Sunday, March 27, 2005

Echoing the dot-com boom, many middle- class investors are rushing into real estate.

Putting Stock in Property

By David Streitfeld
Times Staff Writer

SAN FRANCISCO — Chris Boome, an insurance agent in the suburb of Burlingame, doesn't want to work the rest of his life. Who does? But at 58, Boome knows he hasn't saved enough to retire.

So a few weeks ago, he revamped his retirement accounts. He sold most of the mutual fund shares and used the cash to buy an $83,500 chunk of land in the Nevada hills, a stretch of ground he had seen only in a photograph.

"This is more exciting than a mutual fund," Boome said. "It feels safer too. You buy a piece of dirt, you feel you'll always have a piece of dirt."

The astounding rise in home values is enticing many middle-class Californians to bet on dirt, gambling their retirements that they can do better with property than with any other investment.

In the same way that the stock market's apparently limitless ascent in the late 1990s seduced investors into buying shares in untested dot-coms, relentlessly rising house and land prices are spurring people to do things that used to be considered unusual — if not irresponsible.

They're cashing in retirement funds, selling stock and taking out second mortgages. They're pouring the money into real estate, often in distant states, often without seeing the property.

"Markets are ruled by either fear or greed," said Robert Campbell, a San Diego investor who has written a book on timing the real estate market. "At the moment, it's all about greed. Huge numbers of people are buying in at very high prices."

Economists have been wondering for at least a year if real estate is in a manic phase that will end unhappily.

Federal Reserve Chairman Alan Greenspan, whose policy of low interest rates gets credit for launching the real estate boom, also has begun to fret. "I think we're running into certain problems in certain localized areas," he told a congressional hearing last month.

Some speculators have already been burned in Las Vegas, until recently the hottest market in the country. But for most investors everywhere else, any risks are outweighed by the potential rewards.

"People who did this five years ago aren't working today," Boome said.

Like just about every longtime homeowner in California, he's already made a bundle on real estate, at least on paper. Boome estimated his three-bedroom San Carlos home increased in value last year by $140,000 — about what he and his wife, Sharon, a nurse, made at their jobs. In the super-charged Bay Area housing market, their home is worth at least $1.2 million.

If one property seriously boosts your net worth, investors have concluded, a handful could make you downright rich.

The number of homes bought not as primary or secondary residences but solely for investment jumped 50% in the last four years, according to the San Francisco research firm LoanPerformance. They made up 8.65% of all prime mortgages in 2004, the company said.

The National Assn. of Realtors contends the total is higher. About a quarter of home purchases in 2004 — 1.8 million — were made by people intent on becoming landlords, the association's surveys show.

Lenders are so eager to provide funding that it's easy to do a deal with a down payment of only 5%. If the house increases in value by 5%, you've doubled your investment. Many homes in California, the Northeast and Florida have increased by more than 20% annually for the last three years, a run-up with few historical precedents.

New investors like Boome realize they're coming to the party late but feel they have little choice. The stock market has been lackluster. Salaries are stagnant. The debate over Social Security has heightened Americans' worries about how to support themselves during retirement. And even those million-dollar houses are often less valuable to their owners than they may appear. Second mortgages and home equity loans have taken away large slices.

"Every time I took money out of the house, I should have invested it," Boome said ruefully. "But I used it to go on vacation or buy a car."
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The Price of Proximity

Traditionally, people invested in real estate near where they lived. That way they could inspect the purchase and keep an eye on the tenants. For most Californians, proximity is no longer affordable. Houses in the coastal cities are so expensive that it's very difficult to charge enough rent to cover the monthly mortgage payment.

That's led to an explosion of buying in the Central Valley. When investments are calculated as a percentage of all purchases, the biggest market in the country is Redding, according to LoanPerformance.

Investors bought nearly one in five Redding homes sold in 2004. Not far behind were Merced, Visalia, San Luis Obispo, Chico, Fresno and Bakersfield.

"I looked in Merced and realized I was three years too late," Boome said.

That pushed him over the border to Nevada.

"Friends, Internet sites, articles I read — they all kept saying, Reno, Reno, Reno. You think of Reno, you think of desert. But it's growing a lot, no question."

