from WSJ, hat tip to Mr. T:
The pace of housing sales has been rising in many markets this year, but it is only partly because families seeking affordable housing are returning to the market.
It also is because of investors like former Deutsche Bank managing director Matthew Cooleen, whose firm has spent $30 million buying pools of foreclosed houses from banks.
His newly formed Greenwich, Conn.-based firm, HudsonCross Financial, is betting it can make a profit reselling in beaten-down markets in states like Nevada, Arizona and Florida and in Southern California because it is paying so little for the homes.
Outside San Francisco, a former Morgan Stanley executive director’s new firm is buying four houses for 75% less than they cost four years ago, and is raising $6 million to purchase others.
In Phoenix, Mark Allen, a former division president at D.R. Horton, the nation’s largest home builder, is reselling homes he is buying at courthouse auctions with funding from Gorilla Capital, an Oregon-based firm that targets foreclosures. “It’s the only way to make money in Phoenix residential real estate right now,” Mr. Allen says.
Below: Gorilla Capital’s Mark Allen, center left, attends auction for foreclosed homes in Phoenix on Monday.
After mostly retreating from the housing market after the bubble burst, investors are returning in droves, hoping to take advantage of the distress. In many cases, Realtors say, investors also are outbidding first-time home buyers and other would-be occupants because they often come to the table with all-cash offerings.
Some of the new investors profited while home prices boomed and are now trying to cash in on their decline. Far from their trading rooms and executive suites, some are spending their days looking for deals in far-flung suburbs and staking out courthouse auctions.
While many real-estate trade groups don’t track investor purchasing on a monthly basis, real-estate agents in many markets say investor buying is high. One telltale sign is how many home buyers are paying all cash.
Though not every cash sale involves an investor, the investors often use cash because they can close quicker and get a better return. In the Phoenix area, for example, about 38% of April sales of single-family homes were all-cash deals. In Punta Gorda, Fla., the figure was 67%, and in the Las Vegas area, total cash sales were 39%.
It isn’t the easiest way to earn money. Managing a far-flung collection of houses can be time-intensive and fraught with hidden costs.
Buying houses, rather than apartment buildings or other commercial property, tends to favor small investors who are agile and understand local submarkets. The work often involves replacing carpets, repainting and kicking out squatters. Much of today’s buying is being done by mom-and-pop investors, who are acquiring a few houses to rent out.
But in some markets, where prices have fallen the most, the bargains are difficult to pass up for larger investors.
“Foreclosures are low-hanging fruit at the moment,” says Laurence Pelosi, who helped close big land and housing-development deals for Morgan Stanley before he left the bank earlier this year and joined McKinley Partners, a small investment firm that is buying foreclosures in California.
McKinley and a partner are in contract to buy four homes in Pittsburg, a small city east of Oakland. The firm is buying one house, which was valued at $412,000 near the peak in 2005, for $84,000. McKinley plans to rent out the homes for as much as $1,200 a month. After paying to manage the property and other expenses, it expects 5% to 7% returns on its investment from the rental income and, hopefully, a big payoff from a resale when the market improves.
The firm is paying cash up front, but has a commitment from One California Bank, an Oakland-based community bank, to finance 50% of the purchases after they close. They hope that will free up cash to buy more homes.
The firm believes homeowners losing their houses in foreclosure actions need places to rent.
“It’s tough times in the Bay area, but this isn’t Detroit,” says Paul Staley, who acquired distressed homes earlier in the decade with Fortress Investment Group and recently teamed up with McKinley. “Everyone is going to need a place to live.”
McKinley plans to resell the houses in about five years for double what it paid and is targeting 20% annualized returns for its investors, which include wealthy individuals.
HudsonCross Financial is buying pools of 10 to 200 homes. “It only makes sense if we buy in bulk,” says Mr. Cooleen, who worked in the structured credit trading group at Deutsche Bank that dealt in credit derivatives and mortgage-backed securities.
About 40% of the banks and lenders Mr. Cooleen deals with are agreeing to sell homes in bulk, but the others are reticent, he says, because they believe they can get better prices if they wait to sell them individually.
“It’s a shame. The sooner we clear the inventory of foreclosure the sooner the housing market can recover,” says Mr. Cooleen.
The competition for the houses is intensifying as the supply of foreclosed homes in some places has fallen in recent months.
Barclays Capital estimates that banks and loan investors owned 765,500 foreclosed homes as of April 1, up from 629,100 a year earlier. The inventory is expected peak at about 1.3 million homes in mid- to late 2010, according to Barclays.
The investors are no panacea to the nation’s housing woes. When the market improves, many of them could put their houses up for sale, reinflating supply.
“All this investor buying isn’t depleting supply, it’s only shifting it around,” says Mr. Allen of Gorilla Capital.