Interesting Times

Jim Wasserman, Sacramento Bee, 3/18/09

Free-falling home prices and thousands of bank repos have pulled investors back into the Sacramento housing market at levels not seen since the headiest days of the housing boom, new statistics show.

Preliminary estimates from researcher MDA DataQuick indicate that 28.4 percent of February buyers in Sacramento County were investors aiming to buy, repair and rent out their new acquisitions.

The numbers confirm a huge shift in the Sacramento housing market in recent months, one that has consumed thousands of foreclosure properties and helped prevent a once-feared pileup of for-sale signs.

Alongside an army of first-time buyers, these investors – many doing cash deals with banks – have fueled growth in home sales for nearly a year. Even as some savvy investors say they're pulling back as prices keep falling, others have moved in to take deals not available in a decade.

"I'm pretty sure in their mind the floor has been set," said Carlos Kozlowski, a Coldwell Banker real estate agent and big player in the region's bank-owned market sector. Fellow repo specialist Ian Maker of ReMax said investor opinion of bottom for the market's low end is, "We're either right before it or right at it."

Investor market share in Sacramento County last hit 25 percent in mid-2004, the most frenzied sales year of the region's housing boom. Then it declined by half as the housing market cooled in 2006 and 2007, according to DataQuick.

But in early 2008 the investor share edged up again to 18 percent with investors paying a median sales price of $185,000 in February. Median is where half the purchases cost more and half less. Since then, investor share has soared as prices have tumbled and bargain hunters with fix-up skills find homes as low as $50,000.

Last month, absentee buyers paid a median $121,500 for houses in Sacramento County, DataQuick reported.

Driving this investment gold rush are the 33,500 Sacramento-area foreclosures during 2007 and 2008, followed by the two-thirds market share captured by banks in unloading discounted repo homes. The plunging prices have made real estate an attractive investor alternative to a battered equities market.

"Many are mom and pop investors who are tired of the stock market," said Kozlowski.

Interviews with investors and agents who specialize in bank repos suggest that most of this rising investor class is local or regional and focused on picking up a handful of homes.

Among the newcomers to the game is Rick Lunsford of Sacramento. He bought a foreclosed house, then a condominium in the past four months and made them into rentals.

"There is some cash flow with 20 percent down," he said. "It seems like an ideal time to start investing and taking a chance."

Sacramento County couple Oscar Vargas and Gladys Flores have more experience, but agree with Lunsford that the time is right. They bought five houses last year priced between $50,000 and $100,000.

"We buy the repos, and the prices are about what it was 15 years ago," Flores said. "We fix what's wrong with them. We spend a little money and put in new carpets and remodel. We do it ourselves and rent them."

The plan is to hold them for several years to see gains, she said. Flores said it's the same drill as the 1990s downturn. Then, the pair bought houses low and sold them high during the boom that followed. They now own and manage 15 rental homes, she said.

Market players say they have seen some outside money scouting Sacramento, primarily from the Bay Area and elsewhere in Northern California. But there are few signs of institutional funds or international investors making bulk buys, they say.

"There is a trust from the Bay Area that wants to buy 200 houses in Sacramento this year," said Kozlowski. "We met and they gave me the parameters they want. They are working with three or four agents."

Kozlowski declined to name the trust. But it's the exception, he said, not the rule.

Maker, who sold 354 repos last year, said, "There's a lot of people with money, but it's not the old people we used to see. It's not the pros. It's new money coming in."

Duane Lyons of Granite Bay, a longtime investor, is among those pros.

"I bought about 31 houses last year, and I'll buy some more this year," he said, "but not as fast as I did last year."

Lyons, who largely does cash deals, said, "I think for a lot of investors right now, nobody's quite sure where the bottom is. Things are still dropping down. Guys like me aren't buying as much as we were."

The veteran said a lot of investors jumped in too early, a year or more ago, and are stressed now by debt, falling values and downward pressure on rents. He said many owe more than they collect in rent, which may result in a new series of foreclosures.

"A lot of them aren't able to get their mortgage payments," Lyons said.

El Dorado Hills investor Scott Arbuckle said he and his partners have also slowed their purchasing after buying 10 area bank repos last year.

"The buys have been good and they've cash-flowed well and make great sense as an investment," he said. "But the prices … keep sliding.

"You just scratch your head," he said. "How is it possible that they keep declining?"

That isn't stopping many investors, however.

"They don't care either way," said Lyons. "The prices are so cheap it doesn't matter as much."

The sudden abundance of neophyte landlords has prompted the Rental Housing Association of the Sacramento Valley to put on more seminars that explain such basics as tenant screening.

"We fill those classes up," said RHA Deputy Director Cory Koehler. "Owning rental property is a very regulated business. With more local jurisdictions imposing more regulation, you need to know what you're doing."

Asked if the investment rush might open opportunities for so-called "slumlords," Koehler said it's not likely.

"Local government in many instances, with our support, is cracking down on those owners who are negligent and irresponsible," he said.

In the meantime, potential investors eye a dwindling supply of repossessed properties as banks continue moratoriums on foreclosures. As the spring sales season is about to start, it's unclear if banks will soon unload a fresh supply of repos or work with borrowers.

First-time real estate investor Lunsford is looking for more deals.

"I hope in a good five or 10 years the values will go back up, and we'll look back at this time and say we picked a perfect time to buy."