The Boomes visited the Virginia Highlands, a hilly, largely undeveloped area south of Reno. They stopped to ask a couple walking their dog a few questions. The woman was a real estate agent. Boome promptly signed on as a client.

He bought his 10 acres on the strength of his favorable impression of the area, his agent's recommendation and a photograph she provided. "It was a great deal," he said.

Complicated too. The rules for buying real estate with an investment retirement account are stringent: The purchase must be made through a specialized administrator, and it must be transacted with all cash. A week ago, the paperwork was done. He went to visit his dirt.

It wasn't quite the way he imagined. "It was steeper. And there's a lot of rocks. Big rocks." He's having a local builder look at the land before the deal is irrevocable.

If this is a setback, it hasn't dented Boome's enthusiasm.

"It could be worth nothing, but I'm willing to bet it's going to work out," he said. "I've got a good feeling."

Other California investors are going much farther than Nevada — and using different strategies to come up with the down payments.

"Five years ago, I was like everyone else, trying to get rich on stocks. I thought real estate was for the wealthy," said Darryl Wortham, a software engineer with Cisco Systems.

The San Jose maker of computer networking gear was one of the great stocks of the 1990s, making millionaires of its early employees. Wortham joined the company in mid-1999. That was too late for the boom but just in time for the bust.

"My biggest block of Cisco stock options is underwater," he said, meaning they'll be worth money only if the stock rises substantially. "Lord knows when I'll see anything from it."

Last fall, the 38-year-old Wortham cashed in some of his viable options and sold company stock he had bought through an employee purchase plan. He then joined an Internet investment group and bought three houses. All are in Georgia, all cost less than $200,000, all were bought with 5% down.

The engineer has seen two out of the three but intends to keep his distance from all of them. He doesn't want to hear about busted plumbing from 3,000 miles away. An agency handles the tenants.

"Who wants to drive by every week and look at a property and manage it?" he asked. "I already have a job."

The ranks of investors like Wortham and Boome have more than tripled in five years, according to the National Assn. of Realtors. In 1999, 20% of the second home buyers surveyed by the association said they were doing it for investment purposes. By 2002, it was 37%; by last year, 64%.

David Holoboff, a programmer for the Hollywood website Filmstew.com, bought a house five years ago near Bob Hope Airport in Burbank for $230,000, sold it last year for $405,000 and immediately bought a new place in Burbank for $569,000. It was recently appraised at $675,000.

Emboldened, Holoboff was browsing the Internet when he happened on a website that listed mobile home parks for sale. By the end of the night, he decided to buy a park in central Texas for a sum he described as "less than a condo in Burbank." The deal will be finalized in May.

"A mobile home park is like an apartment building, but better. You can get additional rent without having to build additional units," said Holoboff, 36. "I just have to fill the park up."

He hasn't visited the park yet but has studied the owner's photographs and talked to city officials about the site's viability. Meanwhile, he bought two homes in Atlanta for about $100,000 each, paying only 3% down.

Since Holoboff and his wife, Karma, have few other investments, the real estate is being paid for with $100,000 in equity taken out of their house. This has increased their monthly payments by $440 but that feels a worthwhile price.

"This is so insanely simple. I didn't have to attend a seminar. I didn't have to read a book," he said.

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Enter, the Salesmen

The only thing better than making a lot of money is doing so effortlessly. A variety of middlemen have sprung up to relieve real estate novices of the burden of doing anything besides forking over a wad of cash.

They'll find the property. Suggest a mortgage lender. Arrange for a management company to find tenants. And repeat, over and over and over, what a smart thing it is to be doing this.

Mile High Capital Group, a Denver firm, has been making repeated forays to California to sell duplexes it plans to build in Colorado, Florida and North Carolina. Presentations in San Francisco in January and Los Angeles in February drew about 400 people each, some simply curious, others brandishing checks.

On the stage, the Mile High speakers sell the idea of real estate. "I'm telling you, from the bottom of my heart, you gotta do this," Chief Executive Rick Dryer exhorted the crowd at the San Francisco convention center.

The firm's sales pitch is that it has done extensive research to determine which communities will be experiencing substantial growth, which will lead to a brisk demand for rental housing.

