Sunday, August 02, 2009

Investors Buying Low End Foreclosures

by Bill McBride on 8/02/2009 08:32:00 PM

From Carolyn Said at the San Francisco Chronicle: Oakland group buying Contra Costa foreclosures (ht Walt, John)

Oakland's McKinley Partners is betting that low-end foreclosed homes in eastern Contra Costa County will double in value in five years.

The real estate development company has formed a $6 million fund to buy bank-owned homes in Antioch, Pittsburg and Bay Point.

It aims to spend about $100,000 per home, including rehab, and rent them out for $1,200 to $1,500 a month. Then it hopes to sell them for $200,000 each in five years.

McKinley is emblematic of a major force currently propelling the real estate market: investors and speculators snapping up foreclosed homes. Along with first-time buyers, they are a primary source of increased sales volume.
I know investor groups doing the same thing, and they pay cash too. As far as these numbers - good luck. The numbers only make sense at the low end, and rents are falling quickly. It is very unlikely the price will double in five years - or even ten years. As the price increases, investors will be selling properties, keeping prices down.

Think of investor owned properties as being in storage, and being removed from storage and sold as the price increases (although this is different than the investors during the bubble because of the positive cash flow).

There are headaches managing low end rental properties too. These will be high maintenance, and finding tenants with decent credit will be difficult.

A few of McKinley's buying guidelines are interesting:
-- It avoids newer homes in cookie-cutter subdivisions. "If they're all around the same vintage of mortgage, then they can all go upside down at the same time," [Gregor Watson, one of four managing partners] said. ...

-- It avoids higher-priced homes. "As the price point gets higher, rents don't cover (costs)," Watson said. ...

-- It's finding that inventory is limited because lenders are sitting on foreclosures. "Banks own 530 homes in this ZIP code (Pittsburg's 94565) but there are only 15 on the market," said [Paul Staley, president of Staley and MacArthur Real Estate Services] "It creates a hyper-competitive situation."
And how about that comment on ZIP code 94565? Only 15 houses on the market, but 530 REOs according to Staley.