This had been on the MLS for less than 24 hours when I went by around lunchtime today, and people were already all over it. Compared to the rest of the recent offerings around La Jolla, it looks like a deal:
Category Archive: ‘Real Estate Investing’
A report on whether the big investor groups are doing the dump-and-run:
Hat tip to SD Squatter for sending in this article from the wsj.com:
LADERA RANCH, Calif.—Rising home prices have fueled the return of a practice that some blamed for inflating the bubble: house flipping.
In California, the number of homes sold in recent months that had been flipped—or bought and resold within six months—has reached the highest levels since late 2005, according to PropertyRadar, a real-estate data firm. About 6,000 homes have been flipped in the state this year through April, or more than 5% of all homes sold statewide.
While flipping is re-emerging nationwide, brokers say it is happening most in California, where home prices have risen sharply over the past year. Six of the 10 largest price gains in major U.S. cities over the past year have been in California, according to Zillow. In April, home values rose by 25% from a year earlier in San Jose, San Francisco and Sacramento, and by 18% in Los Angeles.
“When prices rise, this trade works. It’s not anything more sophisticated than that,” said Christopher Thornberg, an economist with Beacon Economics in Los Angeles.
The industry is split over whether the current flipping activity could lead to potential problems. Jed Kolko, chief economist and a vice president at Trulia Inc., an online real-estate site, says the current activity isn’t indicative of a bubble. “A bubble is when prices are rising fast from high levels,” he said. “We’re not there now.”
Competition for homes “is reaching bubble proportions, and I’m very wary of it,” said Rich Worcester, a real-estate agent in San Diego who flipped about 25 homes last year for himself and clients. Mr. Worcester is representing a colleague who paid $675,000 last month for a foreclosed three-bedroom home in San Gabriel, a Los Angeles suburb. After installing new appliances, relandscaping and staging the empty house with furnishings, it hit the market for $867,000 earlier this month. Mr. Worcester said it hasn’t yet received any offers, and he conceded he may cut the price.
Investors generally make all-cash payments, which gives them an extra advantage over buyers who must complete a lengthy mortgage-approval and home-appraisal process.
Robert Ganem beat out four other offers this year when he paid $600,000 for a short sale—in which a home is sold for less than the amount owed on its mortgage—in Ladera Ranch, in southern Orange County. He made cosmetic renovations—fresh paint, new hardwood floors and kitchen tiles—before selling it a few weeks later for $755,000.
“A year ago, I couldn’t give them away. I was definitely swimming against the current,” said Mr. Ganem, who said he flipped 20 houses last year, double the previous year. Before he became a full-time real-estate investor, Mr. Ganem worked as a mortgage broker in Los Angeles. Flippers get a “bad rap” in the public eye, he said. “Most buyers want a home that’s move-in ready. We come in and make repairs that a bank or an underwater owner is not going to do.”
Meanwhile, the growing competition from investors is unwelcome news for ordinary buyers. After waiting years for prices to hit bottom, “buyers are jumping in before prices bounce so high they can’t afford it,” said Christine Donovan, a real-estate agent in Costa Mesa, Calif.
Parviz Goshtasby, who moved to Southern California three years ago, is finding few homes available to entry-level buyers in Newport Beach, where starter homes can begin at $800,000. “I slowly realized that I can’t compete with these investors,” said Dr. Goshtasby, a plastic surgeon.
After three unsuccessful offers, he agreed to pay $1.6 million for a home in January after the seller agreed to finance a 10% second-lien mortgage, but the deal fell through when the seller later got cold feet. Two weeks ago, he offered to pay the $1.2 million asking price on another home that ended up selling to a cash buyer.
Comments from two readers:
1. Can you please cover one more buyer anxiety – this one’s personal for me? I think that, after the artificial supply suppression and/or institutional investors are gone, the prices will drop. However, I’m not sure how far. So, my fear is that the prices may drop too far, which will make my purchase decision a very bad one. This is especially valid for some investment properties I’m thinking to buy.
2. JTR, I was also thinking about the “illusion of demand”. As both an investor and a house hunter, I see things from different points of view. The conclusion I have come to of late is that in many of the recent bidding war or multiple offer stuations, lets say 10 offers, most likely 7 or 8 of them are from speculators/investors/flippers, with only 2 or 3 from end users, and the end users more often than not get out bid. When this round of properties get shined up with marginal upgrades and are relisted to make a profit, will the end users still be there and will they be willing to (or more to the point, able to) pay the x+ the investor/speculator/flipper needs to make their profit?
My thoughts on each:
#1 - Traditional investment properties are valued on their income, so you would have to believe that rents would drop for the corresponding property values to decline. With the high difficulty of purchasing a home today, the rents should stay strong for the foreseeable future. I don’t see any artificial supply suppression or holdbacks of normal investment properties, none getting foreclosed really.
