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Single-family homes catch investors’ eyes
Buyers focus on rental income more than appreciation potential
Tiffany Brown
A Las Vegas home is shown for sale on July 27. Southern Nevada has seen a recent influx of investors seeking existing homes.
Fri, Jul 31, 2009 (3 a.m.)
The Meridian condominiums are located near the Las Vegas Strip.
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- Las Vegas housing supply hits 3-year low (7-24-2009)
- Las Vegas breaks record for monthly home sales (7-8-2009)
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Southern California investors have returned to the Las Vegas market in force to look for bargains on single-family homes and helped drive Las Vegas to a record number of sales in June, housing industry experts said.
The number of investors buying new and existing homes in Las Vegas rose 35 percent when June numbers are compared with June 2008, according to San Diego-based DataQuick.
The demand for investors buying existing homes has helped that segment of the market fare the best when it comes to real estate investing over the past year and kept housing prices stable between April and June, analysts said.
“Real estate has always been a good investment, and right now it has never been better from a residential standpoint,” said Steve Bottfeld, executive vice president of Marketing Solutions. “I just wouldn’t invest in commercial (real estate) because it is about to go through what residential already has.”
DataQuick reported that investors made up 37.5 percent of the buyers of both new and existing homes in June. That’s the second highest June this decade when it comes to investor-purchased homes, next to the 39.4 percent in June 2004. It’s also the highest percentage of investors as buyers since it was 37.6 percent in February 2006, said DataQuick spokesman Andrew LePage.
The influx of investors into the market is evident since it hit a low of 25.3 percent in September 2008 in the aftermath of the housing boom. In June 2008, investors comprised 27.8 percent of the sales, below the 30.3 percent average for Las Vegas between January 2000 and June 2009, LePage said.
No one should confuse this class of investors in residential real estate with those during the boom that bought and flipped houses, Bottfeld said. These investors are looking to hold long term and earn money off rental income, he said.
It makes sense because if someone can buy a home for $100,000 in cash and rent it for $1,000 a month, that equates to a 12 percent return before taxes and other expenses are included, Bottfeld said. Even getting an 8 percent return is better than the 2 percent they might get at their bank, he added.
Glenn Plantone, a Realtor and president of the Real Estate Insiders Club in Las Vegas, said investors are taking advantage of a steep drop in prices since they peaked in 2006. In some cases, prices of homes in the northwest fell 70 percent.
Homes that sold for about $300,000 are going for about $110,000 he said.
“They are buying them for cash flow,” Plantone said. “We are not even talking about appreciation potential.”
The market to rent homes remains strong because people understand the value compared to renting an apartment, Plantone said. And for those homeowners who lost their home to foreclosure, they want to stay in a home.
“It is a lot easier to rent houses than condos,” Plantone said. “We are getting people who are walking away from a $2,000 a month home payment and going across the street to rent a home for $1,200 in immaculate shape.”
Despite the interest in Las Vegas, it is not as strong as Phoenix where 39.6 percent of sales were bought by investors, LePage said.
Most of the investor buyers that Plantone said he has dealt with are Southern Californians. Many are small businessmen who have several hundred thousand dollars to invest and have been waiting for an opportunity in real estate.
Plantone said these buyers are savvy because none of his investors has bought a property for more than $121,000. They are looking for homes built in 2003 and later.
Robyn Yates, the broker-owner of Windermere Prestige Properties said not only are investors coming from Southern California but there has also been a lot of interest from foreign buyers, especially in Asia. Some are even buying homes without seeing them in person, she said.
Many investors have been hurt by the decline in the stock market and liquidated some of those assets or took out money from their 401k despite having to pay a penalty, she said. In some cases, there are a group of five people pooling cash to buy 10 homes, but most are individual investors, she said.
“Some of them were just holding onto cash until the opportunity was right,” Yates said. “I think they are going to be around for another couple of years.”
As long as homes can be bought much cheaper than builders can construct them, there will be a market for investors in Las Vegas, Yates said.
Plantone said that many of these buyers will leave the market when prices go up $20,000 to $30,000 because their investments won’t pencil out for rental income as they will now.
“That’s why investors have been so aggressive,” Plantone said. “I am telling people they may not see a better time to buy since the Great Depression.”
Investors are winning out over frustrated first-time buyers for the properties because they are offering more than the list price and because they have the advantage of offering cash, Plantone said. It was only three months ago that buyers could get properties below list price, he said.
