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Cash is king

In white-hot real estate market, investors are gobbling up houses, driving up prices and fundamentally changing the way homes are sold in the Portland area


COURTESY: LEAH NASH FOR INVESTIGATEWEST - Justin Buri at his home in the St. Johns neighborhood on a recent April evening. Buri has seen firsthand the pressures of a changing housing market at his job with the Community Alliance of Tenants.Justin and Julieth Buri were about to lose. Again.

This time it was a gold-colored bungalow, a 1,382-square-foot house on Northeast Fremont Street belonging to the estate of Veona Monroe, a church devotee and the matriarch of a large Portland family.

It needed work, but they were smitten, if not optimistic. Justin Buri, by day an advocate for tenants, knew well the scarcity of Portland houses. They offered $250,000 — $10,000 more than the asking price — and crossed their fingers. This time it took a full day before another buyer outbid them, paying all cash. Seven months later, the house sold again, remodeled, for $483,000.

“It was a nightmare,” Justin Buri said of their house-hunting days. From the time those days began in October 2013 until they ended the following May, the Buris were outbid 16 times for homes, many times by all-cash offers.

“Sometimes we wouldn’t even get beat by that much, but because it was a cash offer, the owner would prefer it,” he said.

So goes the story. Cash is king in red-hot Portland real estate, representing a full one-third of single-family home sales last year. Depending on which urban myth you subscribe to, many first-time homebuyers are just out of luck either because the Metro-area Urban Growth Boundary makes housing scarce and pricey, or because Portland is so great, housing is being gobbled up by a flood of New Yorkers and Californians racing here for a slice of nirvana. It’s a post-Portlandia feeding frenzy, right?

Well, no. Not entirely.

Flippers, remodelers, developers and more

Like many cities, Portland is facing pent-up demand by buyers who hunkered down through the recession. Limited supply, new residents and uncertain sellers also are strong market factors.

But an InvestigateWest analysis shows Portland’s affordability also is being pressured by investors so bullish on this city’s single-family housing they’ve bought properties by the dozen on the heels of the recession, driving up prices and rents as they go.

Traditional real estate investors — flippers, remodelers and developers, companies that to some extent have always been here — have been joined by hundreds of private investors and new private equity firms out to make money for investors through real estate.

The increasing pressure of these buyers in the traditional real-estate market after the Great Recession’s foreclosure sales dried up has helped to distort the Portland real estate market, bidding up prices and making it more difficult for would-be homeowners like the Buris. Once the American dream, homeownership is increasingly a securitized asset that is outside the reach of ordinary Portlanders.

One company, American Homes 4 Rent, exemplifies the trend. The company purchased significant portions of property in communities hit hard by foreclosure before coming to Oregon in 2013. It has since sold hundreds of millions of dollars in bonds to investors, backed by single-family rentals. Other companies designed to generate profits for investors include Equity West Capital Partners, a California-based private equity firm that has purchased dozens of Portland-area homes to flip. Dilusso Homes and Portland Development Group, both local remodelers and developers, similarly take cash from private investors in exchange for returns on their deals.

In the greater Portland area, such institutional investors — buyers of more than 10 single-family homes for cash — bought 6,103 properties between 2011 and the end of 2014, according to data from the real estate information company RealtyTrac. That was nearly 14 percent of all cash sales in the area. And as foreclosures slow, those investors have started to move in on the traditional housing marketplace to compete with the likes of the Buris. The InvestigateWest analysis found 26 institutional investors competed regularly in the listed marketplace, where people in search of their own home typically shop. There is nothing illegal or untoward about that activity — it’s just a new way of doing business.

In a few short years, the promise of high returns also has pulled in droves of ordinary people who are increasingly shifting their wealth from traditional banking and investment tools and into housing or pooled-asset real estate.

Not all of these are the nouveau riche, or even old money. Many simply reflect a national flight away from 401(k)s, savings accounts and other products amid deep distrust of banks and Wall Street. Such investors buy their own properties to rent or remodel. Or they now can choose from a bevy of new investment firms to drop their money into Portland housing.

In a December analysis, RealtyTrac ranked Portland second among cities nationwide where institutional investors were active in terms of the size of the potential returns to be made by those investors.

As investment tightens markets and helps to drive up prices, and redevelopment replaces the city’s most affordable dwellings, the city’s Housing Bureau has convened a Community Oversight Committee, in part to oversee strategies to lessen gentrification’s impacts in North and Northeast Portland. Its chairman is Bishop Steven Holt of the International Fellowship Family Church, which was displaced from Northeast Portland during the crisis. He points to new home prices of up to $600,000 and wonders aloud who can afford to foot the bill.

“It isn’t the people who are beginning their careers. It isn’t the people who are in the early stages or even in middle-income stages. It is the folks who are upper-income or upper middle-class income that can afford to buy these houses. So you’ve just classed out a significant amount of people,” he said. “Our city is becoming an exclusive kind of rich kid club.”

COURTESY: LEAH NASH FOR INVESTIGATEWEST - A home in the Woodstock area of Portland that was just put on the market is inundated with real estate agents cards.

The new investor — almost anybody

Grace Widdicombe, president of the Northwest Real Estate Investors Association, says among those who have turned to real estate are people trying to climb out of financial holes.

