After retreating in fear from housing's sudden collapse, those who buy homes as an investment are reappearing in Inland Southern California's beaten down marketplace.
Sharply discounted foreclosed properties are luring back the first wave of professional investors and amateurs, both those hoping to "flip" for a quick buck and those wanting to buy and hold for a future rebound.
Nicholas Manfredi, a professional investor, said that about five months ago lenders began lowering prices enough on houses they repossessed to entice him after a four-year hiatus, during which he lived on gains accumulated during the spectacular housing price run-up of the early 2000s.
Manfredi concedes that investing in housing today is nowhere near as easy as it was from 2002 to 2007, when seemingly anyone could buy a house and wait a few months or weeks for its value to skyrocket.
Now Manfredi said he must make about 50 offers on foreclosed houses to sew up one deal that meets his criteria: a fixer upper that after about $20,000 worth of rehabilitation can net him $30,000 profit in about four months.
The process of "flipping" is still risky, many experts warn, since the investor has to take into account that home values continue to fall, which could erode anticipated profits from a resale.
"When values are going up, everybody looks like Einstein. But to make money in a declining market is extremely hard. It is very dangerous to flip houses," said Lee Medlin, a real estate agent with Prudential California Realty in Corona.
Brokers say most prospective investors, many of whom were burned by waiting too long to sell properties before prices plummeted, still remain timidly on the sidelines.
Mike Novak-Smith, a broker-agent with Re/Max Results in Moreno Valley who specializes in selling repossessed houses, said since the summer he has seen an influx of investors, who he said now account for about 30 percent of his buyers. He said most seem to be novices, while the more seasoned are waiting for prices to fall further.
Investors also must cope with government regulations designed to rein them in. Fannie Mae and Freddie Mac enforce a limit of four homes per borrower, and the Federal Housing Administration requires the seller of a house purchased with an FHA-insured mortgage to have owned it at least 90 days.
Still, investors like Manfredi already find the water inviting.
Manfredi said in some areas like Moreno Valley, Riverside and parts of Corona, prices are starting to stabilize, and there are plenty of first-time buyers to snap up houses that are refurbished to turnkey quality. He is buying about a house a week.
Manfredi said that while he flips some of the houses, he sells most of them at a "wholesale" price to other investors who do the rehabilitation and marketing. In a worst-case scenario, he said, if a house doesn't sell fast enough in a falling market, the investor can rent it out and wait for long-term appreciation.
Foreclosed houses are priced so low today, he said, that it is easy for an investor, after making at least a 20 percent down payment, to charge enough rent to cover the mortgage and other holding costs.
Cindy Vedder, a real estate agent with Prudential California Realty in Riverside, said she's been contacted by out-of-state investors interested in Southern California property. She said among them are parents buying homes in Riverside and Loma Linda for children who are medical school students with the hope that the houses will reap them a profit by graduation.
Range of Ages
Pete Nyiri, owner of Top Producers Realty & REO in Corona, said in the past four months he has been selling repossessed houses to investors in their 20s to 60s who are fishing for a better return than they are getting in the bank or their retirement account.
Susan Beaver, 62, owner of a Corona firm that manages homeowners associations, said earlier this year she bought two foreclosure properties in Corona, paying $300,000 for a four-bedroom house with a golf course view and $170,000 for a condominium.
Beaver said she had no trouble finding tenants to rent the homes for enough to cover the mortgages and she plans to keep the houses at least 10 years to help her build a retirement nest egg.
"I definitely just jumped in," Beaver said. "I don't want to be sitting on the sidelines saying I should've, I could've."
Bubble memories
The rekindling of investor interest is bad news to some people who blame investors for having fueled the recently burst real estate bubble.
Investors say they are generally targeting the cheapest and most dilapidated houses nobody else wants and turning them into the nicest-looking houses in the neighborhood.
John Salvatore, a Corona real estate broker, said he started rehabilitating and selling foreclosed houses when friends who specialize in liquidating foreclosed houses asked him to consider buying those that were languishing on the market.
Salvatore said he frequently buys houses so badly vandalized that "the only thing left is the paint on the walls. The bathtubs and toilets are ripped out as well as the sinks and kitchen cabinets."
Salvatore said he bought such a house in Riverside for $239,000 that once was worth $900,000. He said after he fixes it up he plans to resell it for between $325,000 and $350,000.
Bruce Norris, a veteran Riverside investor who finances and trains other investors, said his group is revamping enough fixer-upper houses to keep four construction crews busy. He said they routinely install new kitchens and bathrooms with granite countertops and tile flooring.
Norris said his investment group buys houses so shoddy they would not qualify for the FHA financing that most first-time buyers need.
"We are buying them for $50,000 to $75,000 left and right," Norris said. He said he just bought a three-bedroom Moreno Valley house for $50,000 that previously had a $350,000 mortgage on it. He said after fixing it up he plans to sell it for $130,000.
Different View
Not everyone agrees that investors perform a public service.
John Marcell, an Upland mortgage broker, said the FHA will lend up to $35,000 to first-time buyers for repairs or improvements. He said he worries that investors will again inflate home prices by flipping.
Marcell also said that investors who buy houses for income and future appreciation will contribute to an oversupply of rentals.
Prudential California Realty agent Marni Jimenez said in competition for houses, investors generally have an edge over first-time buyers. She said that is because investors come with a substantial down payment.
Investors also tend to have conventional financing that lenders prefer over the FHA mortgages that are geared for entry level buyers that take longer to arrange.
Inland economist John Husing said investors who are buying bank-owned houses for rental income further deteriorate neighborhoods and attract crime. "It is a great strategy for the investor but a disastrous strategy for the community," Husing said.
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