Investors Cash in on Real Estate

Realtors have used the sentence so much over the last five years or so that it’s become a cliche: “There’s never been a better time to buy a home in Northwest Arkansas.”

Interest rates hover near record lows and home prices continue to fall.

For folks who’ve lost their jobs in the recession or owe too much on their current home to sell it and buy another, that cheery refrain may seem like salt in the wound.

But investors who have cash on hand are finding some validity in that statement.

Marcus Necessary, an executive broker with Weichert, Realtors – The Griffin Co., said that while there’s still some “flipping” going on, in which buyers renovate a home and resell it for a profit, most people buying investment properties these days plan to hold them for rental income.

“There’s a need for rental properties out there, so investors see that opportunity,” he said.

In the November/December issue of Realtor magazine, Lawrence Yun writes that 22 percent of home purchases in August were made by investors.

 He projects that if annual rent gains stay near 3.5 percent, rents will double in 20 years. If they reach 5 percent, rent doubling would occur in 14 years.

Yun, chief economist and senior vice president of research at the National Association of Realtors, adds that investment buyers also can expect to see home prices appreciate considerably in the next decade or so.

“The future home price path should follow the future rent growth path,” Yun writes. “That means home prices could also double in 14 to 20 years, though it is unclear when home prices will begin to catch up with rents. But long-term investors buying today are sure to catch some, if not most, of the upward ride.”

 

Cash Is King

The Arkansas Realtors Association reported that 2,401 homes were sold in the state in August. Using Yun’s estimate that 22 percent were investor purchases, that would mean 528 of those homes were sold to investors.

By the same estimate, 75 of the 340 homes sold in Benton County in August went to investors, as did 45 of the 206 homes sold in Washington County.

For bargain prices, most investors look for bank-owned properties, known in the industry as REO, or real estate owned. This is the final step in the foreclosure process, in which ownership of the property has reverted back to the lender.

Necessary, who works with both investors and REO properties, said paying cash has a number of benefits for banks and buyers.

“From the bank’s perspective, cash is always king,” he said. “Banks are just wanting to get rid of the property, and with cash, they don’t have to worry about the loan going through, and [the sale] can close quicker.”

Also, banks are willing to take a discount to get the properties off their hands.

“From the buyer’s perspective, they come in knowing they’ve got the bull by the horns,” he said.

He added it’s common, though, for buyers to apply for bank loans on the property after they’ve made the cash purchase.

Tyler F. Thompson of Bentonville has been investing in real estate full time since 2005. At 31, he estimates he’s bought about 105 homes. He looks for foreclosures, generally in the $40,000 to $50,000 price range.

He said he normally pays for properties in cash and then gets bank financing, which typically requires a 20 percent to 30 percent down payment.

Thompson, who flips about three of every four homes he buys, said he doesn’t restrict his search for bargains to any particular city or neighborhood.

“If you’re looking for deals, you’ve got to look everywhere,” he said.

 

Fewer Foreclosures

Necessary said one agent with Weichert who manages about 130 homes currently has only eight vacancies. He knows an agent with another company who has 250 properties and just 20 vacancies.

“Those are incredibly low numbers” of vacancies, he said.

But while demand for rental single-family homes is only expected to grow as would-be homeowners are shut out of the market, some say the available supply of bargain properties in Northwest Arkansas is dwindling.

This year, there aren’t as many homes available in the $40,000 to $50.000 range, Necessary said, and he’s even seen bidding wars break out that escalate those prices.

“Some of these properties are actually selling for over 20 percent more than we listed them for,” he said.

“The flipping would still be going on if we had the foreclosures we had two years ago.”

Thompson said he used to see as many as 20 people at each foreclosure sale on the courthouse steps.

“Now there’s just two or three people,” he said. “The rest have gone and gotten jobs.”

In fact, to make up for the lack of opportunity in buying foreclosed homes, Thompson said he recently bought a water damage restoration franchise.

While nationally the percentage of loans on which foreclosure proceedings were started rose in the third quarter this year, Arkansas was one of 12 states to see a drop, according to the Mortgage Bankers Association.

Along with New Jersey and Washington, Arkansas “had significant decreases [in foreclosure starts] across all loan types, an implication that there might have been state-specific factors causing what might be a temporary stop on the initiation of the foreclosure process,” the MBA states in its National Delinquency Survey released Nov. 17.

This may be partly due to changes made earlier this year in Arkansas foreclosure law. Act 885 requires mortgage servicers to provide homeowners with copies of all relevant mortgage documents and information about loss mitigation or loan modification programs before beginning foreclosure proceedings.

Arkansas Attorney General Dustin McDaniel has said the new law could help some families avoid foreclosure.

 

Demand for Rentals

Between the slowdown in foreclosure availability and the need for rental housing, today’s investors are more likely to become landlords than try to turn a house for a quick profit.

Jerry Allred, the owner and principal broker of Allred Properties in Fayetteville, said almost all of the company’s business involves managing rental properties for investors.

The company manages about 500 properties throughout Benton and Washington counties, he said, and has about a 98 percent occupancy rate.

“Demand for rentals is definitely on the upswing,” he said.

Because of the tighter rental market, owners can raise the rent on their properties, which makes for more attractive investments, Allred said.

The average rental rate is getting close to $1,000 a month, he said, which is comparable to 2007 levels, before the housing market crashed.

The company also does court-appointed receiverships, he said, “so we do a little bit of everything in every price point.”

Allred said 90 percent of the company’s investors are out of state, and some even out of the country.

“Brokers during the building boom were looking for hot spots to invest,” he said. Northwest Arkansas was one of these.

Allred said one of the changes he’s seen in the last few years is an influx of tenants who have homes in other areas that they haven’t been able to sell.

Many of these folks have been transferred to Northwest Arkansas by their companies, and tend to rent more upscale properties.

“We’re seeing that a lot in the Rogers/Bentonville area,” where many Wal-Mart Stores Inc. suppliers have offices, he said.

Allred, who helps investors find rental properties, said he works with each one to determine what criteria are most important, such as location or the amount of repair needed.

Echoing Yun, Allred said that hinges on what the investor wants that property to do.

“Some are looking for more appreciation of value,” he said, “and others are looking for cash flow.”