Friday, June 12, 2009

Investors not flipping houses, but renting

by J. Craig Anderson - Jun. 12, 2009 12:00 AM
The Arizona Republic

Real-estate investors have returned to the Valley in a big way, prompting concerns that the housing market is becoming too speculative to sustain the recent buyer activity.

The lure of once-in-a-lifetime deals on bank-owned homes is driving investor purchases, which experts say account for 50 to 70 percent of recent home-buying transactions. Still, it's the ability to generate revenue by renting the homes to tenants - in some cases, previous owners - that makes the properties such attractive investments.

The Phoenix-area housing market has been flooded with homes for rent in recent months, raising concerns about whether there will be enough tenants to keep the Valley's estimated 130,000-and-growing rental properties out of financial jeopardy.

Even some longtime supporters of the home-investment market say they've noticed a disturbing return of the can't-lose mentality that got so many speculators and house-flippers into trouble a few years ago.

"Investors are starting to look at the market from a speculative standpoint," said Alan Langston, who runs the Arizona Real Estate Investors Association. "We could end up with an oversaturated rental market."

Although the demand for rental homes is still strong, Langston said, speculators seeking big returns could be in for an unpleasant surprise, especially if they don't treat rental-home ownership as a business that requires time, effort and cash reserves.

Dealing with tenants also requires legal knowledge, he added. "You need to have a good lease, and you need to know how to enforce it," he said.

Langston has created a second organization, the Arizona Rental Property Owners and Landlords Association, to provide resources such as proper lease agreements, market data and legal advice in exchange for an annual fee of $129.

Rental-home owners who lack a full understanding of the financial risks and recommended precautions could find the homes they purchased from lenders right back on the market, which would be bad for investors, tenants and the area's economic recovery.

Home foreclosures have created an atypically high demand for rental properties, but that demand is not unlimited, and rental investments are not immune to financial risks such as tenants losing their jobs or continued decline in rental rates as supply increases. The glut of single-family homes for rent, overbuilding of apartments and failed condominium projects have created a difficult and highly competitive market for rental-property owners.

Many apartment managers have responded by boosting incentives such as lower rents, waived or reduced fees and complimentary services.

Many rental-home investors have purchased the properties with cash, which means there is little chance of those homes going into foreclosure. Of the estimated 131,000 rental homes in the Phoenix area, only about 5,000 are currently in the foreclosure process, according to Valley market-research firm NetValueCentral Inc.

Langston said it's likely that many of the houses in foreclosure are owned by what he calls "reluctant landlords," people who were forced to leave their homes and rent them to tenants because of financial problems.

But whenever there is a perceived opportunity for investment gains, he said, it will attract what Langston calls "stupid money." Stupid money was flowing like water during the housing boom, he added.

"The idea is that you could make money even if you didn't do anything right," he said.

Chaz Smith, senior vice president of the LandSource Group at Colliers International in Phoenix, said first-time buyers in the current market are all too aware of the investor presence.

"Young people looking for a starter home, they get outbid by investors," Smith said.

Still, Smith and Langston see real-estate investment as a positive. The competition that's causing frustration for other buyers is keeping prices from falling further, they said. Starter-home buyers alone would not create enough demand to absorb the supply of bank-owned homes coming on to the market each month, they said.

Investors have fixed up many dilapidated or trashed homes and prevented the Valley from having neighborhoods littered with abandoned properties.

"Homes are being bought, neighborhoods are recovering," Langston said. "Imagine this market today without investor activity."

However, he said, there is a big difference between an investor and a speculator.

"Investors follow solid investment practices. They add value to the transaction," Langston said. "Speculators are looking for a very quick turnaround and a very large return."

Despite the economic benefits of investor participation in the market, some observers say, the return of investors - even responsible ones - has disturbing moral implications.

Jim LaVanway, vice president of Homeowners Financial Group in Phoenix, is among those who blame the investment community for creating a bubble in the first place.

"That's the irony of it," he said. "Now, we're waiting for those same guys to come back and buy those same homes at a lower price."

Too many rentals?
Investors' rush to purchase bank-owned homes and turn them into rentals has sparked a number of concerns, including:

• Too much supply: Rental properties would put many apartment and rental-home owners out of business.

• Future concerns: The failure of rental investments would lead to future foreclosures and displacement of families. Also, a high number of rental-investment failures would scare away other potential investors and decrease home sales.

• Homeowner appeal: Neighborhoods overrun with rental properties would be undesirable to prospective homeowner-occupants.

How I see it in the trenches here on the front lines. Arizona Real Estate/Rental Market Update.

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