Discounted house prices - and Canadian developers - offer the best potential for rental investors BY FRANK O'BRIEN Foreclosures are accelerating in most U.S. states and the knock of the sheriff on the door is tattooing across the Sunbelt - yet one recreational developer is gambling on building in the U.S. as Canadian investors look south for bargains with positive cash-flow potential. And there are bargains once you get past the heartbreak. In Nevada, a staggering one out of every 11 households received a foreclosure filing in 2010; one out of every 17 did in Arizona and one out of every 18 in Florida, and it looks like it could get worse this year. The number of U.S. homes receiving a foreclosure notice rose 33 per cent in August from July, the biggest monthly gain in four years, according to California-based RealtyTrac Inc. Banks were on track to repossess about 800,000 homes this year, but with 222,000 homes receiving a default notice in August, 2011 could be the highest on record. "This is really the first time we've seen a significant increase in the number of new foreclosure actions," said Rick Sharga, a senior vice president at RealtyTrac. "It's still possible this is a blip, but I think it's much more likely we're seeing the beginning of a trend here. 2011 is going to be the peak." The "bloated foreclosure pipeline now presents the greatest obstacle to a housing market recovery," said Josh Levin, a Citi Bank analyst. Across the U.S., 3.7 million more homes are in some stage of foreclosure than in a normal housing market, he said.
Nowhere is the foreclosure action higher than in Arizona and Nevada. Right now, 30 per cent of all Phoenix detached house sales are foreclosures and the average house price is around $110,000, half of what it was four years ago. In Las Vegas, 40,000 homes will be foreclosed this year, 6,000 more than in 2010, estimates the LasVegas County Sheriff's office, which often has to handle evictions. Phoenix If you are looking for U.S. prices at rock-bottom, however, Arizona's major city may be it. "We have great [Phoenix] condos available for as little as $25,000 and houses for $80,000, with tenants or without. Apartments are starting around $20,000 per unit and are less than one-third of what it costs to build. All these low prices create a cash-flowing investment that will only continue to appreciate as the market recovers," said Patrick O'Sullivan with Team Gerchick of Phoenix, which works with many Canadian buyers. The company held a tour for potential Canadian investors in October that drew about two dozen potential investors, mostly from Vancouver and Calgary. Recently, homes valued at or below $100,000 have been selling almost as soon as they hit the market, O'Sullivan said, while demand has nearly disappeared for homes priced above the Federal Housing Administration-guaranteed loan limit, currently $346,250 in Maricopa County (which is anchored by Phoenix). At least half of all recent home purchases have been made by investors looking to renovate and lease out the homes to generate monthly income, according to Sullivan. Such investments have the greatest profit potential and pose the least amount of financial risk at the low end of the market, Team Gerchik founder Lynda Gerchik told a recent Vancouver real estate conference. She added that notices-of-trustee sales, or pre-foreclosures, are half of what they were a year ago. "The bargains we are seeing today won't last forever," she said. The main reasons why "we believe the Phoenix market is an excellent investment," she said, are: • excellent cash flow while holding your investment; • you are buying for a fraction of what it costs to build; • Phoenix has the demand and supporting demographics for real estate appreciation; • the median price per square foot is $78.29, down from $190 in 2006; • 8,734 sales in August, up 26.5 per cent from August 2010; and • active listings are declining and the supply of homes priced under $100,000 is falling fast. Phoenix has an apartment rental vacancy rate of 13.4 per cent, but Gerchik and other realtors say that rental demand for better property remains tight. "We have no problem renting out homes, sometimes to the former owners," she said. Las Vegas Nevada continues to lead the nation in foreclosures, with one in every 118 households receiving a foreclosure-related notice in August, RealtyTrac reports. Though default notices surged, they fell 13.7 per cent short of the 6,116 notices filed in the same month a year earlier. The recent surge in foreclosure filings is primarily attributed to the Bank of America, the nation's single largest lender, which is moving forward on troubled mortgages where paperwork was found to have been improperly "robo-signed" by bank employees, ForeclosureRadar CEO Sean O'Toole said. "It's possible that they are clearing up files that were set aside during review of the robo-signing," the foreclosure analyst said. "If that's the case, I think this will be a one-month blip of cleanup." The rental vacancy rate in Las Vegas has fallen to the 9 per cent range, down sharply from a year ago, according to California-based Marcus & Millichap, which says a gradual recovery of the gaming industry should lower vacancy rates and increase rents in 2011. The firm says Las Vegas employers should add about 14,000 workers, a 2 per cent increase. Visitors should increase by 2 per cent this year, improving the gaming and hospitality industries that drive apartment operations, said Hessam Nadji, managing director. Lydia Clarke, Las Vegas-based president of Investment Properties International, specializes in buying real estate through foreclosure auctions in the U.S. gaming capital, fixing them up and either flipping them or renting them out. Clarke said most of her clients are western Canadians. "Simply put, Las Vegas home values have dropped by more than half of what they were bought for five or six years ago," Clarke said. "Many people who purchased or refinanced now owe much more on their homes than they are worth." Some distressed buyers will try for a short sale, where the lender forgives the difference in the sale price and the mortgage owing to get some of the money back. Other owners simply walk away and let the home fall into foreclosure. About 1,000 homes are put to auction every day in Vegas, Clarke said, noting that the city is leading the U.S. in both foreclosures and highest volume of homes sold. Clarke said Canadians could make money through buy-and-hold or through positive cash flow as a rental. As an example she used a Las Vegas three bedroom in a good neighbourhood that she bought at auction for US$110,000. The house was given a quick makeover and rented out for US$1,350 per month. Clarke also has detached houses listed in Las Vegas for US$78,000 and townhomes from US$58,000. A Canadian recreational investor can buy two-bedroom condominiums in Sin City for less than $100 per square foot, or about a third of the price in a B.C. or Alberta resort. Washington state Closer to home, Washington state saw 40,000 home foreclosures in 2010, according to the Washington State Department of Commerce. This has led to state-wide foreclosure mediation service being offered by the state government. But the housing market in neighbouring British Columbia is among the best in North America. This has helped convince a group of Canadians and Americans to plan and launch a new lakefront resort aimed directly at Canadians. In fact, it is being marketed by Surrey, B.C.-based Fifth Avenue Marketing Ltd. The Wildwood Waterfront Cottages by Lake Whatcom Resorts LLP is offering 90 lakefront cottages on Lake Whatcom from US$249,000, according to Wayne Lyle, director of sales. The cottages, set over 15 acres, include access to a private marina with boat docks. The cottages are around 420 square feet, but have large decks and are right on the lakefront. They are being sold as freehold strata units with whole ownership and Lyle, formerly with Intrawest Properties, said an exchange program allows owners to exchange their Wildwood cottage for resort homes in North America and overseas. Rentals are also allowed at the Whatcom Lake resort, which is about 45 minutes south of the U.S.-Canadian border near Bellingham, Washington. The site had been used as a RV vacation spot for years. Lyle expects 90 per cent of the cottages to be sold to Canadians when the project begins sales at the end of October, noting that Wildwood's lakefront prices are less than half of what a cottage would cost in popular B.C. areas like Cultus Lake or the Okanagan. Mike Kent, broker-owner of Windermere Real Estate Whatcom Inc., said the Wildwood cottages would likely sell well to Canadians seeking a "lock-and-leave" vacation home, though he cautioned there is little chance of upside equity in the current U.S. market. "This is a great lifestyle choice," he said. "It is not a great real estate investment."
from Western Investor November 2011 |
