “I was late for a date and driving like a maniac through Hollywood. I see this little sign that said ‘For Sale’ and a phone number,” says Mr. Segal, adding that he immediately pulled off the side of the road to call. “I was late for the date. You can see my priorities. Don’t tell anyone that.”

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June 26, 2013 Wall Street Journal

By Glenn Kelman

“The long-awaited day of reckoning is here,” Chris Farrell wrote in Forbes this week. “The era of historically low interest rates is over.” Mortgage interest rates began to increase in the first week of May, going from 3.35% to the headline-grabbing rate of 4.36% as of Friday.

What happened? Last Wednesday, Federal Reserve Chairman Ben Bernankeannounced that if the economy continued to improve, the government would stop buying $85 billion in bonds each month by mid-2014. The stock market lost 3% of its value in three days.

Everyone wants to know how American home buyers will react to the rate increase, but it usually takes months for people to buy a home, and months more for records of such sales to become public.

In the meantime, the real estate industry remains bullish; confidence among home builders hit a seven-year high last week.

At Redfin, we see a slightly different trend. As a company of technology-powered real estate agents, we’re able to track how more than 6,000 of our home-buying clients across 25 U.S. markets are reacting in real time, touring homes and writing offers in greater or lesser numbers.

Our data from this weekend suggest that buyers already in the market remain engaged, but new buyers may be stepping back. Comparing this weekend to the average of the last three weekends, we found that:

The number of customers making an offer on a home increased 4%.

The number of customers touring a home increased 1%.

The number of new customers contacting a real-estate agent decreased 11%.

This reaction isn’t dramatic, but it is a continuation of a largely unheralded softening in the market. For the first time since November, the percentage of homes going under contract in less than two weeks began to decrease in May, from 33% to 32%, a reversal of an important trend. Bidding wars peaked in February at 79% of the homes bid on by Redfin agents, falling in May to 69%.

We aren’t surprised that the growth in offers actually accelerated. It turns out that rising rates probably lured some dawdling buyers, suddenly concerned that money was getting more expensive, to jump into the market. Yes, compared to the same weekend last year, the growth in Redfin customers making offers this past weekend actually increased, but the eight-week trend has been softening:

We saw a similar pattern with customers touring homes, an uptick this weekend in the growth compared with last year of home-buyers touring homes, but in the context of a four-week softening in demand:

Most markedly, the number of new customers entering the market has begun to slow, returning to growth rates we saw in the first four months of the year:

This tells us that rising rates will temper the market’s growth. As Redfin agent Landon Nash noted about one of the wealthiest of U.S. markets, San Francisco, “Rates are still historically low, but some of my buyers who were already close to their max price are now priced out because of the rate jump.”

We now see some folks belatedly jumping into the market, but more pulling back. Given how fast prices have been rising and how few homes there have to been to buy, that might be a good thing. “All my clients have told me they are still going to purchase,” said Redfin Los Angeles-area agent Loren Bennett. “Many feel that we have been in a small bubble that the rate increase may actually deflate.”

Some buyers have been spurred to action by the rate increase. “I had two tours this weekend with first-time clients who said they have been looking online for awhile and decided to jump in and get serious, touring homes to buy now that they feel rates are going up,” said Redfin Orange County agent Katrina Jauregui.

“It has definitely registered with consumers,” said Redfin Baltimore agent Casie Yarn. “A client who just got into contract called Friday in a near-panic about rates going up. She kept asking if I thought that they’d go back down any time soon. She was actually considering two different lenders and made a decision under pressure to lock in with one at 4.25% before rates went up more.”

But more than a few agents noticed a significant downturn in demand. “It’s like the market just died,” said Bree Al-Rashid, a Redfin agent who lists homes in the Seattle area. “In neighborhoods where I would expect 5–10 offers on a median-priced home, I might be getting one, two if I’m lucky. I’m preparing sellers very differently than I did even a couple of weeks ago.”

 
 

Delinquency, Foreclosure Rates Decrease to Post-Crisis Lows in May

06/25/2013BY: ESTHER CHO

The national delinquency rate and foreclosure inventory rate each fell to post-crisis lows in May, Lender Processing Services(LPS) reported Tuesday.

At 6.08 percent, the national delinquency rate in May stood at the lowest level since May 2008, when the rate was 5.96 percent.

Month-over-month, the delinquency rate decreased 2.1 percent from April and plunged 12 percent from May 2012.

At the same time, the foreclosure inventory rate slipped to 3.05 percent, which represents the lowest point since March 2009 when the rate was 2.90 percent. The rate has also fallen for 13 straight months now.

Over the last year, foreclosure inventory has plunged 27 percent and also fell by 3.9 percent over the last month.

LPS also reported about 3.04 million mortgages were past due by at least one month, but not yet in foreclosure. Of that total, about 1.34 million are 90 days or more past due but not in foreclosure.

