By Kevin Chiu
Groups of investors are pooling their money to buy large bulk inventories of foreclosures in hopes of making a financial killing. The purchases of mainly single family homes comprise the largest sector of buyers in the housing market these days, according to a study by Housing Predictor.
The findings were determined after an analysis was conducted over a month long period determining that groups from Wall Street hedge funds to mom and pop operations are gathering millions of dollars to make purchases at wholesale prices. Many homes are being bought for as little as a nickel on a dollar.
The groups of investors are waging their investment might at auction houses, picking-up deals directly from banks, including Wells Fargo Bank and one of the largest insurers of home mortgages, Fannie Mae. Dozens of bulk sales under $5-million have closed with buyers, most of whom make the purchases before even seeing the property in person. Homes are selling for as little as $1,000 each.
However, there’s a catch for investors that few seem to realize. An Oakland, California group is in the midst of a buying frenzy in Contra Costa County in the Bay Area’s East Bay, picking up single family homes for roughly $100,000 each. They’re putting their trust in the belief that the housing market will somehow bounce back in five years, doubling their investment.
In these times of economic uncertainly when Wall Street and the bankers messed up the entire world’s financial system is it really a good time to put your money on a gamble like this?
Real estate analysts offer mixed reviews. “The housing market will come back,” said Housing Predictor economist John Hines. “But it’s going to take at least a decade to reach the level of pricing at the peak of the market, and it will probably take much longer than that.”
Other analysts are more critical. “The theory of selling from one person to another for a higher price than buying it for has become relatively well known as the theory of the Greater Fool,” said one highly placed Wall Street real estate analyst, who spoke on condition of anonymity. “Apparently these days PT Barnum was right. There’s a sucker born every minute.”
But one person’s gamble is another’s sure bet.
The fact is that foreclosures are being handled in a whole new way these days. Bankers and mortgage service companies’ foreclosure departments are retaining attorneys to handle foreclosures for much lower costs than what has been paid in the past. Attorneys are doing them at low bulk rate prices, around $1,400 on average, resulting in much lower foreclosure costs to lenders.
The bankers don’t have as much to lose with federal government money that’s been set aside to buy up the mortgages.
Investment groups are paying cash for properties. Oakland’s McKinley Partners gathered $6-million to buy bank owned homes in Antioch, Bay Point and Pittsburg. It’s unlikely that they’ll be able to rent the homes for as much as they hope at $1,200 in a falling rental market.
Real estate has historically been a cyclical investment, but who really knows how long it will be before another big cycle hits with all kinds of new federal legislation to protect consumers coming down the track sure to extend or delay a return to another big boom.
James O. Barnes of South Carolina is one happy investor, who paid $1.2-million to take 800 homes off the hands of troubled Fannie Mae. The homes were located in five states, including Michigan, Indiana, Tennessee and Ohio in some of the markets that have been savaged by the real estate downturn. He’s making sizable profits on re-sales already selling the properties to new homeowners.