VOL. 127 | NO. 94 | Monday, May 14, 2012
By Sarah Baker
Investor Warren Buffett admitted in his annual letter to shareholders recently that he was “dead wrong” in his early 2011 prediction that the housing market would have begun recovery by now.
Photo illustration: Emily Morrow // Imagery source: Shutterstock
During that same time, the billionaire also said that single-family homes are such an attractive investment right now, he’d buy up “a couple hundred thousand” if it were practical to do so. Buffett said historically low interest rates and discounted pricing make homes held for long-term an even better investment than stocks.
Investment firms nationwide are snatching up single-family real estate-owned (REO) properties, renovating and renting them, and then selling them to other investors – many of whom buy sight unseen. This “house flipping” is seen as especially opportunistic in Memphis, where median asking prices are dwarfed by national averages and vacancies are widespread.
“There’s so many houses being renovated now because there’s a foreclosure on every street in Memphis almost,” said Jim Reedy, founder of Memphis Investment Properties LLC, which currently manages about 1,200 properties for investors across the country and around the world.
The company closed on 56 houses in its two markets – Memphis and Atlanta – during the first quarter, and has about 40 contracts pending.
Memphis Investment Properties focuses on the southern part of the city, specifically ZIP codes like Hickory Hill South’s 38141, Southeast Shelby County’s 38125, Oakhaven/Parkway Village’s 38118 and Whitehaven’s 38116. The average house the company seeks is 25 to 45 years old.
Reedy estimates that up to 20 percent of his clients are West Coast investors buying with trust accounts and self-managing Individual Retirement Arrangement money. But the company’s specialty is working with investors from Australia, New Zealand, Singapore and South Africa.
About 60 percent of Memphis Investment Properties’ investors are paying with cash. The rest are being financed by private lenders that the firm has assembled.
It’s the West Coast and foreign buyers, or “the guys with the money,” Reedy said, that have “set a floor on prices” where they won’t drop any further.
“If you didn’t have this influx of foreign buyers or national buyers over the last three or four years, our prices here would have just completely eroded down to nothing,” Reedy said. “It’d be scary to think that you could go down to Whitehaven and instead of paying maybe $30,000 for a house now, paying $15,000 for one.”
A staggering 62 percent of all home sales in Shelby County last quarter were valued at $100,000 or less, according to real estate data company Chandler Reports.
The first quarter performance was the best since 2008 based on total number of sales (3,178), but 54 percent were bank sales and investor purchases.
Contractors renovate a previously foreclosed Cordova home, right, for Memphis Invest. Neighboring homeowners expressed gratitude to representatives of the company for reclaiming a blighted property.
(Photo: Lance Murphey)
Many local firms tout their ability to transform vacant, bank-owned property into an occupied space, thus saving neighborhoods from impending blight.
But since investors are flipping homes, sometimes on the same day, it could suggest an artificial boost in nonbank sales activity is taking place, said Phyllis Betts, director of the University of Memphis’ Center for Community Building & Neighborhood Action.
“If many apparent arms-length sales are actually quick transactions perpetrated by flippers, then there would not only be a spike in nonbank activity, but the prices might be lower than they would otherwise be if homes remained on the market,” Betts said. “However, if homes remained on the market longer, then that too tends to depress prices. The underlying problem seems to be weak effective demand on the part of would-be owner occupants.”
Then there’s the argument that the REO-to-rental trend could just be prolonging the problem, since the commitment for renters is not as high as homeowners. For Betts, transitioning mid-range houses to the rental market, when they could just stay empty and wait for improved occupancy rates, is an issue that needs to be addressed.
“If a neighborhood has a certain level of quality, a certain average selling price before the bust, then I would say it’s better even if the houses remain vacant for them to stay on the market rather than the flipping and the rental,” Betts said.
“If the alternative is this is a neighborhood where there is a certain amount of blight already, then vacancy just increases the blight, transition to rental might be better. The problem comes in that we sort of think that’s the only choice. We keep saying, ‘we need more affordable housing’ without really having a good policy on how to deal with the apartment markets.”
Investors picking up single-family houses in bulk are a contributing factor to depleted inventory levels across the board. The Memphis Area Association of Realtors currently has about 6,800 listings compared to 13,000 listings five years ago.
Joe Spake of inCityRealty said if sellers have to bring money to the closing table, they’re staying put.
“When the inventory was high, lots of houses were selling, so there’s lots of people that bought into the bubble,” Spake said. “Now, even though they might have a great house, it’s not worth what they paid for it. I think clipping off the bottom-end properties has affected the inventory, and the fact that just not much is coming online because people don’t think they can get their value out of it.”
