Entrepreneurs' unusual tactic: Buying up homes by hundreds

The Pittsburgh Post-Gazette ^ | Saturday, March 05, 2005 | James R. Hagerty, The Wall Street Journal

[Willie Green]

TRENTON, N.J. -- Many people agonize for months before deciding to buy a house. Jonas P. Lee is more decisive: He often buys several in a day.

This year, the 38-year-old Mr. Lee says he plans to buy more than 1,000 homes for Redbrick Partners LP, a New York firm he runs with the help of an MIT economist to invest in single-family rental property. What millions of mom-and-pop landlords do locally, Redbrick is trying to do on a grander scale.

Mr. Lee, a former Web entrepreneur who grew up in New York's posh Westchester County, doesn't see much value in most suburbs at today's lofty prices. Instead, he is buying in working-class neighborhoods in such cities as Baltimore, Philadelphia and Trenton. Even there, however, he is running into tough competition from people determined to cash in on America's decade-long housing boom.

[listenhillary]

Pay cash

[Mad Dawgg]

"Hasn't this been a strategy for years in rural areas where people buy five or ten "rental properties" for cheap?"

There has been in my area. We have been in the rental business since 1985. We have 13 units right now and our goal is to have 20 units by the end of the year.

Total purchase price for the thirteen units we own now is $197,000. Total investment to date (Repairs and remodels including purchase prices) 255,000. Total still owed on these properties $76,000. Total cash flow per month (figuring 5% vacancy) 4,400 a month.

I love real estate!

[investigateworld]

Yep, that's how I started. A broker lined up the property- financing and I was the sweat equity. The broker made out on the listing and re-sale commission.
Back in the mid 70s to net 5 grand a house was a big deal! (in California) Now of course, I wish I'd kept them. But I never could pencil out keeping a single family home, unless it was on commercial zoned property.
Now I'm bored with retirement and have been told a 32 year break in service makes me too old to play in the Middle East, so I'm thinking hard about dabbling again.

[durasell]

Question: If house prices drop 10 to 15%, how will that impact you? I'm guessing the effects will be minimal.

[BJungNan]

If he had done that in our area last year, those 1,000 homes would have found him with a gross profit of around $100,000,000 in just one year.

[Mad Dawgg]

"Question: If house prices drop 10 to 15%, how will that impact you? I'm guessing the effects will be minimal."

I am a very careful buyer, in my area the property market is severly depressed right now. My rule of thumb is to buy at 50% or below of value of surrounding properties. So a 15% drop means I bought at 35% below market value. I am still golden at those levels.

The properties I listed above, one of them is worth more than the entire money we have spent to date on all of them. IT is a commercial property that is 60X120 two story brick structure with three store fronts on the downstairs level and we are building an apartment on the upstairs level. To build this building today would cost probably 5 times or more what I have spent on all properties so far.

[sinanju]

I wouldn't be surprised to find that there is also some government money somewhere in this mix (for instance HUD section 8), although I don't see any indicated in the article. If he is clever enough to help the occupants into such programs, he might be able to turn a good profit from such since it should help keep his occupancy rates up. (I am not aware of anyone that has tried to do this, and I may be way off base on this one.)

The prospective renters are one of the biggest unexamined factors here. I know little of how the section 8 slumlord business operates but he did not quite sound like the type, probably more a gentrifiying reverse-blockbuster, forcing a toehold into sketchy neighborhoods for intrepid young couples who want to live downtown. In my Arlington, VA neighborhood as the old folks die out the houses are sublet to Friends/Melrose Place upwardly mobile youngsters who do their time on the Hill or "K" Street for a few years before either moving on up to one of the nearby apartments by the metro or getting married and buying a starter home way out in the sticks. The only people who can actually afford a home here buy an old one, then tear it down and cram a mini-McMansion on the lot. Which is probably why we're going to see more immigrants (legal and otherwise) around here as they're the only ones who will live twelve to an apartment. There was a humorous article in the Washington City Paper about just how competitive even the contest for a broom closet in these group homes is getting.

I thought the big problem with section 8 dirtbags was that they regularly trashed their dwellings or turned them into shooting-galleries, crack-houses, meth labs, etc.

[durasell]

Thanks for sharing that. Fascinating.

I'm off to work.

[sinanju]

That tent on the beach reminds me..

There must be some bonanza opportunities along the Indian Ocean. That little wave must have swept clean. I've been reading about how land ownership records were so often destroyed by seawater and so many of the more downtrodden victims did not actually own their homes in the first place. Hmmm.

[sinanju]

"Build up lots of cash. Then buy up the McMansions at the foreclosure sales. :-)"

If I understand correctly the problem with McMansions is that of zoning laws that basically require them? 2 1/2 acre lots that are only allowed one single-family dwelling? It always had me scratching my head. I really can't think of many people who want to bother with so much lawn. Take a drive through such areas and for the most part all you see is souless cut grass. On endless front yards big enough for Uncle Mikey's Neverland Ranch or John Travolta's airplane collection. This, I gather is a consequence of "Smart Growth" or "Keep out, thy unwashed villeins!" policies?

