Cash-rich real estate investors trigger bidding wars, frustrate other buyers

By Dina ElBoghdady
Washington Post Staff Writer
Sunday, January 3, 2010; A01

Investors have reemerged with brute force in the Washington region's real estate market over the past few months, triggering bidding wars in some neighborhoods teeming with foreclosed properties and hindering traditional home buyers such as Melissa Diggins.

Diggins and her fiance, George Mills, made a dozen offers on houses in Prince William County but lost more than half of them to investors making all-cash offers.

Frustrated, they gave up their search for a new home, convinced that they could not compete.

"We thought to ourselves: 'Enough is enough,' " said Diggins, a graphic designer. "We'd sometimes offer more than the asking price and we wouldn't even get a call back. It was crazy."

With interest rates low and home prices way down from their peaks, all-cash investors are snapping up the cheapest properties and helping clear out the excess supply of homes on the market. They're betting that the market has hit bottom or will soon.

But that's of little consolation to traditional home buyers such as Diggins, who find themselves at a disadvantage because their offers usually hinge on financing contingencies, appraisals and home inspections.

"What's happening in this area reflects what's happening in other parts of the country," said Sam Khater, senior economist at First American CoreLogic, which plans to release a report soon on all-cash deals. "In markets where price declines have been steep, we've seen quite a bit of competition between the low-end, first-time home buyers and investors."

All-cash sales are tough to track because of inconsistencies in the way jurisdictions collect data. But Khater said the preliminary data his firm has gathered suggest the deals are becoming more popular. More than a dozen real estate agents and consumers interviewed for this article say they have witnessed the buying frenzy firsthand.

"There are bidding wars out there. It's like the 2005 market but at discount prices," said Stella Barbour, a real estate agent at Jobin Realty in Northern Virginia. "I put in offers for my clients only to find there are already multiple offers. They always choose the one that's all cash."

Some of these cash-only investors use their own money to buy properties, while others borrow it at high interest rates from other private sources.

Chris "CC" Cormack, an investor, said she used her own money to beat out four other offers and buy a townhouse in Ashburn this year. The home, a foreclosure, was listed for $214,500, and she got it for $220,000. Cormack fixed it up and sold it a few months later for a sizable profit.

"It had been under contract twice before, and both of those loans fell apart," said Cormack, who is also a real estate agent. "By the time I came along with all-cash offer, the bank said, 'I'll take it.' They did not want to take a chance on the deal falling apart again."

Cormack is now eyeing some other properties to buy and rent out because "the prices are awesome and the rental market is strong."

After the mortgage market melted down more than two years ago, investors were singled out as key contributors to the crisis. That's because a large portion of them defaulted on their loans after home prices plunged and they could not flip their properties at a profit.

The mortgage industry reacted by tightening rules in a way that made it tough, if not impossible, to take out a loan for an investment property without a substantial down payment and top-notch credit scores.

The crackdown has created more opportunities for what some would describe as a more legitimate breed of investor -- namely, those who have so much cash that they don't need a loan.

"There's a big difference between [the all-cash] investor and the flipper of the housing bubble, who put no money down," said Mark Zandi, chief economist at Moody's Economy.com. "This person has all the skin in the game, and that's encouraging. It suggests that housing in the area is now appropriately valued or maybe even undervalued."

But the ensuing bidding wars have exasperated traditional buyers. For instance, many are using loans insured by the Federal Housing Administration to purchase foreclosures. Yet many of the foreclosures might not meet FHA's appraisal requirements because they are in bad shape after months of neglect, or even vandalism, by their former owners.

To give traditional buyers more of a chance, mortgage financier Fannie Mae recently said it would not consider offers from investors on the foreclosures it owns for 15 days after the homes are listed. But buyers still face an uphill battle.

To successfully compete with this investor class, real estate agent Jennifer Bridges recently advised one of her clients to offer $275,000 on a Woodbridge townhouse listed for $219,000. After reviewing the prices of similar homes in the area, Bridges concluded that the home (a foreclosure) was listed well below its value to induce a bidding war.

"When the agent called the following day to say they'd accepted our offer, I was screaming a the top of my lungs," said Bridges, who is with ERA Blue Diamond Realty. "They had 14 offers, including some cash offers, but the agent said he felt ours was better. He didn't specify why."

Robert Bauman, the buyer, was downright ecstatic when he ended up paying $13,000 less than he'd offered because the appraisal came in that much lower. "It was so rewarding after having lost so many bidding wars," Bauman said.

As for Diggins, even though she and her fiance have given up house hunting for now, she is not discouraged about the future.

"I figure those investors are going to sell all those houses they've got," Diggins said. "Those houses will be on the market at higher prices, but we will be able to look at them again someday."

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