Rehabbers retreat as the market slows down

Amateur investors are left holding properties

October 08, 2006|By Jamie Smith Hopkins | Jamie Smith Hopkins,sun reporter

Peter J. Forbes has newly rehabbed homes to sell in Federal Hill, and he's hardly alone. There's so much competition in the trendy Baltimore neighborhood that one of his projects sat on the market for months and finally sold for $85,000 less than he had hoped to get.

"Rough," he calls it. He made money on the deal, and he's continuing to buy for rehabbing, but business "could be better - a whole lot better."

Whether it improves or worsens matters to more than Forbes and his competitors.

Baltimore, which saw an astonishing uptick in residential real estate investing during the housing boom, has benefited from the resulting upsurge in rehabbing but is now flush with inexperienced property owners who might not have the wherewithal to deal with a no-longer-hot market. City advocates, who watched the investing explosion with a mixture of optimism and anxiety, worry now that further slowing could leave investors so financially strapped that they walk away from homes they bought.

FOR THE RECORD - An Oct. 8 article about real estate investors buying homes in Baltimore included a sales statistic from data provided by the state Department of Assessments and Taxation that the agency later determined was incorrect. A programming error by the agency overstated the number of city homes bought by "non-owner-occupiers" in the last six months of last year. It was about 6,500 homes, or 70 percent of all sold, according to the department.
The Sun regrets the errors.

The city has yet to see the en masse pullout some economists predicted when the market began cooling a year ago. Investor buying, in fact, remained almost as high in the first half of this year as it was during the same period last year. But it's off sharply from the latter half of last year, when activity apparently reached a frenzied peak.

City home sales to "non owner-occupiers" - almost entirely investors in a market not known for vacation properties - totaled nearly 5,300 in the first half of this year, according to a Sun analysis of the most recent state property transfer data.

That was 62 percent of all sales, triple the share elsewhere in the state.

Investor purchases dropped by 200 from the comparable period last year, a modest decline.

On the one hand, city investor transactions were still more than double the number in the first half of 2004, state Department of Assessments and Taxation statistics show.

On the other, they paled in comparison with the last six months of last year, when state records showed investors snapping up 9 of 10 homes that sold in the city - more than 8,000 in all.

These numbers are tracked by deed recordations, the very end of the real estate transaction process - typically several weeks after the settlement date and several months after the date a contract is signed. For that reason, experienced investors warn that the current market could be slower than the most recent statistics suggest.

Interest remains

It's not as if interest has nose-dived. A tour of city properties during a real estate conference last week drew more than 100 investors and would-be investors, so many that organizers said they had to turn some away for lack of bus seats.

But auctions that last year were a tumult of outbidding are now drawing circumspect buyers; some properties aren't attracting so much as an opening bid. Rehabbers, especially those turning out high-end products, are getting pinched as homes sit on the market longer and longer. More investors are choosing to rent rather than sell - either by choice or by default.

No one wants to admit to losing money, but everyone seems to know about people who have.

Longer-term investors are greeting these trends with more relief than concern.

"Some of the amateurs are getting out of the game, which is better for everyone," said Rebecca Giacobba, a Realtor who began investing in the city in the late 1990s and believes that prices got "inflated" by the abundance of buyers. "Everybody and their brother became a real estate investor in the last few years."

The phenomenon was national, prompted by low interest rates, quick appreciation and several years of poor stock market returns. But Baltimore stood out. Its prices looked cheap to people from the suburbs and more expensive U.S. cities, and average values were going up fast - nearly 25 percent in 2005 alone.

Nationwide, a record 40 percent of transactions last year had non-owner-occupier buyers, a fair chunk of whom were vacation-home purchasers rather than investors, according to National Association of Realtors surveys. In Baltimore, it was 80 percent, state numbers show - up from 35 percent four years earlier.

Buyers surged in from across the country, particularly New York and Washington. Many homes were passed from investor to investor as longtime landlords unloaded hundreds of properties.

"A lot of the old guys who held onto lots of rental property - like these one- and two- and three-unit buildings - decided to retire," said Alan Chantker, president of the Mid-Atlantic Real Estate Investors Association.

In the near term, investors could have an outsized effect on the housing slowdown if they further add to the imbalance in supply and demand.

City home sales dropped 30 percent in August versus a year earlier, while the number of homes on the market nearly doubled, according to data from Metropolitan Regional Information Systems Inc. that includes most resales.

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