Over the last nine quarters, there have been an average of 2,000 non-investor sales per quarter with an average sales price of $160,000. But in that same period of time, an average of 458 homes were flipped within 60-days of purchase averaging $74,000 per transaction.
Some 63,751 homes in the county are non-owner occupied. That translates to 23 percent of Memphis’ total housing stock.
Couple low inventory levels with a high population of renters, and the outcome is heated competition, Reedy said.
“Right now, we can’t find enough houses believe it or not,” Reedy said. “Down at the courthouse steps it’s competitive, buying from the traditional ways through the real estate market with Realtors is highly competitive. It creates a bidding frenzy. So we’ve increased our rental rates … and we’re beginning to choose from a group of tenants instead of only selecting from a few.”
Renters in single-family homes are also affecting measures for the Shelby County Assessor of Property Cheyenne Johnson in preparing for next year’s countywide reappraisal. State law requires the assessor to update the conditions of the county’s 350,000 parcels every four years to ensure changes in the local real estate market are reflected in property values.
“We’re doing everything possible to get out there and make sure we know exactly what’s happening in the neighborhoods,” Johnson said. “Once these sales actually occur, shortly after they have been renovated and they are put back on the market and they are being rented. And even though they’re not selling, rent is being collected, so we’re trying to find as much rent information as possible too in order to derive good reappraisals for the 2013 year.”
When an investor buys a house in a certain neighborhood, there’s an impact on pricing of the surrounding houses. But to Memphis Invest partner Chris Clothier, it varies based on the existing renting population of that neighborhood.
“Many of the neighborhoods that we’re in, you’re only talking about 15 percent of the neighborhood is rental property,” Clothier said. “So we’re not really affecting the values – there’s retail value already established, and we’re just selling well below retail on our properties. In other neighborhoods where there is no activity at all, these foreclosed homes are setting the new retail value for today. When the normal market returns and you begin to see retail activity in these neighborhoods, then the normal market value will come back very quickly.”
Memphis Invest manages more than 1,100 homes in Memphis for about 400 investors. Unlike Memphis Investment Properties, the majority of Memphis Invest’s client portfolio is made up of American buyers (about 90 percent of whom are out of state).
“One of the things about Memphis, obviously it’s an ease of entry for an out-of-state investor,” Clothier said. “Even at the home price that we sell at – which is on average around $80,000 – they cannot find generally this type of deal where they live. The lower interest rate means that as they begin to finance these properties, they can get a better return faster for their dollar.”
Clothier said right now, Memphis Invest is heavily active in 38125, 38115 (Hickory Hill North), 38133 (Bartlett/Brunswick), 38134 (Bartlett) and 38135 (Bartlett/Ellendale).
Memphis Invest sold 301 houses last year, and projects its total this year to land somewhere between 400 and 500. The company recently entered Dallas, and is exploring other markets like Nashville and Atlanta.
In the past, Memphis Invest has been known to hold large investor tour weekends as often as once a quarter, incorporating Graceland and barbecue into the mix of scooping up REOs. This year, the company is only holding a couple, starting with its first 2012 meeting May 11 to May 13, during which a donation to St. Jude Children’s Research Hospital will be made in front of more than 140 investors.
“We’re trying to show that Memphis is more than just cheap housing,” Clothier said. “That’s a big deal to us right now. We’re trying to show that you’ve got companies like St. Jude that actually mean something to the longevity of this city and we’re here to stay. We’re not like some of these other Midwestern cities that are disappearing with economic trouble.”
Yet another firm in the game is Brookefield Property Investments, which sets itself apart from its peers by concentrating on newer, mid-range homes.
“With a little bit higher-priced houses, you get a little bit newer quality houses that require less maintenance, you get a tenant who is a little bit more financially stable and you get a lot better chance of collecting your rent on time,” said co-owner Jeff Boone. “And then the appreciation value that you’re going to get in nicer neighborhoods with people who are able to qualify for loans better is much superior to that when you’re in lower-end type neighborhoods.”
The investors that Brookefield Property Investments works with are all U.S. citizens – many from the West Coast that are buying to build their nest egg or, as Buffett suggested, to seek better returns in the marketplace.
“There’s been a lot of talk lately that the housing market has hit bottom and is on the way back, but just the cash flow returns that people are getting right now far outdo stock markets and bonds and that sort of thing,” Boone said. “It’s a lot less volatility.”