[sinanju]

"Does anyone have experience re: the heavily advertised 'get rich quick' in real estate programs?"

No, but if you want a real good discount on a copy of Matthew Lesko's "Free Money to get a Better Home" you talk to me.

[sinanju]

"In one case I wanted $175K for a property that had cost $95K. The developer and his realtor partner offered me a completed home for the package of four lots. The survey and map development (engineering) cost me $11K He took three lots and the house I got sold for $225K. It only took about 10 months. I love rural property splits. They are a minimum hassle and good reward if you stay in the path of progress. Every California lanscape is changing constantly."

_____________________________________________________________

Shucks! If Bill and Hillary had gone into business with you instead of the McDougals they could have stayed out of trouble and retired from politics...

[djreece]

Thank you for that info. My personal impression has been that investors were buying up the houses and driving the boom in my area, but I hadn't seen hard data to back that up.

[wardaddy]

So what do you do for a living?

I've given my occupation. I develop real estate. I have to actually go out and get this money we are talking about. It helps to know when folks are opining on FR financial threads.

I'm an upsider.

Are Richard and the goldbugs still around?

Been awhile since I looked at a financial thread here.

I pinged two freepers who know me off this forum and can vouch I am who I claim.

I'm not questioning you but your prespectives are pretty firm and I wondered what real world knowledge you have to back it up. Are you a banker or CPA or stockbroker.

I disagree about Pulte...no matter their construction loans being short term ...a downturn in new home construction slams their topline and their overhead though trimmed will not disappear..overhead is something which most contractors have in spades....not to mention all that land they will have bought to maybe spend the money to rezone and then sit there paying increased preoperty taxes on while they can't build or move new homes.

They have more exposure than just construction loans. I have been involved as an investor in buying low density zoned land and getting a higher density rezoning and then reselling the property to Phillips which was recently bought by Beazer....my limited experience there.

But I do not nor ever have built houses. I can tell you a lot though about warehouses, self storage, boat and RV parks and my favorite...high end car washes.

I borrow money as sole owner or LLC or (S) corp depending on the deal.

I also know a little about merchant fleet ownership and placer mining but that was a long time ago.

I was raised as a 4th generation General Contractor but eschewed that course for adventure and investments.

I have a BA in Poli Sci which is btw...BS...100%

So, that's my foundation to opine here.

oh yeah...I daytraded for a few years...had fun but about killed me....best for the 20 somethings...

many here seem to be speculating on either a housing boom or mortage boom burst and where that leads and how to profit.

well, is the past is any key....go buy those very homes after the burst, cause they will go back up.

[wardaddy]

That sounds like the usual FReeper doom and gloom long view...lol

[cgbg]

mcmansions.."smart growth"

There are two different kinds of mcmansions.

In areas where land is very expensive they often build gigantic houses on quarter acre lots.

In other areas, usually exurban, the local zoning is the issue as the zoning board is trying to keep the riff-raff out by requiring large (and expensive) acreage.

I have a large property, including a large lawn, with a normal size house. That kind of setup is not for everyone. In my case I actually enjoy the outdoor activity and want the privacy.

When folks at work complain about their neighbors latest lack of consideration I just smile....neighbors....what are those? :-)

[Fish Hunter]

Dude,

You are my hero for the day.

Real-estate is the last thing I would be buying now. Domestic stocks look better with the strengthening dollar and rising interest rates. I believe the market will get double boosted by foreign buyers hoping to cash in on the rising dollar, and long term bond selling. IMHO you would have to be a total "dumas" to invest in margined real estate these days :)


F H

[Dad yer funny]

for later,...after supper,...like for dessert

[XBob]

bttt - great thread, lots of good info.

and original source has a lot of good stuff which wasn't excerpt.

[Diana in Wisconsin]

"This, I gather is a consequence of "Smart Growth" or "Keep out, thy unwashed villeins!" policies?"

In some parts of America, it's to keep all our farm land from being chopped up into subdivisions, which I appreciate to some extent, being land-locked as I am. The State of Wisconsin owns most of the land that surrounds me, to include a lake across the road (that no one can use!) A Gentleman Farmer from The Big City owns about 500 acres around us and rents it out for corn and soybean production to a local canning company. I've lived here for ten years and currently you need to purchase 40 ACRES to build a ONE family home! Yikes!

The reverse of this is that people that have 'huge tracts of land' such as my FIL, can never get Top Dollar for it because they have to sell it off in those 40 acre parcels. And really, who can afford 40 acres of land, just to build a house? (That's about $200K worth of land, 'round heah.) And who the heck can afford to buy up a few chunks that run together and start a new farm? Few, that's who! I'm FIL's Executor. I'm not looking forward to dealing with this hair-brained liquidation when the time comes. Grrrr!

It's a double-edged sword. I own a farm with two acres. Only a small amount is in "lawn" because the land is so fertile and valueable I'd be a fool to not have my 1/4 acre garden and berry bushes and fruit trees and Punkin' Patch and chickens, etc. to make a little extra cash off the land to pay the taxes. No WAY would I waste this little Gold Mine on a McMansion!

"This Old Dump" is alright with me. ;)