August 12, 2013

The Belief That Market Conditions Couldn’t Get Worse

The News & Observer reports from North Carolina. “Last week, American Homes 4 Rent, the large investor that has been gobbling up single-family homes in the Triangle and turning them into rentals, raised $705.9 million in an initial public offering of stock. If American Homes 4 Rent continues to acquire homes in the Triangle at its current pace, its success or failure will be closely watched in communities where it has been buying properties. Since December it has acquired more than 640 homes in Durham, Johnston and Wake counties, according to property records.”

“American Homes 4 Rent plans to use the proceeds from its IPO to rapidly expand its operations ‘even if the rental and housing markets are not as favorable as they have been in recent months.’ American Homes 4 Rent reported a net loss of $7.7 million in the first quarter on revenues of just $6.6 million. The company had leased just 9,882 of its homes as of June 30, an occupancy rate under 50 percent.”

“In its regulatory filings, the company reported that between July 1 and July 9 it acquired 512 homes, with about 38 percent of those being acquired in foreclosure auctions. In the Triangle, the bulk of the company’s inventory has not been foreclosures. It has even purchased a sizable number of new homes from builders.”

“There are strong signs that the initial enthusiasm among investors for the rent-to-buy model has cooled. Two other similar companies that went public before American Homes 4 Rent are trading below their offering prices, and American Homes 4 Rent’s IPO was far smaller than the $1.25 billion it hoped to raise when it filed in June. The company’s shares, which began trading last week at $16, closed Wednesday at $15.65.”

The Roanoke Times in Virginia. “Facing financial distress, the owner of a huge, nearly new mountaintop home outside Roanoke is planning to sell the property at far below its construction price, along with 900 acres of land, at an auction. It sits on 7 acres. Also available are 29 contiguous parcels, two with conventional homes and 27 undeveloped. Owner Mark Oliver, who has a background in construction and remodeling, bought the land in 2004. He spent $1.5 million to $1.8 million on the massive home, which was completed in 2009, said Sam Hardy, an associate broker Woltz & Associates, the company staging the auction. It is assessed for $807,000.”

“However, the minimum price to buy the home and the 7 acres is going to be $578,700 and, as long as that price is reached at the auction, the home will be sold, Hardy said. The owners at one time envisioned a community of luxury mountain homes. But only the large home, which was still occupied Monday, got built. ‘The downturn of the economy has reshaped the dreams and the future that the family had to develop this,’ said Jim Woltz of Woltz & Associates. ‘They’re needing to sell it for financial reasons.’”

The Washington Post on Maryland. “Between January and June, Maryland went from having one of the lowest foreclosure rates in the nation to the third highest as banks worked their way through a backlog of delinquent loans, created in part by the state’s long foreclosure process. Pamela Adegbuyi’s house in Fort Washington is not technically in foreclosure, but she recently received a letter from bank lawyers saying that legal action is pending. Home prices have gone up in her neighborhood, but not enough to help the Adegbuyis, who bought their house in 2005 for $583,000. In January, the county assessed it at $332,900, tax records show.”

“She and her husband began negotiating with her bank in 2008, after she was laid off from her workforce development job. That was the start of a five-year stint in paperwork purgatory that she said continues. The couple started to fall seriously behind on their mortgage after her husband was laid off in 2011. ‘We went from a two-income household to a one-income household to a zero-income household,’ she said. At last count, the Adegbuyis owed more than $680,000, with interest and penalties added. She has no idea now they will pay it off. ‘This house is never going to be worth what it was,’ she said.”

“Jessica Smith-Harper of Mid-Shore Pro Bono legal services, which serves five Eastern Shore counties, said she sees the foreclosure surge on a daily basis. Banks are also moving more quickly in some areas than others, she said. She cited an 1850s house in Caroline County with a stream underneath it whose owner hasn’t paid the mortgage in three years. ‘I’d be surprised if the foreclosure is done by the end of the year,’ Smith-Harper said. ‘But a million-dollar waterfront property on Kent Island? They are ramming that through.’”

The Herald Mail in Maryland. “In July, almost 25 years to the day he and his wife bought their first house to fix up and flip for a profit, Tim Fields was back at that same property. But this time, with his house-flipping days long over and the recession having dismantled his small empire as one of Washington County’s top custom homebuilders, Fields was back for a different reason — to power wash the back porch. Quite an economic comedown for the man who was president of the Home Builders Association of Washington County from 2004 through 2007.”

“In July 1988, the young couple bought their first investment house. It grew so much that in 2005, Fields hired a professional to manage the business. ‘And, by 2007, I was semi-retired. I was 48 years old and making $100,000 a year. It was a good life. It was a good life,’ he said.”

“There was a time back about 2003, when a landowner in the county wanted a developer to pay as much as $25,000 for a 1-acre home lot, he said. ‘I remember the first time that I saw (the offer of) an acre for $25,000. I laughed out loud,’ said Fields, who noted he could remember thinking ‘that is ridiculous. Nobody is going to pay that.’”

“But soon, as mortgage lenders offered easy terms, the real estate and home building markets exploded. And, prices for home lots shot up fast. Large metropolitan builders were moving in, too, pushing lot prices higher faster. Suddenly, Fields said he was paying prices far higher than $25,000. ‘We paid as high as $132,900′ for a 1-acre home lot in about 2006, he said. ‘Anybody with 20-20 hindsight can look back and say now, ‘That was way too much. That was crazy.’”

“Credit began tightening, housing values plunged and millions of new homeowners, owing more that their homes were worth, faced foreclosure and bankruptcy. Nonetheless, Fields said his company’s best year probably was 2006. ‘We were still picking the fruits of ’05 because it takes a while for the (homebuilding) process to be completed,’ he said. Fields said he doesn’t remember how many houses Royal House built in 2006, but he doesn’t think it was more than 15 because people were wanting such large houses. ‘The number might not have been huge, but the size was probably huge because people just couldn’t spend enough money. It (boom market) just sort of all blossomed and expanded substantially.’”

“Looking back now, Fields said he thinks Royal House Construction’s downfall stemmed from the combined effect of its ongoing loan payments for lots it couldn’t sell and from Fields’ ‘bull-headed’ belief that market conditions just couldn’t get worse. Initially, however, even after the slowdown began, Fields said he was still buying extra lots at the high prices. ‘That was not a wise business decision,’ he said.”

“As market prices fell, Royal House began to reel from the pressure of having to make debt payments that were based on the prices it had paid. ‘Because we were fully leveraged on our inventory of lots, we were not in a position to lower the price — because we had to pay the lender off in full, before we could build somebody a house,’ Fields said.”

“As the market continued to decline, Fields said his remaining confidence was badly shaken when his lot lender ’started foreclosure action, after we could no longer make the debt service payments in full. Then, I got scared.’ By then, the market was so bad that even the lender was struggling to sell the lots it repossessed, Fields said. He said the one for which he had paid $132,900, is still unsold — even for the $35,000 the bank is asking now.”

“Finally, last year Royal House stopped doing business after selling all its equipment, and its 3,000-square-foot showroom and office near Clear Spring, he said. There is even the full circle of going back to the beginning, that now includes that first house, the one that the Fields bought 25 years ago on July 24, 1988, with plans to fix up and resell for a profit. On July 23 this year, Fields received a request from the home’s current owner for a quote to come power wash its back porch.”

“‘So there we were, 25 years later, out to wash that house, after I went to the mountaintop and down all through the valley,’ he said. ‘Twenty-five years later, we were back at the same house doing a $300 power wash.’”

Bits Bucket for August 12, 2013

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