Bargains: The sunny side of the housing slump
Despite the downturn, some people are still managing to make money off real estate. Here's how they're doing it.
Yes, there's gloom and doom in the housing market. Prices are plummeting, sales are stalled and foreclosures are rising. But for some, the hard times are an opportunity.
"There’s always someone selling. There is always someone buying," says Steven Brown, an investor who buys houses in Mobile, Ala., does a face lift and makes money on the resale.
Houses too burdensome for their previous owners have become ways for new owners to build nest eggs for retirement and college. While the market for foreclosed and distressed homes is tough to master, rock-bottom prices in some areas have tempted renters and investors out of the woodwork.
Some buy a single house and flip it for a profit. Some buy in hopes of becoming a landlord. And some buy because it's now cheaper than renting.
Renters turn homeowners
One of those renters was Morganne Teseniar, 26, of Mesquite, Texas, a suburb of Dallas, who says she wanted to buy a house last fall despite the touch-if-you-dare market.
Teseniar, who works for the American Heart Association, went shopping with a real-estate agent. She found her dream house for $64,000, bid $50,000 on the foreclosed property and moved in this past November.
The previous owner walked away from the house when he got a new job in California, couldn't sell it and wouldn't pay the mortgage, she says. Left behind was a perfectly fine house with redone floors, wrought-iron fixtures and granite countertops.
"It was gorgeous. I couldn't breathe when I got it. It was so cool," says Teseniar, who is divorced and has a 4-year-old daughter. The price was right, too. She now pays $586 a month for her mortgage, taxes and insurance, $200 less than what she had been paying for rent. And she qualified for a 30-year Federal Housing Administration mortgage to buy it.
Then there are buyers like Lymaris Roman, a Tampa, Fla., pharmacist, and her husband. They saw opportunity, too, in a one-story home with four bedrooms in suburban Lutz, Fla. They bought it for $270,000, far less than its $400,000 appraised value. They moved in on Christmas Day.
Roman's husband, a self-employed contractor, had plenty of time on his hands because of the housing downturn. He spent less than $10,000 upgrading the house, pulling up the carpeting and installing hardwood floors.
They took out an interest-only mortgage and are renting their old house until the market "comes back up."
"Hopefully, the economy will be up and running again. If we can rent it out for longer, great," Roman says.
Opportunity for the little guy
For the smaller entrepreneur, the deal is the thing.
Alex Szalay, a software writer from Pittsburgh, has redone two houses in the past 18 months. He says it's profitable to buy foreclosed homes that are in reasonably good shape. He bought one house for $72,000 and sold it for $117,000 a few months later in Sharon, Pa., about 30 miles north of Pittsburgh.
"You have to be willing to sit on a down market," Szalay says. "I have been fortunate in finding good deals. When I started doing properties, I would buy one fixer-upper at a time. Now, I am able to do a couple at a time."
Tom Cook, an Arlington, Va., contractor, bought a ranch house in January for $500,000. He didn't think that was too risky. He plans to sell the renovated home in this Washington, D.C., suburb for $1.2 million after a complete renovation that will include five bedrooms, 4½ baths and a two-car garage.
"The market is flat in Arlington but not as flat as outside the Beltway," Cook says. "Arlington is resilient. People work in the government and defense industries. In the long run, we feel we can move it in 60 days."
While Cook and others see openings in the short term, Stephen Crawford of Richmond, Va., is looking for long-term opportunity.
The father of four children, Crawford recently bought three investment properties in Atlanta at reduced prices in hopes they will help finance his kids' college educations. He’s still looking for a fourth nest egg for his 6-year-old.
Crawford has no problem sitting on the houses, betting that the property values will rise as the market regains its footing. In the meantime, he's renting out these homes to pay down the mortgages.
"Once the market takes a turn, these properties will be worth it," says Crawford, who works for a health-care company. "Real estate has always been a good investment."
Flipping on a grand scale
While mortgage rates have been dropping, it is still tough for some people to get a mortgage as a result of the subprime scandal, where buyers were signing up for badly crafted loans. Plenty of mortgage money has dried up, and banks are extremely cautious about making sure buyers are qualified to make their monthly payments.
Still, there are plenty of people willing to take a chance if they can. Brown, the Alabama entrepreneur, sold 85 houses through his company last year. He expects at least that many sales this year, banking on the construction of a ThyssenKrupp Steel USA carbon and stainless-steel processing plant that will bring many new jobs and home buyers to his region.
He usually spends less than $20,000 on rehab, adding new fixtures, upgrading the flooring and installing central heat and air conditioning in houses built 50 years ago.
Florida investor Cody Loughlin is another of the hard-times risk-takers, expressing confidence that the market will do well for him even in a state that has one of the highest foreclosure rates in the country.
Unlike big builders who constructed giant homes at top dollar and are stuck, Loughlin says he makes money by buying properties at 50 cents on the dollar and selling them for 75 cents on the dollar.
Loughlin's company, Florida Property Club, is attracting buyers from all over the United States and as far away as South Korea.
He recently bought a four-bedroom, three-bathroom home in Lakeland, Fla., for $240,000, made $30,000 in repairs and sold it for $365,000 within three months.
"When people tell you, 'Don't buy real estate,' well, you should buy real estate," Loughlin says. "People aren't going to stop retiring. Kids aren't going to stop graduating from colleges. This lag will catch itself, and there will be more demand than supply."
And there are plenty of people such as Loughlin still willing to take a chance to make money on real estate. Sandy Muff, 31, an office manager in Tampa, Fla., decided to buy a bungalow last year for $70,000.
She's renting it out at $950 a month and paying a $900 monthly mortgage. She eventually hopes to sell the 950-square-foot home for $135,000, its current appraisal.
"You have to spend money to make money," Muff says. "You're not going to be in a slump forever."
It's not all sawdust and profit
Experts caution the housing market has not reached bottom, and it may be another year before the economic realities shake out. Lehman Brothers has reported that the number of foreclosed homes is expected to quadruple this year, adding 1 million properties to the market in 2008 and another million in 2009.
One economist warns that people can still "lose their shirts" with high-stakes gambles.
"There are certainly places where the market is going to be good and growing. But you still could be making a bad move," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.
Yet plenty of investors are willing to take that chance.
Foreclosure auctions can pit a small investor against well-schooled experts who know how to calculate a property's real value. In addition, many properties are mortgaged so steeply that banks often ask for bids that are higher than what the properties are worth. On top of that, an increasingly stringent credit market means fewer buyers can qualify for a mortgage.
Thriving in the chaos
Despite the pitfalls, many say they can beat and have beaten the system by seizing opportunity while remaining flexible.
In Tacoma, Wash., Steven Ling is making money off foreclosures or on houses that are on the verge of being put on the auction block. He buys them at a steep discount, adds granite countertops and maple kitchen cabinets, and gives them a bit of curb appeal.
Right now, he's working on a house originally listed at $300,000. He bought it for $175,000 because the owner wanted to avoid having a foreclosure listed on his credit record. Ling is adding some updates and a fresh coat of paint, and getting it ready for an “average Joe.”
Ling says it takes maneuvering to get some potential homeowners qualified for a mortgage. That occasionally means renting them a house on a lease-purchase deal and helping them straighten out any credit mess to qualify for a mortgage.
"We make sure the income they make is feasible to handle the house. And if that is the case and credit is messed up, we let them buy the house on a lease option," Ling says.
Still, skeptics remain.
Mike Meredith from Washington, D.C., renovated and sold 75 properties in the past two years, but has decided to sit it out for a while.
"I am waiting until next winter, when the prices will drop more," Meredith says.