Properties in foreclosure pre-sale inventory numbered 1.52 million as of May, bringing the total number of delinquencies and foreclosures to 4.56 million.

The five states that topped the list for having the highest percentage of past due mortgages were Florida, New Jersey, Mississippi, Nevada, and New York.

The five states with the lowest percentage of non-current loans were Montana, Alaska, Wyoming, South Dakota, and North Dakota.

 

A Lender’s Perspective: Pre-Construction Suggested Items for Project Management – a few things to consider.

For those that are Fixing and Flipping or Buying and Holding, I thought I would post some suggested tips when managing your own project.  This is from my construction control management experience and while most rehabbers, builders, developers and investors know a lot of these suggested steps, my posting is just meant as a helpful guide-line reminder, to assist you in your successful completion of future projects.  Let me know what you think and if you have any questions, please leave them here or email me at Barry@InstantFunder.com.  Wishing you luck and success with all of your projects.  Best, Barry

 

Pre-Construction Suggested Items for Project Management

1. Building Permit requirements

2. Additional Insured requirements – (general & subcontractors)

3. Project Plan Set availability, if any

4. Quality control is the contractor’s responsibility to adhere to specifications

5. Subcontractor’s contact information list for lien waiver tracking

6. Progress payment (Draw) submittal requirements

a. Spreadsheet format with requested line item levels of completion

b. Lien waiver releases

c. Invoices for stored materials, services, etc

d. Design changes that may impacts costs

e. Contingency line item impacts

f. Progress Schedule changes

g. Copy of building permit cards

h. Inspection dates within 48 hours of request

i. It’s safe to assume that “If it’s not seen, it’s not going to be funded”

7. Discussion of project schedule, date of agreed work completion

8. Who has authority to approve project changes? 

 

The New York Times

DEALBOOK

Behind the Rise in House Prices, Wall Street Buyers

 

Joe Cusumano, a real estate agent, outside a home in Riverside, Calif. He said much of his business came from large investors.
EMILY BERL FOR THE NEW YORK TIMES
 
By NATHANIEL POPPER
June 3, 2013

The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.

Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.

“The growth is being propelled by institutional money,” said Suzanne Mistretta, an analyst at Fitch Ratings. “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.”

Wall Street played a central role in the last housing boom by supplying easy — and, in retrospect, risky — mortgage financing. Now, investment companies like the Blackstone Group have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest.

 

Mr. Cusumano said he was concerned that outside investors would fail to take care of properties the way local buyers would.

EMILY BERL FOR THE NEW YORK TIMES

Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough.

While these investors have not touched many healthy real estate markets, they are among the biggest buyers in struggling areas of the country where housing prices have been increasing the fastest. Those gains, in turn, have been at the leading edge of rising home prices nationwide.

Some see the emergence of Wall Street buyers as a market-driven answer to the nation’s housing ills. Investment companies are buying up rundown homes at a time when ordinary people can’t or won’t.

Nationwide, 68 percent of the damaged homes sold in April went to investors, and only 19 percent to first-time home buyers, according to Campbell HousingPulse. That is helping to shore up prices and create confidence in the broader markets.

 

“When people write the story of this housing recovery, these investors will be seen to have helped put the floor under the housing market,” said David Bragg, an analyst at Green Street Advisors. “In some of the key markets, that contributed to the recovery.”

The story, though, often looks more complicated on the ground. Joe Cusumano, a real estate agent in Riverside County, Calif., said that in recent months 90 percent of his business had been for companies like Invitation Homes, a Blackstone subsidiary. Home values in Riverside County have risen by 15 percent in the last year, according to CoreLogic.

But Mr. Cusumano said he wondered if faraway investors would properly maintain the homes they buy. He said that Invitation Homes had been willing to put money into the properties, but he was not so sure about the other players. He also worries what will happen when these investors start selling, as they inevitably will.

“The thing that scares me is the values going up so quickly,” said Mr. Cusumano. “That’s what happened before and that’s what’s scaring me. Is this going to happen again?”

The idea of investors’ buying homes and renting them out is nothing new. But in the past, landlords were almost always local. Now big investors are using agents like Mr. Cusumano to stake a claim to entire neighborhoods.

In a sign of the potential peril ahead, some of the investment firms have recently taken the first steps to cash out.

The investment fund financed by Colony Capital filed last week to go public, the second firm to do so in May. Another early player in the business, the Carrington Holding Company, said last week that prices had risen too far, leading the firm to begin selling some of its holdings.

Fitch Ratings warned last Tuesday that prices for single-family homes in the regions with the biggest housing rebounds had been outpacing the growth rate in the local economies and “could stall or possibly reverse” if big investors start selling.

