Call them grave dancers, vulture funds, turnaround specialists or the more euphemistic “opportunity investors.” However you identify them, the deal is the same: When hyperactive real estate markets lose their sizzle, or property owners no longer can afford to hang on to their houses, well-capitalized investors smell blood — and move in.
That’s happening in most of the “bubble” areas that saw heavy speculative activity and razzle-dazzle financing from 2001 through 2005. But it’s also happening across the country in less volatile markets where unaffordable mortgages and economic distress are producing record numbers of panic sales to investors at fractions of former values.
In Miami Beach and South Florida, real estate consultant Jack McCabe says he is advising “hedge funds, high net-worth individuals, Wall Street investment banks, and groups of doctors and lawyers” who all want a piece of the area’s tottering condominium and townhouse sector, where some properties are selling for 50 cents on the dollar.
McCabe, CEO of McCabe Research and Consulting, in Deerfield Beach, Fla., says investment groups with capital “in the multiple billions” are already active in South Florida, searching for fire-sale prices on properties with good long-term prospects. In the greater Miami area, McCabe estimates there are approximately 25,000 unsold condos and townhouses on multiple listing services, which he calculates is a 35-month supply at current absorption rates. Another 22,600 units are under construction, and 4,000 more are slated to begin construction in the next year or two.
In one recent auction, according to McCabe, investors walked away with three-bedroom condos for $300,000 that originally sold for $550,000 to $675,000. Though not all units are selling at giveaway prices, he says, “Miami is the poster child” for overbuilt, overpriced condo markets that were dominated by speculators during the boom.
McCabe declines to identify any of his roster of vulture fund clients, “who prefer to fly under the radar.” But they are out in droves to acquire entire buildings — or floors or individual units — then refurbish them, convert them to different uses, rent them out or hold them and resell at the first sign that the local market is bouncing back. McCabe estimates that for many of these units, this might not happen until 2010 or 2011.
McCabe’s segment of the market tends toward big-bucks, but around the country there are hundreds of much smaller-scale investors on the prowl for individual turnaround situations inside otherwise stable markets. The largest organization of such entrepreneurs is HomeVestors, a Dallas-based franchiser started in the mid-1990s. Its 260-plus franchisee partners are on track to buy more than 7,100 individual houses in 35 states this year at discounts averaging 35 percent to 45 percent, according to John Hayes, president and CEO.
Best known for its advertising slogan “We Buy Ugly Houses,” HomeVestors trains its franchisees to spot and capitalize not only on houses that need work, but on what Hayes calls “ugly situations” — people with problems who are motivated to sell for cash. Among the most common:
Divorce of the property owners.
Deaths.
Loss of a job.
Problem tenants causing headaches for landlords.
Mortgage delinquencies caused by unaffordable financing.
HomeVestor franchisees — who typically are professionals or small business veterans — pay a $49,000 fee up front and must have net assets of $200,000 in cash or cash equivalents. They also pay the parent company a flat $775 for every house they acquire, plus interest on credit lines the company extends to enable them to buy high volumes of properties. Some HomeVestor franchisees buy, fix up, rent or resell 100 or more houses a year, thanks in part to high volumes of potential sellers — over 200,000 this year, according to Hayes — who are driven to them by the company’s advertising campaigns.
Subprime mortgage delinquencies and foreclosures are swelling those numbers significantly, he said, along with plunging prices in some local areas. Softening markets are also driving down the expected discounts on troubled houses. Where as in past years, “We might offer 65 percent of a property’s expected value after repair, now in some places we’re looking at 50 percent” offers, said Hayes.
A $100,000 starter home needing renovations with a seriously delinquent mortgage, for instance, might draw an offer of just $50,000 to $55,000 cash from a HomeVestor franchisee. “The owner might be offended at the low-ball offer,” said Hayes, “but then again, in some situations that might be the only offer they get.”
Ken Harney is a real estate columnist with the Washington Post.