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Back Flip

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  • | 4:37 p.m. August 6, 2009
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The flippers are back. Speculators have returned in droves to the Cape Coral-Fort Myers residential market, snapping up foreclosed homes at below-replacement costs and quickly selling them for more. Existing single-family home sales jumped 137% in June. Is this 2005 all over again?

Residential broker Steve Koffman recently helped sell a home in North Cape Coral for $52,000. Just a few weeks later, the same house sold for about $80,000.

It's dejà vu all over again for Lee County, which is still suffering from one of the biggest real estate boom-busts in the country. Flippers who bought homes and sold them quickly for a profit during the boom largely disappeared in the bust that followed.

But these fly-below-the-radar speculators are back, brokers and investors say. While they're helping to winnow the massive overhang of inventory from the boom, some worry they might be delaying the recovery when they eventually put those homes back on the market.

In June, the Cape Coral-Fort Myers area reported the biggest jump in existing single-family home sales of any metro area in the state on an annual percentage change basis — up 137%.

Not coincidentally, the area also recorded the second-highest rate of foreclosure in the country in the first half of 2009, with one of every 14 housing units in some stage of foreclosure, according to RealtyTrac.

The inventory of homes on the market, a closely watched gauge by builders and developers, fell 41% in June compared with the same month last year, according to the Realtor Association of Greater Fort Myers and the Beach.

The area now has a three-month supply of existing homes for sale at the current sales pace, well below the six-month threshold that is widely considered equilibrium between supply and demand.

The avalanche of publicity about the foreclosure crisis in the Cape Coral-Fort Myers area has attracted speculators of every stripe from around the country and even overseas. Some speculators are even seeking homes afflicted with Chinese drywall, hoping to acquire them for pennies and sell them for a profit after they rehab them.

“It's like the Wild West,” chuckles Lynda Moritz, sales manager for Sellstate Priority Realty in Cape Coral. “You cannot be in real estate today and not make money, but it's hard work. It's down in the trenches.”

Realtors and longtime Florida investors scarred by the last downturn aren't so sure that the resurgence of speculators is a good thing.

For starters, some of these investors bypass Realtors to find buyers and avoid paying them commissions. They're also paying cash for homes, outmaneuvering prospective homeowners who want to live in the homes but are financing their purchases. And because most of the speculators don't plan to hold onto the homes for long, they will dump these homes back on the market if prices don't rise as fast as they anticipate.

“A lot of the people who are buying now are making the same mistakes as 2005. They're overpaying,” says David Diaz, chief operating officer with Carney Properties & Investment Group, a Cape Coral-based company that has been buying and selling distressed residential real estate for 11 years.

Of course, one big difference with 2005 is that home prices have collapsed. The median price of a single-family home in the Cape Coral-Fort Myers area fell 73% to $87,900 from its peak of $322,300 in December 2005.

But increased investor activity appears to be fueling price rebounds in some parts of the county after several years of double-digit percentage declines.

The median sales price of a single-family home in Cape Coral jumped 3% to $92,500 from April to May and another 3% to $95,000 from May to June, says Tom Gunkelman, broker manager of Coldwell Banker Residential Real Estate in Cape Coral.

Low end heats up
Cape Coral, the third-largest city in Florida by landmass crisscrossed by 400 miles of canals, is the epicenter of the new wave of speculation.

Speculators are a secretive bunch who never reveal their strategy, often pay cash and hide their true identity for fear that sellers will recognize their deep pockets.

“They operate under the radar,” says Moritz. “Most of the time, when they put in these offers, they won't say who they are. They don't want people to know they're a big buying group.”

“It's worse than a poker tournament,” says Koffman, an agent with Century 21 Sunbelt in Cape Coral. Many of these speculators have swooped in to buy homes priced at $60 a square foot, a 30% discount to replacement cost.

Often, these speculators come from outside the Fort Myers area, chasing the next hot investment. “I don't know where they're coming up with the cash,” says Suzanne Sherer, a Realtor with Remax Realty Team in Cape Coral and president of the local association.

They're the day traders of 2000 and the real estate speculators of 2004, says Diaz. “There are a lot more buyers showing up,” he says, though some of them are not sophisticated because they're buying sight unseen. “A lot of them are not doing their homework.”

Cash buyers almost always have the upper hand, even if their offer is below someone who needs to finance the purchase. That's because banks prefer to dispose of their real estate quickly and appraisals have been coming in so low that many buyers can't qualify for financing without additional equity. Nearly 57% of home sales in June were bank-owned and another 16% were lender-driven short sales, according to the Realtor association.

This fact puts first-time homebuyers and people who want to live in their home at a disadvantage because they're most likely to buy with financing. “I've heard stories about parents cashing out their 401(k)s to help their kids buy houses,” Sherer says.

Longer-term investors
In contrast to speculators, some investors have more realistic expectations. “Most people are looking at eight to 10 years for a return,” says Siegfried Fuchs, a Realtor with Century 21 Sunbelt in Cape Coral who helps German investors find property here. Unlike the previous boom, Fuchs says German investors don't expect to double their money even after 10 years.

Instead, many Europeans view their real estate investment in the U.S. as a safe haven to park their hard-earned money and as business income. For example, Fuchs helped Europe's largest motorcycle dealer acquire two homes in Cape Coral that he'll rent to customers who want to vacation here and ride.

Foreign investors make up a small but important part of the landscape. Guy Briolet, a French businessman who recently created a company called Florid'Lands, recently placed an ad for investment property on the Gulf Coast in the French news magazine Le Point. “I've got lots of meetings and I'm making sales,” he says. He's planning a trip to the U.S. in mid-August to scout properties for his customers.

Investors today are a different crowd from 2005, says Gunkelman. “They're more professional and astute,” he says. “They follow real estate investments and when the market is at a low ebb, they go in.”

Koffman says investors he's worked with don't have set expectations of a return, but they're confident the market will eventually rebound. “As long as prices are below replacement cost, it makes the risk acceptable to a lot of buyers,” he says.

Some are paying so little for property that they can sustain these homes with renters until the market turns around. “They'll hold them three or four years and put them back on the market,” says Moritz.

While investors gobble up excess inventory, some worry that this trend doesn't solve the area's real estate woes because buyers don't live in the homes. And the area's 13% unemployment rate doesn't bode well for renters or homeowners. “It's a double-edged sword,” says Sherer.

Plus, there is a backlog of more than 20,000 homes in the foreclosure pipeline. “There's no question the pipeline of delinquency loans is very high and many of those will probably be foreclosures,” says Gunkelman.

Resetting adjustable-rate mortgages, rising unemployment and other unforeseen economic problems could help flood the market and perhaps drive prices even lower. “That's the $64,000 question,” Diaz wonders. “Is this a false bottom?”

Notes, condos and short sales
Now that they've driven up prices of low-end homes, speculators are shifting their attention to other areas of the market. “All the really good buys are gone,” Moritz says.

“Some investors are asking for every home that has Chinese drywall,” Moritz says. They figure banks will give them away for pennies to avoid the liability. Buyers can fix them for $50,000 each and sell them at a profit, she says.

In some cases, investors are buying the nonperforming bank notes for 10 cents on the dollar. Then, they either refinance the current homeowner or foreclose on the home and put it on the market.

Investors are also shifting into long-neglected areas of the market, including condos and short sales.

“If we could get all these [loan] servicers to work through short sales, we could see, in a 60-day period, a stabilization of the market and perhaps price appreciation,” says Sherer. “We really need help from the banking industry.”


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