December 17th, 2009 6:24 PM by Lehel S.
By Sue McAllister
Bay Area real estate investors have gone on a shopping spree, snapping up homes in low-cost communities outside the region as falling home prices and low mortgage rates make the economics of buying rental property far more appealing.
In the third quarter of this year, for instance, buyers in the nine-county Bay Area purchased nearly 3,000 homes outside the region, up 58 percent from the same quarter last year, typically for prices well below 2008 levels.
The wave of investment was led by purchases in communities stocked with rental housing, with Sacramento, Las Vegas, Stockton and Tracy among the top destinations for Bay Area residents' out-of-area real estate spending, according to information compiled for the Mercury News by MDA DataQuick.
That's quite a shift from five years ago, when many buyers were flocking to well-appointed condos and homes in tony vacation enclaves. The data looked at home sales in which the property address and the buyer's mailing address were in different places.
"People are looking for value in areas where prices have fallen," said Matthew Anderson, a partner with economic research firm Foresight Analytics in Oakland. "It seems pretty clear that the increase in volume was in the areas that have been hardest hit by price declines and high volumes of defaults."
What people paid for second homes varied widely by location, but in general they shelled out much less than they would have a year earlier.
In Sacramento, Bay Area buyers paid a median of $141,000 for homes, or 15 percent less than a year earlier. Sacramento was the most popular venue in the third quarter for Bay Area buyers, who bought 277 homes there.
"The values are too good to pass up," said Carlos Kozlowski, a Coldwell Banker broker in Sacramento. Homes that sold three years ago for $170,000 might go for $80,000 to $110,000 now, he said, and rental rates are typically high enough to cover buyers' mortgage payments and leave them with positive cash flow.
Kozlowski said most investors in the area are buying in cash, not financing their purchases with a mortgage. Some sold property four or five years ago during the boom, he said, and others are tapping equity in their homes to pay cash for Sacramento's bargains. "Most of the investors we see are the mom and pop investors who come and buy one, two, three, four properties, maximum. Typically, they are going to hold them for a long time."
Public records don't indicate whether purchases were for vacation or investment purposes. But the data clearly indicate that in comparison to five years ago, near the height of the Bay Area housing boom, purchasing suburban rental property is the hot ticket now, not buying vacation homes. While sales to Bay Area buyers are up from 2004 in Stockton and Tracy, for example, they are down in Carmel and Palm Springs.
Bay Area residents have also increased their purchases of second homes within the nine-county area, in places such as Pittsburg and Antioch. Five years ago, those were not top destinations for local investment, but they've gained popularity as prices have fallen steeply after waves of foreclosures.
Real estate and mortgage brokers say that in the past several months, they've begun hearing from more people interested in buying rental property. But there are hurdles, especially for first-time investors, said Stanley Tseng, a mortgage broker at Nova Financial and a past president of the Silicon Valley chapter of the California Association of Mortgage Brokers.
Buyers typically need down payments of 20 or 25 percent and good credit, of course. But they're unlikely to get a loan if the seller of the property has owned it less than 90 days (indicating the house is simply being "flipped"), and recently some lenders have begun requiring that buyers have two years of experience owning rental property before they'll approve a loan.
"It's a chicken-and-egg problem. If you don't buy it, how can you have the experience?" Tseng said. "The guidelines are becoming more and more difficult each month. They won't be relaxed until we see a consistent appreciation of home values. Lenders are afraid they still have a lot of downside risk."
Alamo homeowners Scott Keith and his wife, Lori, are among the thousands of Bay Area residents who sized up the risks and made a purchase recently. This summer, for just over $400,000, they bought a lot at Martis Camp, a development near Truckee with direct access to the Northstar-at-Tahoe ski resort.
When they first pondered the purchase, Keith said, "I thought, 'No one's going to be doing this, are we crazy?' But still it seemed to be the right time to us. We wanted to set up that kind of vacation property where we could enjoy family time." The couple and their three children hope eventually to build a four-bedroom house on their lot.
And one added bonus: Prices for contractors are lower than a few years ago, Keith said. "It makes things much more doable."