Finding fortunes in foreclosures

Jul.July 01, 2012 07:00 AM

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While much attention has been paid to the buying and selling of trophy Manhattan properties as the market recovers, some outer-borough real estate players are reaping enormous returns on a different kind of investment: They’re buying formerly distressed homes and quickly flipping them.

According to an analysis of city property records by The Real Deal, these New York City– and Long Island–based firms are, in many instances, doubling their money in just a few short months by scooping up underwater one- and two-family homes.

The foreclosed or otherwise distressed properties are producing average gross margins of about 75 percent, or about $160,000 per home, according to our analysis, which covered the last 24 months. Some of the investors are stringing together dozens of these property flips and likely making millions. (Though, without knowing exactly how much money these investors are pouring into the homes in capital improvements, and what they’re spending to market the properties, it’s impossible to say how much net profit they’re seeing.)

Most of the 20 firms that TRD identified as players in this universe fly under the radar. Indeed, the vast majority of them do not have websites and are not known to many real estate insiders. In addition, many use multiple names for their acquisitions so it is difficult to track the total activity each firm has done.

One of the most active companies was also the most transparent.

Residential Development Group, an investment company headed by Kamran Badkobeh and based in Ozone Park, has a website,  www.buyallcash.com, with properties for sale and under contract. TRD identified 48 properties that the company sold over the past two years, with a gross profit — which we calculated as the difference between the purchase price and the sale price — of more than $8 million. (The firm may have had even more transactions that were listed under a different company name in public records.)

Badkobeh could not confirm TRD’s figures, but said his company was not as profitable as the numbers suggest, in part because the analysis does not count money spent to rehabilitate and sell the homes.

“We can state that the gross profit you set forth is certainly far in excess of our net profit, which, of course, is far more relevant. Moreover, we have done numerous projects over the years which have lost money,” Badkobeh said.

Other firms flipping distressed outer-borough properties include the Jamaica, Queens–based Barca Development, headed by Yizhaq Ben-Shabat, which sold at least 31 properties with an average spread between purchase and sale price of $164,000 per home, and the Kew Gardens–based Daniel Group, which sold at least 20 such properties at an average spread of $173,000.

The Daniel Group appears to be run by Joseph Cohen and Yehuda Cohen.

Another dominant player is Richmond Hills–based Yavne Management, whose president is Menachem Heller. The firm did at least 31 deals with an average spread of $166,000 per home over the past two years. The majority of the properties that the above-mentioned companies snapped up were either REOs (properties owned by a bank), homes owned by another investor who previously bought it from a lender after it went into distress or properties purchased from an underwater homeowner at a steep discount.

One of the smaller firms on this scene is Retained Realty, a company affiliated with Howard Milstein’s Midtown-based Emigrant Savings Bank.

The named firms all either declined to comment or did not respond to requests for comment.

Meanwhile, lenders such as Deutsche Bank or Credit Suisse’s DLJ Mortgage Capital, as well as government-supported enterprises such as Fannie Mae, sold many of these outer-borough properties to these investors. Other sellers include financial firms like the now-defunct GRP Financial Services, which was acquired by Sallie Mae in 2005 and liquidated at the end of 2009.

Douglas Lombardo — a former GRP employee who now has his own real estate firm called Stone Bay Realty Services in the Bronx — said GRP hired local brokers to market the properties. He estimated that an investment firm would spend roughly $60,000 on average getting them in shape to sell to homeowners.

“In the New York area, it was very rare that a foreclosed property was in good shape,” he said.

How it works

The ability to buy these distressed outer-borough homes in bulk appears to be aided by insider-baseball-type connections to lenders, a deep knowledge of home values and access to equity and debt.

After acquiring the title from the lender or distressed homeowner, the investment firm can either take out a loan on the property or, far more frequently, keep it as an all-cash investment. Either way, the investors generally pay between $170,000 and $250,000 for each home and hold them for between four and 10 months, according to TRD’s review.

It is unclear how much capital these companies are spending on home renovations to prepare them for a higher-priced resale. One industry player, who asked not to be identified, put the figure somewhere between $40,000 and $100,000, plus “the closing costs are close to 6 percent, and we typically pay about a 6 percent [brokerage] commission.”

A review of several dozen of the hundreds of flips TRD found reveals investors filed very few permits with the city Department of Buildings.

Also, TRD’s analysis only found one firm that was frequently obtaining mortgages. Yavne Management often received loans from groups such as Bayport Funding, based in Great Neck.

A look at one Queens property offers a window into the outer-borough flipping sector.

It started way back in April 2006, when a female buyer paid $400,000 for 148–20 112th Avenue, a 1,600-square-foot, single-family home in South Jamaica, a bit more than a mile north of John F. Kennedy Airport, data from PropertyShark shows.

At the same time, she took out two mortgages totaling $400,000. She defaulted, and the lender — Fremont Investment & Loan — filed to foreclose in 2008. In 2009, Fremont transferred the loan to Colorado-based Residential Mortgage Solutions. Then, in late 2010, the house was put up for sale at an auction with a lien of $444,808, but RMS took it back, turning it into an REO.

Just over a year later, in January 2012, RMS sold the property to Barca Development for $181,000. That’s when the flipping opportunity ripened: five months later, Barca sold the home for $356,500, city records show.

The flip yielded Barca a gross profit of $175,500.

DOB does not show any permits filed over the past 10 years on the house, so it is unclear how much Barca spent, if anything, on rehabilitating the home.

Not without controversy

The local distressed-home market was tainted with a scandal nearly two decades ago. Twenty-five brokers and investors admitted to rigging bids at Queens foreclosure auctions between 1986 and 1997.

Some housing advocates say the high margins on today’s flips could be a red flag indicating manipulation of the market, or could simply be an indication that the properties need a lot of work.

Meanwhile, academics are studying the REO market and its impact on residential neighborhoods.

New York University’s Furman Center for Real Estate and Urban Policy published a report in May that found only three firms purchased more than 10 REO properties in 2010 and 2011 in the outer boroughs. That suggests that most of the purchases were made by smaller companies.

However, the study did not analyze the individual investment firms buying and selling the homes that were often achieving the hefty markups.

“It definitely warrants further research. It does seem like either the banks are trying to get them off their books and the investors are putting in the necessary work, or perhaps Fannie [Mae] and Freddie [Mac] are not marketing their properties quite as aggressively as they could,” said Furman Center research analyst Max Weselcouch.


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