“We see economies that continue to struggle — we don’t see them recovering enough to justify this drastic increase in prices,” said Ms. Mistretta at Fitch.

Despite the recent gains, housing prices remain well below their precrisis highs. In Riverside, for example, home values are still down more than 40 percent from their 2006 records, according to CoreLogic.

To the extent that the housing rebound is becoming overheated in some pockets, it does not carry the most significant risks of the real estate boom that came crashing down in 2008. The new investment groups are not heavily indebted, making them less vulnerable to small movements in real estate values, and the risks are not spread as widely through the financial system.

Nearly all of the big investors have insisted that they plan to rent the houses they are buying for years to come. The Blackstone unit, Invitation Homes, has opened 14 offices across the country to serve the homes it has bought, a spokesman for the firm said.

At American Residential Properties, which went public in May, the chief executive, Stephen G. Schmitz, said that if other firms start selling their houses, “we’ll step up our buying.”

He added: “We still think that we’re in a buyer’s market.”

Yet some investment companies are already pulling back in the markets that have had the fastest growth. In Phoenix, the percentage of all house purchases involving investors fell to about 25 percent in March from a high of 36 percent last summer, according to the Campbell HousingPulse Survey. The same survey shows that investors have been increasing their presence in new areas like Florida and California.

All of this has made it hard for house hunters like Jeff Martin, who is looking to buy a fixer-upper in Riverside County. Mr. Martin, 58, has made offers on 15 houses over the last year. Last Wednesday, he received his latest rejection. On most of the houses, Mr. Martin has lost out to investors offering all cash.

Mr. Martin, a retired Navy veteran, puts much of the blame on banks that have been holding onto empty houses, lowering the supply of available homes. He said he has trouble faulting the investors, given that he was involved in real estate financing during the last boom. But he is worried that if mortgage rates begin to rise he will lose out on his opportunity to buy. Rising mortgage rates could also lead to a broader slowdown in the real estate recovery.

Mr. Cusumano said that the investors he works for have been trimming back their purchases in the area. His agency closed on three houses for investors in May, down from eight in February.

But the fevered pitch of the market has not died down.

In late May, one of his clients closed on a house just a month after it went on the market. There were eight bidders, despite a listing that said “NEEDS TLC!!” Mr. Cusumano’s client won the house only after agreeing to go $500 over the asking price of $194,500.

“It’s just a strange market,” he said. “We are in uncharted territory.”

GOOD NEWS FOR INVESTORS?

Posted: June 4, 2013 in Uncategorized

Report: Shadow Inventory Looms Large for GSEs, HUD

06/03/2013BY: ESTHER CHO 

Shadow inventory held by the GSEs and HUD “vastly” outnumbers REO properties the groups maintain, according to a joint report from the Office of Inspector General for theFederal Housing Finance Agency and HUD. The report further warned HUD and the GSEs must pay close attention to shadow inventory, which threatens to increase their supply of REOs.

For the report, shadow inventory was defined as properties 90-days or more past due but not yet in foreclosure

According to the report, as of September 2012, HUD held about 37,445 REOs in its inventory, while Fannie Mae and Freddie Mac had about 158,138 REOs, leading to a combined total of 195,583.

Meanwhile, the GSEs held 966,649 properties in their shadow inventory, while HUD was found to have 741,384 homes still in the shadows, for a total of 1.7 million properties.

For the GSEs, the ratio of shadow inventory to REO inventory was about 6-to-1, while shadow inventory for HUD was 19.9 times greater than REO inventory.

Given the massive number of homes still hiding in the shadows, the OIG says the number of REO inventories held by the GSEs could increase significantly as the seriously delinquent properties become foreclosed on.

“Even a fraction of the shadow inventory falling into foreclosure could considerably swell HUD and GSE inventories of REOproperties,” the report stated.

The OIG also found the number of mortgages past due by a year or more actually increased, rising from 558,761 at the end of 2011 to 655,782 by the end of September 2012.

According to the report, the inspector general for HUD named several areas where HUD did not have “adequate procedures,” such as list prices that were not reduced according to marketing plans, accepted bids that did meet HUD’s flexible threshold, and properties assigned to field service managers even though performance issues were identified, among other issues.

The issues resulted in REO properties that were not competitively valued, longer holding times, sales that did not achieve the highest net return, and properties being assigned to contractors that did not perform at a satisfactory level, according to the report.

The improve FHFA’s oversight and conservatorship efforts, the report says the inspector general for the agency is implementing an audit and evaluation strategy to monitor performance.

For example, FHFA-OIG plans to assess FHFA’s REO-to-rental pilot program and the agency’s oversight of single-family property inspections from the GSEs.

Through the evaluations, FHFA-OIG will determine if the agency is ensuring the GSEs are effectively managing REOs to maximize financial recoveries and to minimize the negative impact of foreclosures.