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Letter to the editor

Builders limit sales to investors

By JUDY STARK
Published July 31, 2004

Low mortgage-interest rates and fast home-price appreciation make this a great market for investors in residential real estate. But some national builders, and their Tampa Bay area divisions, are limiting the number of new homes they will sell to investors.

"Most of the nationals are at least monitoring it," said David Pelletz, president of Westfield Homes' Tampa division, which builds in many communities around the area and is part of Standard Pacific Homes of Irvine, Calif.

His company will not sell to investors in its second phase of villa sales at MiraBay in Apollo Beach, has limited the number of townhouses it sells to investors in other subdivisions and is watching the situation in all its communities, Pelletz said.

Why the limits? Why isn't a builder happy to sell a house to whomever wants to sign a contract?

Several reasons, builders say:

A community heavy on investor-owned homes may start to look and feel like a rental community, which is not what resident buyers were expecting when they bought their homes. Builders worry that landlords and their tenants may be less attentive to the home's appearance and landscaping than resident owners. Overall result: Unhappy buyers, negative feelings about a community, depressed prices.

Investors eager to flip their homes for a quick profit compete with the builder. They may do so by undercutting the builder on price (while still making a profit) or simply by "putting one more house on the market, whether the pricing is the same or different," said Steve Ebensberger, Tampa division president at David Weekley Homes, which also is monitoring the investor situation.

If the economy goes bad, investors are the first to walk away, selling their investment property at fire-sale prices. In some states, including California, buyers can walk away from a contract any time up to closing, and investors who get nervous when rates start to rise can leave the builder with unwanted, unsold inventory. Some would rather lose a $20,000 deposit than be stuck with a $200,000 house if they think a market is in trouble. (In Florida, buyers are closely bound by a contract and can walk away only with difficulty.)

Some builders, such as Weekley, do not allow buyers to "flip" a contract:to turn around and sell the contract to another buyer. The first person to sign a contract on a house must close on it. Only then can the buyer resell.

A limit of around 20 percent is a "nice round number" that KB Home is aiming for as its Tampa division articulates a policy on investors, which president Marshall Gray said should be finalized in two to three weeks.

Pelletz said Westfield is aiming for a limit of 20 to 25 percent investors. Its rate of investor sales exceeded that in MiraBay's first phase of villas, which is why it is cutting back in the second phase. Villas and townhomes are often attractive rental properties because of their size, location in maintenance-free communities and price, which translates to a monthly rent the market will accept.

Builders' sales representatives will ask prospective buyers early whether they are buying as a resident or an investor. At contract time, buyers must state their intention either to live in the house or to hold it as an investment. Developers or homeowner associations can limit the viability of rentals by restrictions on leases: a minimum of seven months, say, or no more than two leases per year in each home.

Builders can monitor the investment situation in the form of earnest-money, option deposits and loan approvals.

"That doesn't necessarily shake out the investors," Weekley's Ebensberger said. "(It) just confirms that we have a solid contract" with sellers who are highly motivated to go to closing, not with investors who feel freer to walk away.

"In the beginning of a community like MiraBay, it's hard to keep investors out," said Brenda Kunkel, vice president/sales and marketing for developer Newland Communities South. "We know they're what's going to get a community going, and there was such a pent-up demand for waterfront, we didn't do any restrictions in the first year of sales. All of a sudden we've got a lot of investors."

Many of them bought homes in the less expensive sections, she said, for two reasons: Homes in modest price ranges are easier to rent, and the buyers thought that as insiders, they'd get a heads-up on information about sales in other sections of MiraBay before the general public.

Los Angeles-based KB Home, Standard Pacific, Shea Homes of Walnut, Calif., and other big builders, particularly those in markets where housing prices have skyrocketed, are taking similar antispeculation steps, the Wall Street Journal reports.

The crackdown is a big turnaround from the last national housing boom, in the late 1980s, when builders didn't discourage such practices, the Journal said. Fueled by easy access to capital, builders went on a developing binge and overestimated demand in part because of buying by speculators. Many builders across the country fell into financial trouble, and some were forced out of business.

"When you're selling a lot of homes to investors, it gives you a false view of the market," JoAnne Anderson, vice president of sales and marketing for the northern California division of Shea Homes, told the Journal.

Pelletz said the profile of the investor has changed in the last year or so. Once, investors were professionals; now, they're the "average person next door" who has heard other people say they "are making a killing in real estate investments," Pelletz said. But what he called "Average Joe investors" who buy "onesies and twosies" may get stuck if the economy turns sour, he said.

- Information from the Wall Street Journal was used in this report.

[Last modified July 30, 2004, 09:43:46]