Any investors who bought in 2007 or early 2008 wouldn’t have had any luck with appreciation, although buying single-family homes fared the best out of all real estate investment categories over the past year, according to Larry Murphy, president of SalesTraq, a Las Vegas housing research firm.
“The single-family home has always been the preferred house of choice with most people,” Murphy said. “Most people want the picket fence and the back yard and not being attached to someone.”
Between the first six months of 2008 and first six months of 2009, the median price of single-family homes fell 34 percent, Murphy said.
The best performer on price appreciation when it comes to planned communities was Silverstone Ranch in the northwest valley. The Pulte Homes community had a median price of $226,000 in 2008 and that fell 19 percent to $182,500 through the second quarter this year, Murphy said.
Homes performed better than an acre of undeveloped land, whose median price fell 42 percent over that timeframe, he said.
Third on the list were mid-rise condominiums, which fell 49 percent in the past year They were barely ahead of high-rise condos whose values fell 50 percent and other condos and town homes which fell 51 percent, Murphy said.
The worst investment over the past year was apartment conversions with values falling by 56 percent, Murphy said.
The worst of the that segment was the Meridian at Hughes Center on Flamingo Road, east of the Strip that was converted from apartments to condominiums between 2005 and 2007, Murphy said.
The property, which had a failed attempt at trying to convert into a condo-hotel because of Clark County regulations, sold for $604 per square foot when it first entered the market. The average price was $539,000, Murphy said.
Through June, the average resale price has fallen to $87,611 or $121 a square foot, Murphy said. With that drop in price has come rising foreclosures. Murphy reports that 201 of the 680 units or 30 percent have been foreclosed upon, and that number is likely to rise. The foreclosures have been running as high as 25 a month so far in 2009, he said.
Murphy said he’s not surprised apartment conversions have fared the worst because in essence some are 20-year-old buildings that have a new granite countertop.
There was a strong demand for condo conversions during the housing boom because they were the only units available that could be bought for $200,000 or less. With homes more affordable today, that softens the demand for conversions, he said.
Land came in second after single-family homes because despite the meltdown in the market, it remains a precious commodity, Bottfeld said. Even though Las Vegas is overbuilt, there is a limited supply of land because of restrictions by the federal government, he said.
There is not as much movement on buying high-rise condominiums because the inventory is limited and banks have been reluctant to put that inventory on the market at bargain prices, Plantone said.
The high-rise condominium market that has fared poorly is condo-hotels in which buyers put the room in the daily hotel rental pool. Demand for hotel rooms has been weak in the economy and hotels only return about $30 for every $100 in rental income, Plantone said.
Discussion: 26 comments so far…
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I'm sure the banks are happy to get these stuco piles of crap off their books.
ohh and the classic "buy now before it's too late" comments are great.
"That's why investors have been so aggressive," Plantone said. "I am telling people they may not see a better time to buy since the Great Depression."
like we havent heard that all before.
Here we go again.
"It makes sense because if someone can buy a home for $100,000 in cash and rent it for $1,000 a month, that equates to a 12 percent return before taxes and other expenses are included, Bottfeld said. Even getting an 8 percent return is better than the 2 percent they might get at their bank, he added"
Yeah, right. Sure the figures are possible and most likely correct but don't tell me that a large percentage of these homes aren't going to be converted into Section 8 housing so those so-called investors can get their share from the gov't to rent these properties out.
The investorss from California and elsewhere RUINED it the first time around. THEY are the ones that have THE highest percentage of foreclosures in the valley because the houses turned into bad investments so they walked and wrote the investment off. In the neighborhood I used to live in in North Las Vegas, I spoke with a tenant of a rental home and was told that the original investor who bought the home they were living in bought SIX other properties in Vegas and the investor was foreclosing on all but one. I dont think that was a fluke, but the norm.
And yes, Vulcan, here we go again.....
Cash flow is the acid test of real estate investment. If a property can stay in positive cash flow (especially in a down market), it is very likely a good investment.
So investors are near a decade-high portion of the buyers, and one of their main traits is that they pay bottom dollar on properties. Certainly not 20,30K more than where market is now. And this is a good thing for homeowners concerned about their home's value?
The big difference between 'this time' and 'last time' in the here we go again scenario is financing.
Zero down, 100% financing is what attrbuted to killing the market, not who owned the homes. I welcome investors that are vested in the property with cash purchases. These investors aren't going to walk away from the homes when they really are investments.