#2 Flippers have been very successful around NSDCC, even when paying retail - but they have caught the market in the perfect upswing. I think we will stop seeing short-sales, REO, and flippers within a year, and just see the occasional default. It’s doubtful that the debt-tax exemption will be extended again after it expires this year, and any homeowner who has hung on this long will want to reap some equity return, or go back to making payments.
An employee of Bank of America told me last week that they are finding a way to keep everyone in their house who wants to stay. Only those borrowers who completely give up are getting foreclosed, and I’m sure every bank is taking their sweet time with the process:
The demand is still fairly deep, and with virtually no bargains coming to market, those who are selling are reaping a nice windfall. We got caught up in a ferocious bidding war yesterday on this property:
It was listed for $895,000, though the last three model-match sales were $670,000, $765,000, and $800,000 (the $670,000 was the most recent, in January).
There were eight offers at, or above list price, and all had at least 20% down. The seller took a full-price cash offer that will close in 15 days – and left at least $50,000 on the table for that convenience.
The worst part is that there are six other losers out there for us to compete with on the next one!
I don’t endorse this company but I like the idea:
Realty Mogul, a site where accredited investors can can pool their money to back real estate deals, is going live today.
Co-founder and Jilliene Helman argued that in the current financial landscape, real estate is “one of the ways that people can still get yields.” She also acknowledged that there’s a lot of excitement right now about equity crowdfunding for startups, but she noted that investments on Realty Mogul can start paying off in a few months (in the form of rent checks or loan payments), rather than five or ten years: “Our big focus for investors is cash flow.”
For now, Helman said Realty Mogul is “100 percent focused on accredited investors” (to qualify as an individual, you’d need to have a net worth of more than $1 million or income of more than $200,000). She also suggested that these kinds of investments could also be a good fit for the “mass affluent” — i.e., people making more than $100,000 a year who aren’t accredited investors — but the company is currently waiting for the final regulations to come out of the JOBS Act before it decides whether to actually open up to that group.
Realty Mogul was incubated by the Microsoft/TechStars Accelerator in Seattle, and it’s also announcing a $500,000 seed round (more on that in a second). Participating angel investors include Gust CEO David S. Rose, Gordon Stephenson (who’s on the board of directors at Zillow), and serial entrepreneur Sky Kruse.
Even though it’s officially launching today, Realty Mogul already funded its first project — AH Capital used the site to raise $110,000 to purchase and rehabilitate a duplex in Los Angeles.
When you join the site, you can browse a marketplace of different investments, then sign the paperwork and submit the payment for deals that you’re interested in. The investment only happens if the total funding goal is reached. If it is, you can then track your investments in an investor dashboard.
Helman said that one of her big goals is to build investor trust. For example, Realty Mogul links to all of the real estate companies’ LinkedIn profiles, so users can see whether they’re connected to the company in some way. For now, the site is limited to properties in Washington and California, although investors can participate in anywhere. Helman said she plans to expand gradually.
“We are a tech startup, and tech startups are supposed to grow as quickly as humanly possible,” Helman said. “But we’re a financial services company first and a tech startup second, so I want to grow as quickly but as conservatively as possible. We need to make sure we’re keeping investor protections first.”
This is right down the street from the flipper who made $850,000 gross profit when he sold his duplex for $1,825,000 cash, so others nearby figure that it means something, and are hoping to get in on the action.
This doesn’t really pencil as an investment property, unless you really worked the vacation rentals, plus got some benefit from using it yourself?
Or buy it for your kids?
Shiller is asked in the video how many houses he owns (two) and why – his answer – “My wife wants them”. (at the 7:50-min mark)
Robert Shiller, the Yale economist who nailed the housing bubble before it burst, was on Bloomberg Television with Trish Regan and Adam Johnson on Wednesday afternoon to discuss the U.S. housing market.
As usual, Shiller was reluctant to declare that home prices had bottomed. He explained that the housing market is a speculative one and that there’s no telling, which way prices would go tomorrow. He also explained that there wasn’t much reason to believe that home prices would appreciate back to levels seen during the last cycle.
Regan followed up with a question that got Shiller perked up.
“Then why buy a home?” she asked. “People trap their savings in a home. They’re running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?”
“Absolutely!” Shiller exclaimed. “Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, new ones are better.”
These were some of the issues Shiller addressed in his classic book, Irrational Exuberance.
“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000′s. And I don’t expect it to come back. Not with the same force. So people might just decide, “Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.”
Adam Johnson also noted that this was in line with Shiller’s assessment that real U.S. home price appreciation from 1890 to 1990 was just about 0 percent. This is explained by the falling costs of construction and labor.
For people who can’t wrap there heads around this, Shiller offers an analogy.
