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Doors Close for Real Estate Speculators
After Pushing Up Prices, Investors Are Left Holding Too Many Homes

By Kirstin Downey
Washington Post Staff Writer
Saturday, April 22, 2006

Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos.

What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.

Sales of new condos fell 43 percent in the first quarter of the year, compared with the first quarter of 2005, according to one report, and there are almost four times as many existing condos for sale than last year.

"We think the softness of the market is largely due to the pulling out of investors," said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders. "They have not only pulled back, they are canceling purchases."

David Bath, a retired dentist in Reston, rode the boom up. A condo he bought in Vienna for $97,000 sold for $250,000 in a single day. He was able to sell another condo in Herndon for an even bigger profit.

Now he wants out. He has had no luck finding buyers for two investment houses and a four-unit apartment building he owns in Florida. He has been stuck making mortgage payments on vacant houses that took a lot of time and money to repair.

"It's a lot of work and I don't see the returns anymore," he said. "I'm going to the table to cash my chips in."

While condominiums were the product of choice for investors, luxury neighborhoods also fell prey to real estate speculation, leading to the prospect of price drops even in affluent subdivisions.

"Here we had it even in $1 million homes," said Kenneth Wenhold, Virginia and Maryland director for Metrostudy, a real estate information firm.

Robert Toll, chairman and chief executive of Toll Brothers Inc., which builds luxury homes, said in a recent conference call with analysts that the Washington market was the hardest-hit in the nation by investors who bought properties intending to flip them, and who have put the homes up for sale. "We can feel the impact of speculative play coming back into the market," he said.

Nobody knows exactly how much of the real estate boom was driven by investment and speculation. Experts say that between 15 and 30 percent of all purchases were made by investors, rather than by people who bought homes intending to live in them. Some bought the properties for cash, sometimes with equity they pulled out of their own homes, so there is no loan record. Other buyers pretended on loan applications that they would live in homes they really intended to flip, so that they could qualify for better loan terms or get around developer restrictions on investor-buyers.

Some projects became particular investor magnets, and, more recently, the subject of real estate blogs criticizing speculative excesses. For example, the local Internet blog Bubble Meter focused last month on what it called "the bubblicious bench." At one recently completed condominium called the Halstead at Dunn Loring, a luxury condominium complex in Fairfax County, a park bench outside the building bristles with real estate agent lockboxes to permit vacant units to be shown to prospective buyers or renters. On a recent morning, there were 49 lockboxes there, outside a building that has about 200 units.

Manuel Tagle, a real estate agent with Fairfax Realty in Falls Church, is representing two units there, both owned by investors, one of which is for sale and one for rent. He owns a unit there himself, which he has rented out.

"There's a very high concentration of investors," he said. "I have seen a lot of investors selling now. They see values going downhill."

The prevalence of investors -- and now their disappearance -- is causing real problems for owner-occupants who want to sell, sometimes against competitors willing to cut prices substantially because of profits they made in 2003 or 2004. Mike Pugh, a real estate agent with Re/Max Allegiance in Arlington, is trying to sell a condo at the Halstead for a woman he says bought it for her retirement home, then became ill and went to live with family. Pugh said his client, who he believes was one of the few purely owner-occupants in the complex, is likely to lose money she had saved over a lifetime.

"We aren't investors, but we are being punished by the market as though we were," he said.

They face plenty of competition. Delta Associates, an Alexandria real estate research firm, said there are about 25,853 new condos being marketed locally now. But only about 1,996 new condos were sold from January to March, down from 3,520 in the first three months of last year. And the area's multiple-listing service, which lists mostly previously owned properties, showed about 5,500 condos and co-ops for sale in March in Washington and the close-in suburbs. That was about a fourfold increase from about 1,400 listed in March 2005 with the service, Metropolitan Regional Information Systems Inc.

Some developers are struggling to sell units in the face of competition from the investor-buyers who want to dump the properties. Many had sought to protect themselves against an invasion of investors for just this reason.

A National Association of Home Builders survey of builders last year found that about 52 percent of builders tried to sell only to owner-occupants, 33 percent prohibited renting the unit out during the first year after settlement, 29 percent declined to make multiple sales to people with the same last name and about 28 percent kept the right to buy back the unit at the same price if the owner sold in the first year.

But many failed to ferret out investors or could not resist the buzz of a fast sell-out when speculators flocked to purchase. A quick sales pace allowed the builders to ratchet up prices more quickly for those who got to their doors behind the early birds.

Speculative buyers at the hottest part of the market were able to put down a $20,000 deposit on an uncompleted unit, then close on the transaction and sell it to someone else the next day, pocketing $60,000 or $70,000.

That spawned a "get-rich-quick" mentality, said real estate agent Frank Borges Llosa, of FranklyRealty.com, who said that the people who got in earliest made the most money, while those who came later are at greater risk. Unlike with stocks or bonds, which can simply be sold, a seller of real estate has to find a willing buyer or renter because a mortgage obligates the owner regardless of the value of the asset.

"People who got caught are in trouble," Borges Llosa said.

Some investors are holding on to the properties they have, but they are not expanding their empires. Ruben Cuya, 37, a Peruvian immigrant who works as a quality control technician at Cuisine Solutions Inc. in Alexandria, bought his first rental property, a townhouse in Lorton, in 2002, using the equity from his own home for the down payment. Then he bought an additional rental property in that same way each of the next two years.

"This year I'm not buying," Cuya said. "It's not a good year to buy."

The situation has made home shoppers more wary about making purchases. Real estate agents say many are so leery about where prices are headed that they are engaged in a kind of stare-down with sellers as they seek to negotiate for lower prices and more concessions.

"The buyers are there, there are people who want to buy," Borges Llosa said. "But they see no immediacy to buy now versus next week."

Some buyers are even walking away from transactions. Lawyer Angana Shah, 36, almost bought a new one-bedroom apartment in Adams Morgan last month for $454,000, but as the settlement date approached, she found herself "petrified" over the high price and worried that values would fall.

Then, during the walkthrough, she learned the place was smaller than she had been promised. The developer was unwilling to cut the price, so she decided to walk away from the sale and got her money back. She was glad she did because prices have flattened and she can now afford a two-bedroom instead.

"I don't want a one-bedroom anymore," she said. "I want a two-bedroom. Now people are begging people to buy one-bedrooms. The market is better. I couldn't have bought a two-bedroom last fall and prices for one-bedrooms are falling."

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