I'd rather have an investment property next to me than a bank-owned, empty home.
Many of the neighborhoods in Las Vegas will go back to the desert. If you are buying now, you better make darn sure the desert isn't going to take that land back.
Buying in a neighborhood where the majority of the homes are forclosed is a bad idea. I'm sure some spots in Vegas are fine but the outscirts are toast.
Gee, we haven't seen this one before...
Out of state buyers running up the market and trying to rent out their properties. The percentage of investor buyers is the same as it was four years ago when the bubble started and nobody can understand what's going to happen next? The house of cards will tumble when the glut of rental properties forces rents downward (goodbye positive cash flow!) or there are so many rentals that there aren't enough renters out there to rent at all (goodbye any cash flow!). Then the banks foreclose and we start over only there won't be any investors allowed at that point and values will tumble further and oh yeah, we as taxpayers are stuck holding the bag - again!
Well, looks like the next tidal wave of foreclosures is about 12 months out or so based on this... Too bad we can't learn from history and have to repeat it...
STV:
I would agree with you if these investors were truly paying 100% cash for these homes as they wouldn't be likely to pull out. But, I personally know a few of these investors and while some are truly paying hard cash, most are paying for these homes in a non-cash manner. Either via mortgage fraud (falsely claiming these will be owner occupied and getting FHA loans with 3-1/2% down) or by using home equity lines from their homes that they're to the good on (typically against their true home in another state that they bought before the boom where they have equity) or lastly, they are also doing a hybrid where they use their HELOC to put a down payment on an investment house with conventional financing. Its still a risky game being played.
Its smoke and mirrors I wager that most of these homes are going to be back as foreclosures. I do hope I'm wrong though as I don't want to see this happen again. But, I'm also a believer that those who fail to learn from history are doomed to repeat it.
That's the gamble. Will there be enough renters out there for the investor-owned homes? In the short run, maybe not with gambling business slow and workers are laid off or are being paid less because their jobs are dependent on tips/tokes. For sure, construction workers do not fit in the possible renters because for the most part there is not work to had for quite awhile.
Glocker,
I think your investors mortgage information is at least 6 months out of date.
Ask any lender, (including those doing HELOCs). Investor loans at best come with a 25% down price tag. Regardless of where the down payment money comes from, they still have a hard investment in the properties that are now being bought. Borrowers are now held to a much more stringent qualifying process too. Stated income signature loans are all but a memory
It was very easy for them to walk away before when the only thing they had invested was the time it took to sign a loan for 100% financing.
I'm not saying that a scheming investor can't slip through the cracks here and there and fraud a FHA loan. What I am saying is those investors are now the exception, not the rule.
Not to mention the article states that investors are now looking on the return on their investment coming from rental income, not hyped up market appreciation.
I believe that (for the most part) we are seeing a different species of investor here now.
How much are the cheaper condos going for?
florida is also getting more action; the $8000 that uncle sugar is offering is tempting to some people; we have a ways to go before the market goes back up and the job market has to improve before we see some stability.
Sure looks good on paper but try being a landlord with the many unforeseen problems that can and do arise with tenants, maintenance issues, etc. Not to mention when the glut of rentals brings the prices for rents down and the fact that renters for the most part don't take pride in their properties as owners do.
Here's the sad part. We the taxpayers bailed out these banks. Now foreign investors specially China is ripping the benefits of our tax payer money by buying cheap homes. Investors don't built communities they destroy them. Where is our state leadership on this matter. Real buyers should have a chance at buying these homes before the investors steal them. Shame on all the realtors and Banks who are not interested in building communities all they are interested in is themselves. They will cater to all these folks with cash like the scum. Everyone from the President and down have done nothing for America. First you sold our country to communist China by mass producing national debt. Now that the Country is broke you are selling our neighboorhods to Foreing and local greedy investors. But don't worry we will be here when they need they next bail out. THEY TAKEN OUR JOBS, WE OWE THEM TRILLIONS OF DOLLARS AND NOW THEY ARE TAKING OUR HOMES. WHAT'S NEXT?
I wonder how many of these "investors" are buying and bailing? They are hopelessly underwater in their current home they find a house a 1/2 a mile away for 1/3 or less than what they paid for their current house. They put it in someone elses name, and move in...
