Thursday, March 10, 2005

Stocks Market woes induce many to try flipping real estate

Chicago Tribune

Mary Umberger

On Valentine's Day, the first of about 600 hopefuls began to line up for a three-day vigil outside the sales tent of a Boynton Beach, Fla., developer, where they hoped to nail a condo.

Among them were a couple of stand-ins for real estate agent Peter Celnicker, whose investor clients were clamoring for the units. Celnicker was elated when they snagged two - priced at $390,000 and $465,000 - and plopped down two $15,000 certified checks to reserve the unbuilt units. "Fabulous deal," the Delray Beach, Fla., agent pronounced. "Fabulous." Two days later a woman who had not fared so fabulously offered Celnicker's clients $50,000 per reservation at the sold-out development. Celnicker said they turned her down flat, with the expectation of flipping their deals for sweeter profits down the road. Flipping is the practice of buying properties for resale, an investment strategy that has become wildly popular across the country. Disappointed with the stock market and dazzled by double-digit property-appreciation rates, amateur investors - apparently of every income stripe - are investing in real estate in droves. They are snapping up everything from condo conversions in Chicago suburbs to new three-bedroom ranch homes in the Arizona desert. Ordinary people, armed with bargain mortgages, pooled family savings and cashed-out home equity, are buying for investment at levels that are starting to worry economic analysts. Their numbers are hard to track, but by one count investors bought nearly 8.5 percent of all the homes sold in last year's record market, according to Loan Performance, a California housing data firm. In 2000, the company estimated investor buyers were 5.8 percent of the market. Their effects on escalating home prices - not to mention what might happen to such deals in a real estate "bubble" - are beginning to be noticed. In December, Federal Reserve officials warned that they were concerned about speculative demand affecting housing prices and said they were watching some regions' activity closely. "There are a couple of areas that look really scary, in terms of their share of the market," David Seiders, chief economist of the National Association of Home Builders, said of investors in the national picture. Seiders said, however, that investor activity in this region seems to be in balance. Others agree. "I think for the Midwest, we're on an even keel," said Erik Doersching, vice president of Tracy Cross & Associates, a Schaumburg, Ill., firm that tracks home-building data. "Especially compared to whatever else is happening elsewhere." Last year speculators went into overdrive in Las Vegas, Phoenix, many parts of California and southern Florida, buying perhaps 15 percent or more of homes sold. In those areas people who were buying a home as a residence complained loudly that they were being pushed out of the market. Besides driving up housing prices and assessments, a flood of investor-owned houses can depress prices when a market loses its sizzle. If price-appreciation rates slow - or worse, decline - speculators have more freedom to cut their asking price, sell quickly and get out. Left behind are occupant homeowners, who often must realize a certain profit to buy their next house. In Phoenix, area homebuilders have announced that speculators are no longer welcome. "We were seeing other markets where there were tremendous influxes of investors, particularly Las Vegas," said Susan Williams, a spokeswoman for Element Homes, a Phoenix homebuilder. "They'd come in and buy 10 or 20 homes, and flip them or rent them out. In some subdivisions up to 60 percent of the owners were investors, which was leaving the regular homeowners in an uncomfortable situation. The market became flooded with rentals." When Phoenix began to become a magnet for out-of-state investors Williams' company and many other builders in Phoenix, as well as several in California, started requiring buyers to promise that the homes would be their primary or secondary residences for at least a year. In south Florida such restrictions are generally nonexistent. "We're seeing three times as many buyers as there are units - 300- and 400-unit buildings sell out in a weekend," said Jack McCabe, a Deerfield Beach, Fla., development consultant, who says exuberant investors create artificial demand. "In my very, very conservative estimate, 40 percent of these sales are speculator-driven, and in some projects it's as high as 80 percent." Although Chicago real estate agents and developers say the market is much less heated than Miami or Las Vegas, many say they have seen a surge since last fall in downtown activity, where a record 10,000 new condo units are planned for delivery in 2005, according to Gail Lissner of Appraisal Research Counselors, which gathers data on residential construction. Lissner said 2004's downtown sales boom in Chicago (6,300 units sold, an 80 percent increase from 2003) has local developers optimistic about the units in the pipeline. "But one of my major concerns is what role (speculators are) playing in inflating the true demand in the market," she said. "I'd say a good 25 percent of these sales could be to speculators." Lissner said Chicago has seen such levels of speculation before and survived them without any negative economic repercussions. Investors were at least as active as today's speculators in the 1970s - an era that came to be known as "condomania" because of the large numbers of rentals that were being converted to ownership in the city, she said. "But what killed condomania was a huge run-up of interest rates, not overbuilding," Lissner said. Today some developers court investor interest, Gail Lissner of Appraisal Research Counselors, said. At least one, however, shuns them. "Speculators are also our competition (when they resell) while I still may be trying to sell in my building," said Alan Lev, president of the Belgravia Group, a Chicago-area developer whose sales contracts require buyers to live in its buildings. "Besides, our construction lenders are starting to look at (investor buyers) and say those are not good sales." Overall, the speculation picture is muddy because there is no single definition of "investor." For example, vacation homes count as investments in some databases, not others. Parents who buy condos to house their college-student children may not be trackable. Many investments are bought by landlords for the long term. Or they're consumers who see bricks and mortar as an alternative to stock market nosedives and wimpy returns on bank CDs. Sonya Travis, of Chicago, has bought a series of homes since 1998, residing in each for a couple of years until the price appreciated. Then she moved on to - and into - her next two-year investment stint. Each time, appreciation has averaged 25 percent. Travis lives and invests in Chicago's South Loop, which has been prime flipping territory for years. "Sometimes it can be a challenge to sell units, because there's so much other inventory on the market here," she said. But just as accountants-turned-day traders learned that high-flying stocks can tank, real estate also holds its risks. "Some do get burned," said Chicago real estate agent Pamela Holt, who has worked with Travis on several purchases. "Some of them are fairly unprepared for the reality of what could happen if you buy the wrong thing." Travis isn't worried. Though some of her investments have taken longer to resell than planned and she has one rental unit that has caused some stress, she intends to keep going. "I'll keep investing this way until I'm where I have my dream home, then I'll stay put," said Travis, who works in marketing for a Chicago manufacturer. "But I'll probably keep investing after that."


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