TY CHIVERS WATCHES THE real estate frenzy in South Florida and remembers a similar scene from another era. “Years ago, when you stood in line to get rock concert tickets, people would turn around and resell them,” says the Jupiter, Fla.–based real estate agent. “These guys are scalpers.”
There is a notable difference, however. The concert ticket scalper paid the full price of the ticket upfront before trying to sell it for a profit. Investors usually pay only earnest money upon signing the contract. Then they often resell their houses the day they close, making tens of thousands of dollars from price appreciation that occurred during the lag time of construction between contract and closing. Or, particularly in the case of condominiums, speculators hand over a few thousand dollars for a preconstruction deposit and then sell the unit for a profit before it's even built.
The difference between investors and speculators can be subtle. Investors may buy and resell a property or hold it to rent out for a long-term return on their investment. Speculators are interested only in flipping, and flipping can be profitable. “A lot of people are doubling their money,” notes Chivers.
Chivers says he sees how an onslaught of investor buyers could affect a builder's business. Builders sell a lifestyle with amenities and social activities, and “if you have 80 percent of the people [not] move in, it defeats the purpose of the pitch.”
Still, Chivers says he doesn't quite understand the beef with investor buyers. After all, builders set their own prices, they're making plenty of sales, and they're making a profit. “If [the builders] have their money, why do they care?” he asks.
MAKING A COMMITMENT But they do care, and that concern goes up with the number of houses a builder sells. According to a July 2005 Builder nationwide reader survey, only one in five builder respondents restricts the sales they make to investors, and respondents selling up to 250 houses a year generally are happy to sell to anyone with the money to do a deal. Above that volume, builders are far more likely to crack down on investors, citing such issues as competition in their communities while they're still selling new homes, the creation of an artificial perception of housing demand, a lower profit margin because investors don't buy options and upgrades, and the effect on the ability to build a sense of neighborhood.
“It's important [to limit investor activity],” says Leslie Kratkoski, spokesperson for Beazer Homes USA. “When we build communities, we want them to be stable. We don't want a lot of turnover. It's to our benefit to have people who want to make a long-term commitment.”
The efforts of single-family builders to keep investors at bay appear to be working. Several recent surveys by the NAHB and data from the National Association of Realtors (NAR) point to relatively low interest in new single-family homes among investors. The NAHB surveys, which included builders of all sizes in a variety of markets, revealed that only 3 percent of single-family homes sold in the previous six months were for investment. Similarly, the NAR reported this past summer that only 3 percent of home buyers sell their houses in less than a year.
MARKET-FOCUSED BUILDER'S survey confirmed that investor activity is highly market specific. Respondents building in markets including California, Nevada, Phoenix, Washington, and Florida more often restrict investors than those in the Midwest, Texas, the Northeast, Atlanta, and Seattle, possibly due to tight land supply, rapid price appreciation, or pent-up demand.
And restricting investors in these hotter markets is a smart move, because in markets with high investor activity, such purchases obscure underlying demand and often lead to overbuilding, says Celia Chen, director of housing economics for Economy.com.
Learn more about markets featured in this article: Los Angeles, CA.