One of Mile High's developments is in Fort Lupton, north of Denver. "Few areas in the U.S. afford you to go skiing one day and golfing the next," a company brochure explains with enthusiastic if idiosyncratic English.

At the side of the room, representatives of the mortgage brokers Investment Property Funding offered counsel. In the rear, Mile High representatives unfurled scale drawings of their new neighborhoods. People could mark off the duplex they wanted, provided they were willing to immediately fork over 5% of the price, which was usually $330,000. They won't see the finished product for as long as two years — an eternity for investors.

There are other hurdles. One potential investor asked why the Florida duplexes, located northwest of Orlando, were described as bringing the owners less than $30 a month after mortgage payments and other expenses — hardly worth bothering about.

"If you buy in Florida," said sales director Andrew Eikenberg, "you're really betting on appreciation."

That investor walked away, convinced the bet was unwise.

Those who bought had more faith: that their project will be finished, that the communities in which they're located will become vibrant, that tenants will be plentiful and eager to pay enough rent to allow investors to recoup their costs.

And if any of these things don't come true? The contract states quite clearly: The buyer assumes all risk, and the 5% down payment is not refundable.

"Maybe I'm naïve," said Massoud Balbas, a Laguna Niguel computer consultant who attended the L.A. presentation, "but I thought [the speakers] were genuine."

Balbas bought a lot of tech stocks in the late '90s, an experience that left him unhappy. "I had no idea what I was doing. I put everything in one basket. Real estate is different. People are always going to need homes."

His own home has ascended in value from $400,000 to $1 million. That makes the Colorado duplex he agreed to buy from Mile High look inexpensive. Balbas, 60, has never been to Colorado and said he had no plans to go anytime soon.

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Not-So-Happy Endings

One sign a boom is peaking is that prices have risen so much it appears perfectly natural and inevitable that they will keep doing so. Believing the game has only winners, new investors pile in.

It was against this backdrop that Kim Kaul bought a house last summer in Las Vegas.

By traditional criteria, Kaul, a 36-year-old San Diego homemaker, was an unlikely player in the real estate investment game. She and her husband, Michael, who worked for his father's auto-wrecking yard, are of modest means, with four young children and a rented apartment.

This was part of the appeal, of course. In San Diego last year, it was impossible not to talk about real estate, as prices rose 25%. Las Vegas was even more feverish and had the lure of a much lower entry price. So when Kaul saw a posting on the Internet bulletin board Craig's List by a man selling a contract to buy a new Vegas house, she got in touch.

The seller said he had contracted with Pulte Homes in June to buy a three-bedroom house in the suburb of Henderson for $425,000 but that his financing had fallen through. He sold the contract to Kaul in August for $8,500, money she took out of the family's meager savings. Her new investment, which she bought with no money down, was appraised at $460,000. An agent told Kaul she would be able to sell in six months for a $100,000 profit. In a market where prices had gone up by 50% in the previous 12 months, that appeared reasonable.

Instead, on Oct. 1, the Vegas market caught a chill. In the face of weakening demand, Pulte cut prices. More than 500 would-be investors fled, abandoning their deposits rather than taking possession of something whose value might decline further. The speculators' party was over.

For Kaul, whose model could now be had for $335,000, it was too late. She had closed on her purchase.

During the fall, she was hopeful or maybe just unwilling to see reality. She found a tenant, who pays $1,250 a month. But her mortgage was $3,000.

When her husband lost his job, the situation became dire. The couple paid the January mortgage with borrowed money, then gave up. Their lender is in the early stages of foreclosure, a process that will ruin their credit rating.

Kaul is chastened but still believes in real estate: "I'm sure the market's going to pick up, but I can't hold out that long. This is kind of a bummer."

*

As real estate prices have increased, so have the number of homes bought not as primary residences but solely for investment.

Most popular areas for investment, ranked as a percentage of all homes bought solely for investment in 2004
Redding, Calif. 19.08%
Medford-Ashland, Ore. 18.78%
San Luis Obispo-Atascadero-Paso Robles 18.20%
Visalia*, Calif. 17.98%
Merced, Calif. 17.53%
Chico-Paradise, Calif. 17.52%
Fresno 17.48%
Tallahassee, Fla. 16.78%
Bakersfield 16.56%
Reno 16.18%
*Also includes Tulare and Porterville.