Arizona home sales propped up by investors
Valley landlords buying some houses; hedge funds and equity firms want to buy more
by Catherine Reagor - Oct. 17, 2010 12:00 AM
The Arizona Republic
Investors are dominating metropolitan Phoenix's home-buying market again.
The region's growing supply of inexpensive foreclosure homes is drawing thousands of investors, who can pay cash and close deals fast. The growing supply of renters means those investors can make money off the homes they have scooped up.
The market has drawn a diverse crowd of investors, spurring small-scale landlords to add more homes to their holdings and attracting buyers from around the world looking to get in on a down market.
It also has quietly attracted investment firms that are buying huge quantities of houses in a strategy aimed at reaping big profits from today's low prices. Big investors are showing so much interest that some observers say lenders may soon start selling foreclosure homes in bulk batches, an unprece- dented tactic in metro Phoenix where the homes have always been sold in small groups or one at a time.
Whether the investor-buying trend of the past few months continues at this pace in the Phoenix area depends in some part on the foreclosure moratoriums announced in the past few weeks by a handful of the nation's biggest lenders. So far, many Valley real-estate agents and investors aren't seeing a drop in supply of fore- closure homes for sale or problems finalizing sales on lender-owned homes.
In the past, too many investors hurt Phoenix's housing market. Speculators were blamed for driving up home prices during the area's housing boom of 2004-06.
But now many traditional buyers, who would purchase a single home and live in it, won't buy because of concerns about another dip in home prices or can't because of bad credit.
So market experts say investors are welcome these days; without them, even fewer homes would sell. That would drive home prices down further and likely trigger even more foreclosures.
Investors are behind nearly 40 percent of all Phoenix-area home sales now, according to indus- try estimates, up from about 25 percent in January.
During the next year, Fannie Mae, Freddie Mac and other big lenders are expected to unload tens of thousands of additional foreclosure homes in metro Phoenix, meaning more low-priced properties ready for investors.
Foreclosure homes taken back by lenders are known as REOs, "real estate owned." It's a banking-industry term that has now become a buzzword among buyers and sellers in Phoenix's real-estate market.
"REO inventories have been climbing quickly, up 70 percent since early May," said Mike Orr, publisher of the "Cromford Report," a daily online analysis of metro Phoenix home sales and foreclosures.
"If investors were not active in this market, the situation would be dramatically worse," he said. "Prices would be very much lower, and blighted properties would be deteriorating instead of getting fixed up and resold."
All investors are looking for the best return on their money, whether that means keeping a home as a rental or trying to resell it for a profit. But the huge number of purchases means investors will shape neighborhoods and the resale housing market for years to come.
Classic investors
Julie and Mike Bieganski have bought 10 Phoenix foreclosure homes in the past 15 months.
The couple have lived in the Valley for several years and know the neighborhoods where they are buying. The Bieganskis' strategy is to pay cash for bargain-priced homes in central Phoenix that they can spend less than $20,000 to fix up for renters. Julie is a real-estate agent and finds the homes and renters; Mike handles most of the renovations.
"It's all cash deals now. But if you buy a home for $65,000 and rent it out for $850 to $900, that's a much better return than you would get on your money with a bank," Julie said. "To rent our homes fast, we can list them below current rental rates. With so many displaced people, the rental market will be excellent for years to come."
The Bieganskis already have a renter lined up for their latest foreclosure home, which they closed on less than two weeks ago.
The couple are looking for more to buy.
Julie found a low-priced, lender-owned home in northeast Phoenix last week and was going to make an offer but was unsure if the foreclosure moratoriums would stop or slow a sale.
"I asked the Realtor who has the listing what may happen, and she said everything seems to be fine," Julie said. "There was already another offer on the home. I really think if the folks left the house willingly and let the house go into foreclosure, it shouldn't be a problem to buy it from the lender. There are so many vacant homes out there."
The couple plan to keep acquiring foreclosure homes that fit their strategy and hold onto them longer, profiting on steady rents until they can sell the homes for a considerable profit. Many of their renters can't buy because their own recent foreclosures or short sales, in which banks allowed them to sell for less than they owed, hurt their credit.
If the investor-buying trend continues, some metro Phoenix neighborhoods are bound to have more renters than homeowners living in them. But since many investors are paying cash and fixing up the houses, another foreclosure cycle for those neighborhoods is less likely.
"We try to buy the ugliest home on the block and make it one of the nicest," Julie said. "We are also open to working out deals for people to rent-to-own our homes. We know it's tough to get financing now."
International buyers
Terri and Don Bozok live in Edmonton, Alberta, but were recently in Phoenix shopping for inexpensive houses.
The semiretired couple own a home in Mesa and visit the Valley often. They have seen home prices sag and feel like it's a good time to buy a few fixer-uppers they can renovate and sell quickly.
"We are definitely looking at foreclosures and not short sales because those take too long to negotiate," Terri said. "Because prices are down, we feel like it's definitely feasible we can make a few dollars on homes here."
In April, Canadians passed Californians as the biggest group of out-of-state buyers of metro Phoenix homes, according to the Information Market, a Phoenix-based real-estate data firm.
"Canadians are finding great values in Phoenix homes for their dollar," said Diane Brennan of Scottsdale-based Keller Williams Integrity First Realty. "Some are investing in a home they will rent for a few years and then use as a part-time retirement home."
Phoenix's housing market also is drawing the attention of buyers much farther away than Canada.
"We are seeing an interesting mix of international investors now. Everyone thinks Canadians are the only ones, but we have buyers from Pakistan, Bogota (Colombia) and Israel," said Beth Jo Zeitzer, an REO expert and president of Phoenix-based R.O.I. Properties. "Investors from around the world are seeing the housing deals in Phoenix."
Although some investors have been able to buy foreclosures for prices low enough to resell them quickly for a profit, most investors are buying knowing they will need to hold onto Phoenix homes for at least a few years before prices rebound enough to flip them.
Big groups, big funds
Since last year, G8 Capital has paid cash for more than a hundred metro Phoenix foreclosures homes. The Ladera Ranch, Calif.-based investment firm typically buys Valley foreclosure homes for less than $20,000.
The company led by Evan Gentry, former CEO of MoneyLine Lending Services, has been able to flip some of the Valley foreclosure homes it has bought but is also holding onto other properties and renting them out until home prices climb again.
"We will continue to buy in Phoenix. It's a great long-term market for us," Gentry said. "The foreclosure cycle is far from over, despite any lender moratoriums."
Unlike smaller investors, G8 can buy bulk portfolios of foreclosure homes located across the country from lenders.
"We can buy a portfolio that gives us five foreclosure homes in Phoenix and five in Cleveland," Gentry said. "Our strategies differ by city. We think Phoenix will be a great rental market for a while."
Several out-of-state U.S. hedge funds and investment partnerships are buying Phoenix foreclosure homes. Some of the firms are very low-key about their strategies, partly because they don't want to be seen as "vulture funds" profiting on the real-estate crash.
Most of these large investment firms have had to buy foreclosure properties one-by-one in metro Phoenix. Elsewhere in the country, they have received discounts from lenders when they buy several homes at once.
Zeitzer said when foreclosures started to climb in metro Phoenix in 2008, several groups formed to try to buy portfolios of bank-owned homes in the region. But so many individuals are buying foreclosures that lenders offer few deals to buy multiple Valley properties at once unless foreclosure homes in other parts of the country are acquired at the same time.
"In this second leg of foreclosures, lenders could start to sells homes in bulk to save time and money," Zeitzer said. "Investors are an important part of the market now and will definitely help keep inventories from climbing too fast."