“Some people were actually retired and all of a sudden they lost half their retirement fund in their IRA. I hear a lot of that,” she said.

Others have simply learned they can’t make money on bank products anymore. She points to savings accounts, certificates of deposit and managed funds as unproductive for people trying to plan financial futures.

As real estate holds promise for those who want their money to make money, the force of investment is a growing factor in setting prices for the rest of the buyers. And what’s making housing prices skyrocket isn’t just that investors are here tightening the housing supply with cash. It’s how traditional buyers are responding: by trying to look just like them, setting the safeguards of traditional financing aside.

“Anytime you have multiple offers and you have cash in the mix, the conventionally financed borrower is going to try as hard as they can to look like a cash buyer, even though they’re still being financed,” said Eric Hagstette, owner and principal broker at Inhabit Portland, a real estate company.

When sellers have a choice, they prefer the sure thing. Unlike cash, financing can fall through, especially in a market with tighter credit. Buyers who turn up with a check rather than a pre-approved loan are more likely to complete the transaction — and sellers know it.

To compete, some buyers are simply borrowing cash from friends and family and financing their houses after closing — about 14 percent of cash buyers in the greater Portland area between 2011 and the end of 2014, in fact, according to RealtyTrac.

Others are overbidding to ram deals through quickly, then waiving the right to negotiate price if an appraiser doesn’t agree. The practice comes with significant risks. It also allows the next guy to price his house just as high, while one sale becomes a benchmark for the starting price of the next, Hagstette said.

“The ultimate effect is it’s taking away any sort of price cap,” Hagstette said. Our marketplace? “In a sense, it is unregulated by appraisers.”

While larger investment firms did not respond to InvestigateWest’s requests for comment, some smaller investors shared how the rising prices and competition for houses are changing their work.

Alicia Liberty, who owns Liberty NW Homes, said rising prices have forced her firm to broaden its vision, for example adding a second story to a home to make its investments pencil out.

John Reilly, of Reilly Signature Homes, said banks are again starting to talk about loaning money to his company, which has been using private capital to remodel derelict rentals and other homes he described as in total disrepair. The company has remodeled about 50 homes in eight years, Reilly said.

Across much of Portland, prices seem high, said Steve Wilson, a former project manager for multifamily remodels who has flipped homes through Big Moose Development since launching the company during the crisis.

Perhaps ominously, Wilson says he feels an echo of 2006 in today’s marketplace: Buyers are overpaying. Sellers want top dollar for houses that need work. And developers and remodelers are pushing prices up to $600,000 to make profits.

“I think they’re pushing it to where we’re going to have another crash,” Wilson said.

The torture formula: less stock, more buyers, lots of cash

In a market where multiple offers are raising prices, Teri Toombs, Principal Broker at Living Room Realty, says she discourages people from overpaying for homes. But some can’t resist. Some people don’t want to continue renting. And they don’t care what that costs.

An in-house poll led by Toombs’ colleague, Alyssa Isenstein Krueger, found more than a few first-time buyers with cash to throw around. The Living Room agents that responded said that of 148 first-time buyers served in 2014, 42 percent came to the table with funds from friends and relatives to help grab whatever edge they could leverage. The sums ranged up to $470,000. It’s not scientific, but it suggests a hard new reality in the market.

For those without cash?

Those who can’t overpay?

“It’s torture. And I try my best to prepare them for what they’re in for, and I see them starting to glaze over like, ‘Why is this lady saying all this? Why can’t we just start looking at houses? Why is she bringing us down like this?’” Toombs said. “With determination and being really diligent about it, they can get into a house. But they have to realize that they’re going to be moving into emerging neighborhoods.”

The inner city neighborhoods and those areas with the cute bungalows and post-war homes that typify Portland are out of reach for most first-time buyers.

Here’s part of what has changed: Back in 2008, when shaky mortgages had been toppling for a year and banks were frantically dumping foreclosed homes, investment buyers and their agents could be found near daily on the steps of the Multnomah County Courthouse, or any other courthouse in the region. This was the place for crowding around auctioneers, bidding on single-family homes, and buying up properties by the dozen.

These days, however, the foreclosure scene has tapered off. Many mornings at the courthouse, an auctioneer is still there, still standing on the marble steps, a handful of clipboards on the radiator. But the pickings are slimmer. One or two or three houses at a time. And the auctions often are canceled, title problems or other glitches ensnaring the last trickle of real estate on which an army of investors have now come to depend. Oregon also is moving more foreclosures through the courts.

A handful of the actors who most frequently buy at auction — Bulldog Capital Partners of Lake Oswego, Caliber Real Estate of Bellevue, Wash., and Vestus, the Northwest’s largest foreclosure investment group, among others — are still there. But the market has thinned. “There is no inventory right now. That’s the bottom line. There is not enough to go around,” said Jeremy Romig, a local Vestus representative.

As private and institutional investors step away from the foreclosure market, they are shifting into private deals as well as onto the MLS, where they compete directly with traditionally financed homebuyers. In most cases, they’re looking at the lowest-cost housing on the market, and competing with first-time buyers like Justin and Julieth Buris.

InvestigateWest is a nonprofit investigative newsroom for the Pacific Northwest. If you have experience buying or selling homes in Portland, email Lee van der Voo at lee@invw.org.

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