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Sunday, July 6, 2008

The vultures have arrived

From a CNN Money news story comes this item: Rock-bottom home prices have finally begun to lure vulture real estate investors into the fray.

Sharon Restrepo, a broker in South Florida, where home prices have dropped nearly 27% over the past 12 months, recently bought a three-family home in Cape Coral from a very motivated seller for a mere $65,000. It listed for $195,000. She can rent the three apartments out for about $1,500 and turn a profit, while she holds on to the property until the market recovers. "The savvy investors here," she said, "are buying up everything they can."

Even in the Seattle area, where prices are down just 5% year-over-year, small investors like Liberty Capital, a three-man operation, are snapping up cheap properties. Liberty's portfolio manager Davis Hsu has purchased four homes this year, including a "very clean" 2,700 square foot four bedroom in suburban Federal Way, for about $330,000. He estimated that he bought it at 70 cents on the dollar. He quickly flipped it for a modest profit. He bought another house for only $80,000, a 55% discount from the market, he figured, and made $60,000 profit when it sold. The other two properties he plans to hold onto for a while, renting them out until the market rebounds. "You can get good deals on distressed properties," Hsu said, "if you're willing to wait two or three years before you sell them."

Peter Zalewski, founder of Florida-based Condo Vultures, LLC, which specializes in bulk purchases of condo properties, is finding very deep discounts for his clients. In one deal he recently negotiated in Tampa, a developer's lender agreed to sell 149 units for $12 million - a 43% discount to the outstanding $21 million loan.

Prices are even cheaper in the Midwest. There, buyers like Jeff Ball, president of Austin, Texas-based Econohomes, purchase packages of bank-owned homes from lenders and resell them after little if any rehab. He buys five to 50 houses at a time, sight unseen. Often, the homes come with encumbrances, like back taxes, water bills or other liens that can add up to tens of thousands. Still, he comes out ahead. Econohomes has purchased about 500 of these homes - located primarily in Ohio and Michigan - over the past two years, at an average price of less than $5,000. Ball said he's bought homes in Cleveland and Detroit for as little as $3,000. They sell for an average of $25,000.

His business has been criticized; usually city officials would prefer the homes be renovated before they're resold. But Ball said the money spent doing that would make the business unprofitable; nobody would buy at the prices he would have to charge. They would sit vacant and become havens for squatters, looters and drug dealers. "The most significant thing is to stabilize the situation," Ball said. "Get people back in the house." The new owners move in and start taking care of the properties, according to Ball. If that starts to happen in large numbers, these communities may spring back to life.

In nature vultures and other opportunistic creatures perform a valuable service by cleaning up the remains of dead animals that would otherwise litter the landscape and pose a health hazard. I guess in real estate these vulture investors perform a similar service; although I’d agree with the local governmental bodies that wish they would invest a bit in them. I suppose they would have to make obvious repairs in order to rent them or even to flip them. In any event, the faster they can get the glut of foreclosed houses off he market the better.

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