“If you think investing in housing is such a great idea, why not invest in cars?” he asked. “Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won’t want our cars. It’s the same with our houses. So, they’re not really an investment vehicle.”
Any homeowner knows that you can’t sell a home with 30-year-old roofing, carpet, and kitchen appliances. Sure, the home price might go up, but you have to adjust for years of maintenance and renovations.
Six offers already submitted on this short-sale duplex in La Costa, with one a cash offer well over list price:
From the pyramids to the Empire State Building, the world’s largest structures have typically been financed by the superrich. New York-based Prodigy Network, best known for marketing the Trump SoHo hotel condominium, is now trying a different model: It’s bringing crowdfunding to real estate, soliciting thousands of investors to buy slices of a skyscraper in exchange for a share of rents and property appreciation. “The big difference from traditional real estate is that instead of buying into a fund with a pool of assets, people invest in a single asset,” says Rodrigo Niño, Prodigy’s founder and chief executive officer. “It lets them control the risk.”
Prodigy has wanted to try crowdfunding almost since its founding seven years ago but didn’t get a chance until it stumbled on the derecho fiducario, a little-known financial instrument in Niño’s native Colombia that allows individual investment in isolated real estate projects. In Colombia, Prodigy has crowdfunded a building called BD Bacatá that will be the nation’s tallest. About 3,100 investors kicked in $171.8 million (COP308 billion) of the $239 million needed to build the 66-story skyscraper in downtown Bogotá. Investors can also buy and sell shares through a resale program, which functions like a secondary market.
Prodigy is currently under contract to buy 84 William Street in downtown Manhattan for $58 million. It plans to invest an additional $32 million. Prodigy says it intends to raise some $26 million in equity from individual investors in 11 countries. FTI Consulting, based in West Palm Beach, Fla., will ensure that Prodigy complies with the U.S. tax code, as well as anti-money-laundering laws, when accepting money from outside the country. “Instead of buying crappy condos in South Florida, this allows international investors to invest in real markets like New York and in assets that actually make sense,” says Niño, who was raised in Colombia and studied economics in Switzerland. Prodigy says William Street investors will see returns of 15 percent, compared with 21 percent for investors in BD Bacatá.
The company’s investors don’t yet include Americans because the U.S. allows only accredited investors—generally those who have assets of more than $1 million—to buy equity in private firms. That will soon change: The Jumpstart Our Business Startups Act, signed into law last April, allows anyone to invest as much as $2,000 or 5 percent of their income or net worth, whichever is greater, in closely held ventures. The Securities and Exchange Commission is still working on rules for investor safeguards required by the act.
SEC guarantees may not be enough for leery U.S. investors, says Dan Fasulo, a managing director at Real Capital Analytics. “It’s hard enough to develop a property down the block,” Fasulo says. “How are you going to do it sitting 3,000 miles away?”
Gustavo Gonzalez, a Colombian civil engineer who bought two shares of BD Bacatá in 2010 for 101 million pesos ($57,178), says the returns speak for themselves. Since his purchase, based on an advertisement he read in a local newspaper, the shares have appreciated by about 43 percent. “I like the idea that this is going to be the highest building in the country,” he says. Just as important, “I thought it was going to go up a lot, and that’s what happened.”
The bottom line: Once the SEC finalizes its safeguards, ordinary American investors will be able to buy a slice of individual properties.
Most experts predict a modest price recovery in the Southern California housing market during 2013.
Not Bruce Norris. The Inland Empire investor says get ready for a 20 percent price spike by this time next year.
It’s a bold prediction, but worth listening to because the principal and founder of the Norris Group in Riverside foresaw the housing bubble burst a year before it happened. And he backed up the call by selling off much of his property just before the crash.
“My best guess is that California will have significant price inflation,” Norris said. “Prices could escalate so strongly that we will think we are in 2004 instead of 2013,” Norris said.
Not everyone sees things the same way. Many economists and housing experts are looking at flat to modest growth in prices for 2013. Gary Painter, director of research at the USC Lusk Center for Real Estate, thinks at most the Los Angeles area will see about a 3 percent increase. The California Association of Realtors has predicted an increase of about 5.7 percent.
“Well, I disagree with (Norris),” said Michael Carney, executive director of the Real Estate Research Council at California State Polytechnic University, Pomona.
“My forecast is that we’re not going to see a whole lot of change in home prices for a long time, and the reason is I don’t see the financing coming back. The financing (for the market boom) was coming from worldwide sales of mortgage-backed securities and that clearly came to an end in 2007.”
“There will almost be no change in prices until 2030, a generation,” Carney added.
Carney has had that discussion directly with Norris, who sits on the council’s board.
“Maybe I’ll be wrong,” Carney admits. “I keep reminding people that the truth is uncertain, but Bruce has a better track record at predicting prices than I have.”