THE WALL STREET JOURNAL by Joseph Dobrian
OPPORTUNITES IN REAL ESTATE Saturday/Sunday, June 27-28, 2009
Every downturn in real estate brings opportunities for investors, whether they're looking for commercial property or a new home. The right choice depends on the individual appetite for risk, and the ability to put equity into the deal. The reckless, over-leveraged, buy-and-flip days of the middle of this decade are gone, and today's investor must take a long-term view.
Dennis L. Ruben, managing director NRC Realty Advisors, a Chicago-based firm that specializes in accelerated sales of real estate, says today's opportunities lie in a buy-and-hold strategy, more in residential property than commercial.
"I have a colleague who's buying foreclosed homes from distressed lenders, focusing of four-bedroom properties five years old or less, most of which sold new in the $230,000 to $250,000 range, which he [now] buys for $90,000 to $110,000" he says.
"He pays cash - maybe he'll find some debt later - then he rents the houses out, often to people who'd lost their homes to foreclosure. He's planning at least a five-year hold.
If you're looking for debt to finance an investment in real estate, choose your market carefully, and prepare to put in more equity than you'd like to, suggests Cameron Findlay, chief economist at Charlotte, North Carolina- based Lending Tree, an online service that connects home buyers with lenders.
"Lenders are more conscious now of the metropolitan statistical area they're lending into," he says. "In a high-delinquency market, an opportunity for you might be an unacceptable risk for the lender. If I were investing, I'd look to a city where the government is spending on infrastructure."
Bernnard J. Haddigan, national director of Special Assets Services Group at real estate brokerage Marcus & Millchap in Atlanta, agrees that today's lenders are much stricter, specially as the amount to be borrowed grows. "Today it's hard to get financing for a deal of more than $10 million. I suggest focusing on small clean multi-family properties of 100 units or fewer, or grocery- or drug store- anchored retail."
Auctions are gaining popularity with investors according to Gordon Greene, partner at Cleveland-based Chartwell Group, a full-service real estate company that covers Northwest Ohio. He sees the best deals in developer auctions, which offer large blocks of unsold condos and townhouses.
"At a developer auction there are a number of limited warranties lined up, and title insurance, and sometimes financing," he says. "Over the next 24 months, you'll see many over-leveraged income producing properties sold at auction. Most sales will still be negotiated, but a higher percentage -- 7% or 8%, compared to 2% or 3% in years past -- will be sold through open-outcry auctions.
"In this market, buyers are often unsure of what they should pay, and they won't make an offer for fear that seller might not accept. At auction, the market sets the price.
John Gollinger, East Coast CEO of Accelerated Marketing Partners, a national, full-service residential real estate marketing and consulting firm in Boston, predicts an auction boom in New York, where he estimates a standing inventory of 10,000 condo units for sale, plus another 24,000 units of unreleased "shadow inventory," property completed and ready for sale but that has never been placed on the market.
"In addition, you have units under contract that had been treated by the developer as receivables, but are no longer receivable because the buyers backed out," Mr. Gollinger Says. "They said, 'Why buy into this market when prices are down 25%? It's cheaper to give up my deposit." "Our sellers are always going to wish they'd gotten more", Mr. Gollinger acknowledges, "but we deliver the market [bring in willing buyers who will set market price of an asset]. Our reserve prices are lower than anyone's seen for 10 years, and they force people off the sidelines."
At The National Auction Group in Gadsen, Alabama, President William Bone says that prices on condos in some markets have fallen to where renting them out will pay for them, and a hefty profit after a four- or five-year hold is virtually guaranteed.
"The stars are lined up just right," he says. "The rental market has not been hurt much; it's actually strong. Real estate is always the best investment in the world, if you give it time to mature. I never met anyone who didn't make a lot of money by holding something for five years."
This is also a great time to buy a property you're likely to hold for a lifetime, says Robert Borden III, president of Boston based real estate services company LandVest, an affiliate of Christies Great Estates that specializes in luxury homes and timberland in New England.
"If you really love a property and want to hold it for a long time, you won't find a better time to buy than now," he says. "I've always believed in buying the highest quality you can, for the most you can afford. Residential real estate has two pieces to it: the monetary and the emotional investment, and the latter has always been a part of the payback."
Sometimes you can buy your dream home even if it isn't for sale, with a timely word to the owner. "The greatest buying opportunities in the Vail Valley come from identifying sellers with unique residential properties who realize the value of cash," says Jim Flaum, president and managing broker of Slifer Smith & Frampton Real Estate in Vail, Colorado. "These deals are only happening via well-timed direct written offers."
Availability and affordability may be greater than they've been in several years, but credit is tighter, says Greg McBride, senior financial analyst at Bankrate.com, an online provider of information on financial products based in North Palm Beach, Florida.
If you get a loan today, Mr. McBride says, "you are going to be qualified based on the 30-year mortgage rate, not on the low 'teaser rate [introductory offer on an adjustable-rate mortgage], as in 2003. The good news is that neither home prices nor mortgage rates will run away from you in the next six months."
Not every investor in real estate wants a home or commercial building. Mike Duffy, president of United Country Real Estate in Kansas City, Missouri, which specializes in rural property, says that land values have held steady despite slumps in the stock market, home and urban commercial prices.
"Land is one thing they're not making any more of, "he says. "What's the key to getting the best deal? Finding a local broker who understands that market, who can walk the property with with you, who knows the creeks, the ponds, the wildlife, the timber value. Someone who knows the population trends of the area. Mineral rights might be a factor; in some markets water rights are hugely important. That kind of knowledge is vital in a rural area, because there might not be any comparables, as in a city."
John Rosenthal, president of Realty Marketing/Northwest in Portland, Oregon, is bullish on land, particularly timberland. "Trees are great tenants: they don't talk back to you," he says. It's a hedge against inflation; it's inexpensive to manage; you generate cash through log sales and conservation easements. A small timber tract is a great long term alternative for the small investor."