IS ANYONE KNOCKING? | Prices are down, but housing investors aren't heating up the market
Jeffrey Hall watches the Central Massachusetts real estate market closely, and recently he noticed something a bit odd.
Hall, a principal at Keller Williams Realty in Worcester and Westborough, had his eye on two bank-owned properties. The banks, negotiating a short sale, became frustrated with how long a potential buyer’s application process for a federally backed mortgage was taking.
So the banks put the properties back on the market at a lower price to attract cash buyers and remove the assets from their books. Banks tend to do that after a property has been on the market for a while, and longtime real estate investors know it, Hall said.
But even with the homes back on the market with lower asking prices, the cash buyers never appeared.
“They didn’t come out of the woodwork,” Hall said. “They weren’t there.”
And Hall thinks it’s because many of them have already deployed much of their capital.
A weak housing market has largely taken away a vital part of the equation for single-family and multifamily home investors: flipping properties for a profit.
“Now they’re stockpiling long term. They’re holding on to their properties,” Hall said.
Residential real estate purchases by investors are not tracked on a state-by-state level, but anecdotally, such activity does not appear to be picking up steam in Central Massachusetts.
That goes against a national trend that the National Association of Realtors (NAR) noted recently.
Nationwide, investor purchases in August accounted for 22 percent of total residential real estate transactions, the highest level since March, according to NAR data.
Lawrence Yun, NAR chief economist, said that across the country investors are looking to real estate as a hedge against inflation and a way to quickly get to a positive cash flow. He said investors could have a healing effect on the market.
“The presence of investors is not necessarily good in bubble years,” Yun said. “But investors are very helpful in a down market in helping it to stabilize.”
Factors Influence Investing
Sandy Annunziata, broker and owner of S&R Properties in Leicester, said that her clients who invest in multifamily properties have backed off as of late. In addition to brokering sales and consulting with real estate investors, S&R manages 60 rental units for three different owners.
“They themselves have not picked anything new up,” Annunziata said. “They would love to sell but not in this market, obviously.”
Kristen Barlar, owner of Compassionate Real Estate in Westborough, said her company is holding onto some properties longer than she prefers.
“That holds up our capital,” Barlar said. “We have to hold back and wait for some of it to be released.”
Nevertheless, Barlar said she has been increasing her real estate purchases since founding her company four years ago. The company fixes up the properties with new paint jobs, carpeting and other amenities before trying to sell them.
Business has been increasing, Barlar said, because the company specializes in helping homeowners who owe more than their home is worth to negotiate short sales with their banks.
“That’s a barrier to entry for many competitors because it’s so detailed and time consuming and frustrating,” she said.
Despite the downsides, she said short sales are a win-win for the homeowner because it helps them avoid a public auction and deficiency judgments and the bank gets to write off a non-performing asset.
While Barlar’s company aims to flip properties within several months, other investors take a longer term strategy.
Russell Haims, a principal at Hampton Properties in Worcester, said he’s comfortable holding a property for a decade or longer. Haims, who invests largely in properties around Clark University, said he spends a minimum of $50,000 in renovations for every triple decker he buys.
Renovations draw tenants willing to pay higher rents, and Haims understands that a weakened housing market means he will have trouble buying and flipping properties.
“In this market, that’s not what my goal is,” he said. “Have I done it in the past? Absolutely.”
Haims said his investing pace is about the same as it has been, but he wishes that he could do more deals. What’s stopping him are banks’ asking prices for foreclosure or short sale properties, which he believes is motivated by banks’ unwillingness to accept big losses on mortgages that went bad.
“They’re having a sort of resistance to reality,” Haims said. “I think we all know the values were a bit too inflated and weren’t sustainable.”
Haims sometimes pays an independent appraiser for a second opinion on a property’s value. That second opinion often comes in lower, and has been a good strategy for Haims to coax a stubborn bank to accept a lower price.
Barlar said she also feels that many bank-owned properties are overvalued.
“There’s no agenda within the banks, from what I can see being out here in the field, to move these through quickly,” she said.
Barlar has recently noticed that some of the bigger banks have been unwilling to underwrite mortgages for people wishing to buy one of her properties, even if the person has a 20-percent down payment. She ventured that some banks don’t like mortgaging a property that changed titles less than a year ago, but said she is at a loss to explain why.
Barlar said that local banks have been stepping in more to fill the void.
Kristina Jones, a partner at Worcester-based Precision Capital, said an abundance of foreclosure and short-sale properties on the market has created opportunities for those with capital and patience.
“We personally like to buy something that needs work so we can improve it and increase the value,” Jones said. “It doesn’t bother us to hold onto it, even if it’s for a few years.”
One reason that holding onto investment properties has become a bit more bearable is because of shifts in the rental market. Former owners have transformed into renters because of foreclosures or credit problems.
Hall said those people can’t often get another mortgage right away. So they enter the rental market and in some cases are willing to pay to rent a single-family home.
As of the second quarter of this year, asking rents in the Worcester area were up 4 percent from 2009, according to data from the real estate analysis firm Reis Inc.
Increasing rents and low asking prices on many properties have brought newcomers to the market, Haims said. He said he has encountered them at auction and thinks some may have never purchased investment properties before.
Some are disenchanted with the volatility of the stock market and may have never bought an investment property before, he said.
Haims doesn’t mind the competition, but said it can sometimes drive up prices at auction. And he said some investors underestimate how much renovations and maintenance will cost, so the property stays the same or gets worse, which can drag down values of surrounding properties.
Some may wonder: if there are deals to be had and rents are rising, why aren’t more people investing?
Some may not want to deal with the hassles of being a landlord and others may not have the credit to get a mortgage. But Hall, of Keller Williams, said that certain things in the real estate business remain a mystery.
He said that sometimes a property sits on the market with no offers for months. Then suddenly, a handful of offers all come in at once.
“There are always inexplicable reasons why there’s this wave,” Hall said. “Somehow, whatever it is, there are going to be buyers susceptible to the same influences. They’re on the same cycle and make decisions at the same time.”
(NOTE: The original version of this story provided an incorrect first name for Jeffrey Hall.)
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