The banks continue to proove how gulliable we are. They got us to pay $350k for the average house not too long ago. Now they have us tricked into bidding up distressed properties, when there is a limitless supply of them.
It is not the fault of a Realtor when they have a buyer bidding on a home who is purchasing it to live in and requires financing, along with an investor paying cash and the outcome is the bank accepting the lower price offer from the Investor. The banks are making the rules here as they sell their huge backlog of properties and what they are doing is morally wrong. First time home buyers who now have the opportunity to own a home and are ready and able to buy are being excluded by banks that prefer cash investors.
Much of what I believe is stated by others in the above comments. Let me just add: the Vegas Valley is LOSING population (according to Forbes, 3000 people a month). This will accelerate as City Center and the end of all the recent new-construction binging completely winds down. Not only is there far too much capacity in residential housing, but there will be a glut of hotel rooms. A price war will ensue (if it has not started already). Weaker properties will go in and out of bankruptcy, but the structures will remain. The upshot is that there will also be lengthy blood-letting on the strip. This will lead to a thinning of jobs. And don't forget, for gambling, Vegas ain't the only game around, anymore. There's Indian gaming all over the nation, now. There's gaming up and down the Mississippi River; Tunica has passed up Atlantic City as the number two gambling destination in the country. Biloxi has been rebuilt and is quite nice with its white sandy beaches, to boot. I could go on and on. And don't get me started on how Dubai and Macau will forever suck off the international "whales" that led to the previous boom on the strip.
I don't know at what levels Las Vegas will naturally settle, but it will be far less than what developers and banks have sold us on. Between the single-family home ghost towns, and all the hi-rise condos which eventually must also flood the market, there will NEVER be enough demand to fill all the residential capacity that already exists in Las Vegas. We're in for a race to the bottom in rents.
Just maybe, when newer single-family homes are down to $500 per month rents, a greater influx of retirees might come to take advantage of basement bargains. Personally, I don't see much else to hope for on the long-term horizon.
Excellent and informative analysis, DTJ! I had no idea we were losing that many people per month. Not that I'm complaining about it, but that factor alone will be so impactful, as you stated.
Indeed, it will be very interesting to see where this situation involving a glut of chicken wire stucco homes, coupled with the exodus of people who would ordinarilly live on those crappy homes, takes us.
Speculation is NOT something Vegas needs at this time or any time in the future...DA!!!
i dont think vegas is right for retirees, not for 12 months in a year. for those who could afford it, october to april is ok, but the baghdad season would tire me out [may to september].
Dipstick,
Your post reads like you don't live here. But we do, in fact, have plenty of retirees here. So does Arizona, where the summers are just as hot. Many a former Northeasterner has told me that summers in Vegas beat winters back home, hands down, where you have to shovel your car out of the snow every morning. What gets me is, we also have a lot of people a coming from Florida and California to retire here. Maybe if enough empty out of California, I can go over there to retire ;-).
Okay, now what do the people who live here that want to buy a new home do? How do we compete within a market like this? Why are we going to allow the investors take over our market again. Can't we put some controls on this process? We shouldn't be turned away from each offer due to an investor coming in with a cash offer. We won't own anything in our own communities. We'll all be renting. What's the use? Are the investors being charged taxes for their investments here? Is the state of NV or the cities of Las Vegas and Henderson at least capitalizing on their investments? Their should be a property investment tax initiated.
Among the many cogent comments, VegasGlocker had some good insight in my opinion.
As the valley continues to shed high-paying jobs in construction, and real estate, insurance, & finance (socalled FIRE employment)there will be a continued downward pressure on rents.
The condos now selling for 25-30 cents on the dollar will take apartment-equivalent rents down to 1990 levels and that will pull down the single family rents.
There is a lot of pain to go in the rental market and most of the investors I deal with aren't aware of the dynamics that are playing out.
Additionally, there are another 10,000 REO properties per month coming down the pike through the end of this year - that is the best case scenario.
Well homes are a better investment now than condos or high-rises but this seems like it was written by a realtor. There is only so much demand for rentals and plenty of supply.
first time buyers are the ones feeling the brunt as they cant get into anything decent. I work as a clerk for a small factory and am close to retirement and have some money saved up but i cant get a house as i get beat on my offer every time by so called "investors" that seem to be buying things up all around town! my realtor says i should wait for the right time as my budget is modest but i seen houses selling for around my budget so why cant i get one in full cash offer is anybodys guess