Distressed isle properties offer value

Investors are taking advantage of people's misfortunes by buying troubled real estate

STORY SUMMARY »

Given Hawaii's slowly appreciating real estate climate, more and more investors are turning to distressed and pre-distressed homes where an equity gain may offset their outlays.

The number of foreclosure, short sale and distressed property sales has grown as the buyers who took on more debt than they could afford during the last cycle find that their creative financing has caught up with them. While the trend is unfortunate for some, others have found a way to profit from it.

Surging home prices and the interest in risky mortgages that were part of Hawaii's recent real estate boom have quelled, but the softening market hasn't deterred the most dogged investors from seeking speculative opportunities. In Hawaii and elsewhere, there is a growing pool of folks who buy and sell foreclosure and distressed properties. While there are quite a few dabbling in this trend, others have found career opportunities in this market.

Today's investors are rarely flipping as they did in the most frenetic part of Hawaii's last real estate cycle. When prices stabilized, the market for quick sales diminished. Now, it's all about acquiring properties below market value and holding them until the price is right.

When it comes to real estate, it turns out that location isn't everything. Timing is important, too.

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Rob and Christina Farrow still haven't slept a night in the Palolo fixer-upper that they purchased for $440,000 last year.

Hidden repairs on the property tripled their renovation tab and took up so much of Rob's time that he took a leave of absence from his career. And, worse yet, they broke the cardinal rule of real estate investing by falling in love with the property's sweeping views, antiquated charm and close proximity to town.

The Farrows have sunk so much money into the property that flipping it won't bring enough return on their debt to make the endeavor worthwhile. Similar properties in the neighborhood are selling for $790,000, but given their initial outlay, the couple will have to live in the property for a time to maximize the return on their investment.

Even so, the Farrows are scouring Oahu for another deal -- be it a fixer-upper or one of the growing number of distressed pre-foreclosure, foreclosure, lender-owned or short sales. While the surging home prices and interest in risky mortgages that were part of Hawaii's recent real estate boom have quelled, the softening market hasn't deterred the most dogged investors from seeking speculative opportunities. In some cases, they are continuing to profit, too.

"It's a hobby. Some people have eBay as a sickness, others have real estate," Rob Farrow joked while on his way to look at a foreclosure sale down the road from his home.

Coming into 2008, many investors like Farrow believe that there just might be a little spice left in Oahu's residential real estate market. The dish has cooled, but real estate experts have said that it's still enticing enough to catch its share of nibblers. And what remains is heartier fare than most mainland markets are serving up; for the full year in 2007, home and condominium median prices posted gains. And the market, for most, is expected to hold steady in 2008.

"There are plenty of opportunities out there, but there's nothing left in this town that's a quick turn," Farrow said. "They're all going to take work and money. You just have to do the math."

From 2003 to 2005 or so, the most frenetic part of Hawaii's last real estate cycle, the market saw a fair number of flips. When prices stabilized, the market for quick sales diminished. However, some say that weakness in various regions of the market and sectors of the economy has created another opportunity for savvy investors to find and buy properties below market value.

The number of foreclosure, short sale and distressed property sales has grown as the buyers who took on more debt than they could afford during the last cycle find that their creative financing has caught up with them. While the trend is unfortunate for some, others have found a way to profit from it. Buyer beware was a much-touted line at the top of the cycle in 2005 when sellers throughout the islands commanded premium prices; now it's more like buyer be aware. The most-alert buyers say that today's market conditions still offer optimal investment opportunity.

"It's definitely a buyer's market," said Harvey Shapiro, research economist for the Honolulu Board of Realtors.

While Honolulu's prices haven't slumped to the degree that real estate has on the mainland, sales have fallen and sellers are finding that it's more difficult to move properties. That's created an environment where sellers are more willing to negotiate. Unfortunately, it's also created a climate where foreclosures and distressed sales are more likely because homeowners who get into trouble have less equity available to save their homes and less possibility of realizing a quick sale.

Georgia Roberson, real estate-owned director for Coldwell Banker Pacific Properties, said that she's seen a pickup in the number of lender clients that her agency represents.

"We saw some foreclosures in the beginning of the year but it really picked up in the third quarter," Roberson said, adding that Coldwell Banker listed 20 foreclosure properties in 2007.

While the number of foreclosures that Roberson's office handled last year doesn't come close to the peak 400 or so it handled in 2000, it was well above the levels sustained in the last several years, she said.

"Most of the loans were subprime and they were taken out in 2006," she said, adding that dropping values in some neighborhoods -- especially those that must access Farrington Highway and Fort Weaver Road -- has hurt homeowners' ability to refinance adjusting arms or get out of debt.

While these market conditions are bad news for homeowners, they've given some buyers a leg up, said David Buck, a real estate agent with Re/Max 808 Realty.

"I just got a first-time home buyer into a four-bedroom, three-bath foreclosure property in Ewa Beach with a pool for $475,000," Buck said.

While lenders want fair-market value on the real estate properties that they own, generally they are priced competitively to maximize the chance of a 30-day sale, Roberson said.

"Lenders will discount for every 30 days that the property is still on the market," she said. "David Buck's clients were able to walk into their home with $20,000 to $30,000 in equity."

Buying property on the back side of a real estate cycle offers investors the potential to buy low, hold and later sell high, Buck said.

Investors are still finding that in many cases Hawaii real estate is a more stable investment than stocks, Shapiro said.

"It's not a matter of if prices will go up, it's a matter of when," he said. "There's no doubt that they will go up."

Even though the Farrows must hold onto their Palolo home to reap the kind of return they originally anticipated, they say that the deal penciled out for them. The house has all the hallmarks -- chiefly a stunning view and an East Oahu location near town -- of a good long-term investment, they said.

"Besides, it's an investment that we can live in," Rob Farrow said. "You can't get much more practical than that."