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Vultures Are Circling Over Distressed Properties
By Kenneth R. Harney
Saturday, October 20, 2007; F01

Call them grave dancers, vulture funds, turnaround specialists or the more euphemistic "opportunity investors." However you identify them, the deal is the same: When hyperactive real estate markets lose their sizzle, or property owners no longer can afford to hang on to their houses, well-capitalized investors smell blood and move in.

That's happening in most of the "bubble" areas of the country that saw heavy speculative activity and razzle-dazzle financing from 2001 through 2005. But it's also happening in less volatile markets where unaffordable mortgages and economic distress are producing record numbers of panic sales to investors at fractions of former values.

In Miami Beach and elsewhere in South Florida, for example, real estate consultant Jack McCabe said he is advising "hedge funds, high-net-worth individuals, Wall Street investment banks, and groups of doctors and lawyers" who all want a piece of the area's tottering condominium and townhouse sector, where some properties are selling for 50 cents on the dollar.

McCabe, chief executive of McCabe Research and Consulting in Deerfield Beach, Fla., said investment groups with capital "in the multiple billions" are already active in South Florida, searching for fire-sale prices on properties with good long-term prospects. In the greater Miami area, McCabe estimates, there are 25,000 unsold condos and townhouses on multiple listing services, which he calculates is a 35-month supply at current absorption rates. Another 22,600 units are under construction, and 4,000 more are to begin construction in the next year or two.

At one recent auction, McCabe said, investors walked away with three-bedroom condos for $300,000 that originally sold for $550,000 to $675,000. Though not all units are selling at giveaway prices, he says, Miami is an example for overbuilt, overpriced condo markets that were dominated by speculators during the boom, many of whom have simply sent back the keys and left.

McCabe declined to identify any of his roster of vulture-fund clients, "who prefer to fly under the radar." But they are out in droves to acquire entire buildings -- or floors or individual units -- then refurbish them, convert them to different uses, rent them, out or hold them and resell at the first sign that the local market is bouncing back. McCabe said that for many of these units, this might not happen until 2010 or 2011.

McCabe's segment of the market tends toward big bucks, but around the country, there are hundreds of smaller-scale investors on the prowl for turnaround situations in otherwise stable markets. The largest organization of such entrepreneurs is HomeVestors, a Dallas franchiser started in the mid-1990s. Its more than 260 franchisee partners are on track to buy more than 7,100 individual houses in 35 states this year at value discounts averaging 35 percent to 45 percent, said John Hayes, president and chief executive.

Best known for its advertising slogan "We Buy Ugly Houses," HomeVestors trains its franchisees to spot and capitalize not only on houses that need work, but also on what Hayes calls "ugly situations" -- people with problems who are motivated to sell for cash. Among the most common situations: divorce, death, job loss, problem tenants and mortgage delinquencies caused by unaffordable financing.

HomeVestor franchisees pay a $49,000 fee upfront and must have net assets of $200,000 in cash or cash equivalents. They also pay the parent company $775 for every house they acquire, plus interest on credit lines the company extends to enable them to buy multiple properties. Some HomeVestor franchisees buy, fix, rent or resell 100 or more houses a year, thanks in part to high volumes of potential sellers -- more than 200,000 this year, Hayes said -- who are driven to them by the company's advertising campaigns.

Subprime mortgage delinquencies and foreclosures are swelling those numbers significantly, he said, along with plunging prices in some local areas. Softening markets also are driving down the expected discounts on troubled houses. Whereas in past years, "we might offer 65 percent of a property's expected value after repair, now in some places we're looking at 50 percent," Hayes said.

A $100,000 starter home with a seriously delinquent mortgage and in need of renovation, for instance, might draw an offer of $50,000 to $55,000 cash from a HomeVestor franchisee.

"The owner might be offended at the low-ball offer, but then again, in some situations that might be the only offer they get," Hayes said.

Kenneth R. Harney's e-mail address is

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