Droves of cheap foreclosed homes are drawing serious investor money. From mom-and-pop folks seeking retirement income to Wall Street-backed funds with hundreds of millions to spend, investors buy distressed homes to either fix and flip or, increasingly, to hold and rent out, mainly focusing on the most-affordable areas – those most devastated by the downturn.

“There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit.”

But for now, many distressed homes – foreclosures and short sales – sell for about a third off their peak values, and often for less than it would cost to build a new home.

Investor impact in the Bay Area was magnified during the downturn. That’s because for many years, the Bay Area’s stratospheric prices made buying homes to rent out a losing proposition, so investors bought elsewhere.

“Historically the (sales) price-to-rent ratio for California single-family homes has never made sense to hold houses at any scale,” said Brian Burke, managing director of Praxis Capital, a Santa Rosa real estate investment company. “But the market dynamics have completely changed and opened up an opportunity for us to buy, hold and rent, as well as buying to fix and flip.”

A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share. Absentee buyers are defined as those who have property tax bills sent to a different address than the house they just bought.

Absentee buyers

Absentee buyers were most common in Solano County, where they accounted for almost a third of sales. Solano has by far the lowest median home prices in the Bay Area, weighing in at $200,000 in September, for instance.

Flipped homes – those resold within six months of purchase – went from about 2.5 percent of all Bay Area sales in 2007 to about 4 percent of sales currently, with the biggest bump coming this year. Again, bargain-basement Solano had the most activity, with around 6 percent of sales being flipped homes.

Investors played a big role in helping the market start to recover, experts say.

“The real estate market hit a floor sooner because of investor appetite, so it plays into a stabilizing housing market and overall economy,” said DataQuick analyst Andrew LePage.

But there’s a downside, too. Deep-pocketed investors paying all cash often elbow out prospective homeowners. “It makes it awfully frustrating for first-time buyers who have to compete with them,” LePage said.

Big draw for investors

For now, market dynamics continue to lure investors.

“There are a lot of investors out there, large and small, who continue to relish residential real estate in a market where many people either don’t want to buy a house or cannot buy a house and so are renting,” LePage said. “For a lot of these investors, it’s still penciling out at sometimes-record levels.”

Praxis Capital is a case in point. In 2009, Burke, who had 20 years experience buying homes at foreclosure auctions, partnered with Rivendale Homes, a large private builder, to form Praxis. It started buying about 100 to 120 homes a year to fix and flip in 12 northern California counties, including the East Bay, North Bay and Sacramento area.

A year ago, Praxis started buying houses to hold onto and rent out because home prices finally made the math work, generating positive cash flow. It now has about 100 rental homes, with more in the pipeline.

For instance, it paid $182,000 at a foreclosure auction for a four-bedroom, two-bathroom Santa Rosa tract home that is now getting a $15,000 “cosmetic rehab” of new carpets, paint, flooring and landscaping. The house should rent for $1,950, Burke said. Once it’s rehabbed, he projects its market value will be $253,000. After renting this and similar homes out for five to seven years, Praxis will sell, hoping for significant appreciation.

Praxis has spent $15 million to date on both its flipped and rental properties, and is launching a fund in January focused just on buying homes to rent out. It hopes to raise $25 million, primarily from high-net-worth individuals in the region – winemaking families, small business owners and professionals who are looking to diversify their portfolios, Burke said.

Finding tenants is easy because so many displaced families need housing.

Dominating the market

“Right now the dominating force driving the rental market in California is foreclosed-upon former homeowners transitioning to renters,” Burke said. “That demographic is an important market segment for us.”

Fixing up dilapidated foreclosures “is the home building of the current decade,” Burke said. “In the 2000s, people were building houses everywhere. The home building of today is taking an old rundown house that hasn’t been cared for and bringing it up to current standards and modernizing it.”

Despite its millions of dollars worth of investments, Praxis is small compared with the Wall Street-backed giants who have plunged into the distressed residential real estate market. Oakland’s Waypoint Real Estate Investment Group, for instance, hopes to pour $1 billion into single-family homes over the next couple of years. It owns hundreds of homes in eastern Contra Costa County and Oakland, as well as markets outside the Bay Area.

It’s since been joined by other private-equity backed heavyweights, including Blackstone Group, Colony Capital, Och-Ziff and American Homes 4 Rent.

Many of those big players are focusing on cheaper markets than the Bay Area, such as Arizona, Nevada and Florida. Likewise many mom-and-pop investors have shied away from buying locally.

‘Unlikely to last’

“California doesn’t have large cash flow; it’s more of an appreciation play,” said Kathy Fettke, CEO of Real Wealth Network, a Walnut Creek real-estate investment club. Her club usually steers members to lower-cost markets, but recently recommended buying California homes between $150,000 and $300,000.

“This is the first time we’re featuring California,” Fettke said. “We now have a combination of low home prices and low interest rates, which makes for better cash flow than we’ve ever seen.”

But it’s unlikely to last. “In the last six months, prices have gone up as much as 20 percent in certain neighborhoods,” she said.

“Investor activity eventually will taper off,” LePage said. “Prices will get to the point where it doesn’t pencil. That’s inevitable – but the big question is when. You have to know when the economy will gain a lot more traction.”

Carolyn Said is a San Francisco Chronicle staff writer. E-mail: csaid@sfchronicle.com

Article source: http://www.sfgate.com/business/article/Investors-rushing-into-real-estate-deals-4026281.php

In fact, Goldfarb says the move-out rate is now at 16 percent, below the historical average of 20 percent. The biggest issue for the big apartment REITs, like Equity Residential
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], he adds, is slowing growth rates. The stocks themselves are down and underperforming because investors expected this to be the peak year for the sector.

“Does that continue or do other trends boost them?” asks Goldfarb. “When you look at absolute growth rates, it will look very good relative to other sectors, and that will bring investors back to apartments.”

Goldfarb does not believe that the burgeoning single family rental market is taking share away from the multi-family sector, but others say it could play a role, especially for lower income families looking for more space. Investors in some of the hardest hit housing markets have been buying up as many distressed properties as they can find, citing new demand.

“I see unprecedented demand, more than I’ve ever seen in 15 years,” says James McClelland, CEO of Chicago-based MACK Companies, a rental property investment group. “Our waiting list is already up to 4 months. if you pass our criteria to become one of our renters you get the honor of sitting on a four month waiting list until the next home is available to you.”

The housing market may be recovering, but it is far from a robust recovery, and the lessons learned in the latest crash will likely keep rental demand high. Given where other commercial sectors are with vacancy rates, apartments are still the healthiest; it remains to be seen what all the new supply will do to the fundamentals over the long term. Analysts say 2014 is the year to watch.

Sector Watch: US-Based REITS

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—Simon Property Group
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—Equity Residential
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—Apartment Investment Management Co
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—Vornado Realty Trust
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—Boston Properties
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—FelCor Lodging Trust
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—AvalonBay Communities
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—American Capital Agency Corp
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—UDR, Inc
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—Essex Property Trust, Inc.
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—Camden Property Trust
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