Investors are going nuts for California real-estate again, albeit on a smaller scale than before.
Another sign that the housing market is working just fine…
Carolyn Said, San Francisco Chronicle: Oakland’s McKinley Partners is betting that low-end foreclosed homes in eastern Contra Costa County will double in value in five years.
The real estate development company has formed a $6 million fund to buy bank-owned homes in Antioch, Pittsburg and Bay Point.
It aims to spend about $100,000 per home, including rehab, and rent them out for $1,200 to $1,500 a month. Then it hopes to sell them for $200,000 each in five years.
McKinley is emblematic of a major force currently propelling the real estate market: investors and speculators snapping up foreclosed homes. Along with first-time buyers, they are a primary source of increased sales volume…
McKinley picked the Contra Costa towns because it thinks homes there are bargains and basics such as jobs and transit are strong.
“We’ve seen an over-correction” in home values there, said Gregor Watson, one of four managing partners. “The rents we get justify $170,000 purchase price, and we’re buying for $80,000 to $90,000.”…
For instance, McKinley paid $84,000 for a three-bedroom, 1 1/2-bathroom home in Pittsburg that sold for $412,000 in 2005. Other than the tell-tale brown lawn of a foreclosure (soon to be replaced with fresh sod), it looks like the other decades-old houses in the long-established neighbourhood, within walking distance of shops and transit.
After spending $9,300 on rehab – fresh paint and carpets, dry rot repairs, a stove fan, replacing jerry-rigged electricity, a new sewer lateral – McKinley quickly found a family to lease it for $1,500 a month.
McKinley’s keys to winning this buy-and-hold-foreclosures game? — It avoids newer homes in cookie-cutter subdivisions. “If they’re all around the same vintage of mortgage, then they can all go upside down at the same time,” Watson said. Too many foreclosures will hurt rental income and future appreciation. Instead, it concentrates on older homes in neighborhoods where foreclosures are rarer.
— It avoids higher-priced homes. “As the price point gets higher, rents don’t cover (costs),” Watson said. “All of our analysis says it’s too risky. Also on the exit, we can easily justify a $100,000 home going to $200,000; that’s not that big a stretch. But a $300,000 home going to $600,000 is harder.”
— It focuses on core economic and demographic trends. “We pick neighborhoods that are close to mass transit,” Watson said. “We’re concentrating on areas with job growth; we looked at Stockton, for instance, but don’t see it rebounding. But in the Bay Area we’ve got such a diverse economy. It creates drivers for jobs in the blue-collar space and back office.”
— It’s finding that inventory is limited because lenders are sitting on foreclosures. “Banks own 530 homes in this ZIP code (Pittsburg’s 94565) but there are only 15 on the market,” said Staley, pointing to a three-bedroom updated home priced at $132,900 that had 22 offers. “It creates a hyper-competitive situation.”
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