(Foreclosure Monitor is an effort by MHP to help public officials determine how best to use their resources to help homeowners and neighborhoods hard-hit by foreclosure).
By Tim H. Davis
BOSTON, July 19, 2012- As the real estate market inches toward recovery, one trend to watch is how many troubled properties are being scooped up by buyers purchasing multiple properties, thereby raising the possibility of a return to the real estate bubble days of property flipping, absentee landlords and neighborhood destabilization that has been a byproduct of the foreclosure crisis.
Foreclosure Monitor recently took a look at distressed property resolutions in Massachusetts over a two-year period and found that less than one-quarter of all property resolutions in the state were purchased by buyers of multiple properties. This is in contrast to a recent national report indicating that large investors are working to purchase thousands of properties in foreclosure and that investor purchases increased 64.5 percent nationally from 2010 to 2011.
However, some areas of the state are seeing high incidences of multiple purchases by single investors. This report will highlight some of the areas where investor interest is more prevalent, characterize some of the investors and examine where investors are getting their financing.
The big picture
Our analysis - covering short sales, sales at foreclosure auction or sales of bank-owned properties* - found that buyers of multiple properties accounted for 23 percent of the 23,751 property resolutions in Massachusetts over a two-year period ending March 31, 2012. Breaking this down further, it is clear that only a small number of larger investors are active, as only three percent of resolutions (735 properties) were purchased by buyers purchasing more than 20 properties.
Foreclosure Monitor also dug deeper into the property resolution statistics by municipality type to find how where buyers of multiple properties are most active. Not surprisingly, the strongest investor interest is in distressed properties is in Boston, where buyers of multiple properties accounted for 40 percent (723 out of 1830) of the property resolutions in the city during the two year period surveyed. The state's 24 Gateway Cities were next, with buyers of multiple properties accounting for 27 percent of all resolutions. In the suburbs and rural areas, buyers of multiple properties accounted for 18 percent of all resolutions.
One possible explanation for investor appetite for distressed properties in Boston is that the overall market is strong enough for an investor to purchase a distressed property and then turn around and re-sell it at a higher price. Median sales prices have improved in Boston, increasing four percent from $349,000 in 2010 to $362,500 in 2011, while median prices have declined 0.5 percent statewide during the same period, from $275,000 to $273,500.** For a further look of how Boston property values can resemble a roller coaster ride, check out Chris Lovett's latest report on the Dorchester real estate market.
Another factor favoring investors buying multiple properties in Boston and other urban areas is tightened restrictions on mortgage credit, which have made it harder for individual buyers to obtain financing to purchase properties in distressed neighborhoods. Due to tightened lending practices, potential owner occupants are being outbid by investors, who have cash and can obtain financing.
Multi-property buyers by municipality
While Boston has more activity from multi-property buyers than urban Gateway communities as a whole, two of these Gateway communities - Springfield and New Bedford - were in the top 10 communities with investment by multi-property buyers. In both cities there are active, larger investors. Another pattern that emerges from this list is that 12 of the top 30 communities on this list are in Worcester County.
As reported in previous Foreclosure Monitors, Worcester County communities continue to have some of the highest foreclosure distress rates in the state. Academic studies from cities in other parts of the country are scant, but reports from Oakland, Cleveland and Atlanta show strong investor activity in these cities. The Atlanta report uses a methodology for identifying investors similar to ours; it found that in the first four months of 2009, 40 percent of sales of bank owned properties were to likely investors.
Buyers of multiple properties are a diverse group
The top 20 investors are a diverse group in terms of the sources of financing and geographical area of focus. Of the top 20 investors, 14 relied primarily on cash (69 percent of purchases by those buying more than one property used cash), though it was not unusual for any of these investors to access financing for a portion of their purchases.
The most active buyer of distressed properties (80) was a Metro West-based realtor who has purchased mostly single-family homes and condominiums across Eastern Massachusetts, likely at the foreclosure auction. While most purchases were with cash, this investor has also accessed local sources of private capital.
Realtors and small contractors figure prominently among the top 20 investors, with most focusing in their communities they know best. For example, one investor in the top 20 has focused his efforts in New Bedford, and has purchased a number of properties of more than three units, using national sources of financing.
Further research into New Bedford real estate activity indicates that three investors have purchased over 250 properties in the past few years. Most of the purchases involved multi-family properties totaling 800 units. Trends like this are causes for concern for cities especially when so many properties are in the hands of so few and concentrated in certain neighborhoods.
For more on the implications of investor ownership on neighborhoods, see the 2010 PolicyLink report When Investors Buy Up the Neighborhood.
Who is doing the financing?
Among the top investors for distressed properties in the state are a small number that are purchasing loan packages that include properties across the state. Such investors include two companies based in California: Greenwich Investors which served as the entity for WMD Capital Market's purchase of distressed loan packages, and Kondaur Capital Corporation. Two of the top 20 investors were purchasing all of the units in failed condominium developments, in Raynham and Revere.
The second largest "investor" (76 properties) stands out: NSP Residential LLP. NSP Residential is the legal entity used by Boston Community Capital (BCC) in its Stabilizing Urban Neighborhoods ("SUN") initiative. Under this program, BCC purchases a property from the foreclosing lender (mostly in Boston), and then re-sells the property back to the original homeowner, but at a price that is sustainable for the family. In this respect, BCC is both an investor facilitating the return of a foreclosed property to the market, as well as a lender.
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*About the data: All data is from The Warren Group's distressed property database. In this database, properties are flagged as distressed when a foreclosure petition is filed. These properties are "resolved" when a third party purchases the property as a short sale, at the foreclosure auction, or when an REO (bank owned) property is sold by the lender. These resolutions took place from April 30, 2010 to March 31, 2012.
The data was cleaned to remove non-residential properties (though mixed-use properties were retained) as well as resolutions that were actually transactions between a lender and its own subsidiary or servicing agent. Data was recoded to take into account, where possible, purchases used by the same buyer, using different company names. Even after this recoding was completed, the percentage of properties purchased by multi-property investors remains understated in this analysis because some investors buy properties in the name of realty trusts and other legal entities whose beneficial owners cannot be readily identified from public records. Foreclosure Monitor did do a query on the number of single-property buyers and found that only 927 of 18,310 (5.1%) of these buyers had an LP, LLC or Trust in the name of either the first or second buyer.
**Median sales prices: Boston median sales prices are based on 1-3 unit properties (including condominiums), and is from the City of Boston Department of Neighborhood Development. The statewide figures are for all properties and are from The Warren Group.