Anti-Flippers Buy And Hold Cheap Homes

On Thursday March 18, 2010, 5:45 pm EDT

When Paul Gabrail and two partners snag a foreclosed home on the cheap, neighbors have good reason to cheer.

"We do brand-new everything: new roofs, new windows, new kitchens, new bathrooms, new plumbing," he said. "We put granite in some of the properties. These are areas that have probably never seen granite tops."

The partners of ADP Properties target Cleveland's inner-ring suburbs, which were hit hard by the subprime crisis.

Call these investors anti-flippers. Instead of buying homes to sell fast at a profit — as flippers did in the boom — they buy, hold and upgrade, improving blighted neighborhoods. Not dependent on ever-rising prices, they plan to ride out any value setbacks from future foreclosures.

Many homes along Cleveland streets have been boarded up and taken back by banks. Prices are down as much as 85% from the boom.

Pooling their cash, Gabrail's trio has bought nearly 60 homes since last March, at an average $12,000 to $13,000. Counting rehabs, the final tally reaches $35,000 to $40,000.

"Neighbors stop by and say, 'We love what you're doing to the place,'" Gabrail said.

Money By The Month

Gabrail, 28, and his young partners — Andrew Strigle and former Cleveland Browns tight end Darnell Sanders — have had no trouble finding renters to pony up more than $900 a month, giving them yearly returns of 14% to 16%.

The rental pool is full of ex-homeowners whose subprime mortgages escalated beyond their means, causing them to walk away or go through foreclosure. Most don't have the cash to buy and renovate even the most steeply discounted homes.

"We have a good leasing guy, and we really believe we have a very good product and that helps," Gabrail said. Tenants include cooks, nursing aides and students.

Anti-flippers are targeting some of the worst-hit markets, such as Cleveland, Detroit and Atlanta's West End district, the top U.S. ZIP code for bank fraud. There, ghost buyers used phony Social Security numbers and other means to get mortgages, never intending to make a payment.

Investors started eating away at Atlanta's bank-owned housing stock late last year, including the notorious West End ZIP code of 30310, says Scott Askew, owner of Fourteen West Realtors in Atlanta.

"Investors are the first ones into the market when it first starts to heal, and then they are followed by others," he said.

Though prices have risen in recent months in Detroit, Cleveland, Atlanta and other troubled markets, they're still far below their peak values, and still lower than pre-boom days. So investor-buyers are in no hurry to sell, until they can profit. Meantime, they enjoy rental income, with returns often topping 10%.

"If in five years we can sell, great," Gabrail said. "If we have to hold them for 15 years, great."

Buyer interest in Detroit and Cleveland is rising, says Ken Shuman, spokesman for real estate search engine Trulia.com. He says Detroit was the 36th most-searched city last month vs. 45th a year earlier. Cleveland went from No. 246 in 2009 to No. 160. Atlanta inched up to 15th place from 17th.

"Search behavior is the crystal ball for us. It gives us an idea where markets are heating up," Shuman said.

The boom-bust California markets of Riverside, Stockton and Corona are much less searched this year vs. a year ago, he says. The same goes for Fort Myers and Lehigh Acres in Florida, suggesting "a lot of vultures have already handpicked over them and have moved on to other places."

In deeply discounted Detroit, brokers are working with investors from as far away as Australia.

Buyers are snapping up three-bedroom bungalows for between $2,000 (less than a car, some Motor City observers point out) and $70,000, depending on the area.

"The rental market in Detroit is exploding" with demand due to foreclosures, said Real Estate Dreams broker Mervet Barakat. "Investors are buying one or two homes."

An Aussie group buys 20 to 25 homes a month, capped at $50,000 each with renovations, says Tony Raffin, owner of ReMax Associates in St. Clair Shores, north of Detroit.

One local client spent $8,000 for a home, then $10,000 on hardwood floors and a new kitchen. Across from a hospital and near posh Grosse Pointe, it quickly rented for $1,000 a month.

"Where are you going to make $1,000 a month on $18,000?" Raffin asked.

The jobless rate remains stubbornly high, "but you still have people who are responsible and pay their bills," Gabrail said.

Strength In Numbers

With investor interest picking up, home values have been rising in many hard-hit markets.

Cleveland home prices fell as much as 76% from the winter 2005-06 market peak to the trough last spring, Clear Capital data show. But in the four months ended Feb. 22, they were up 1.8% vs. a year earlier. In Detroit, home prices rose 4.7% and in Atlanta, 2.4%.

A new foreclosure wave would suit buy-and-hold investors just fine. After all, competition for bargains has been intensifying.

"We'll have more opportunities to get good houses," Gabrail said.

On Shoring

Caterpillar Joins 'Onshoring' Trend

by Kris Maher and Bob Tita
Friday, March 12, 2010

provided by

Caterpillar Inc. is considering relocating some heavy-equipment overseas production to a new U.S. plant, part of a growing movement among manufacturers to bring more operations back home -- a shift that will likely spark fierce competition among states for new manufacturing jobs.

The trend, known as onshoring or reshoring, is gaining momentum as a weak U.S. dollar makes it costlier to import products from overseas. Manufacturers are also counting on White House jobs incentives, as well as their ability to negotiate lower prices from U.S. suppliers who were hurt by the downturn and willing to bargain.

After a decade of rapid globalization, economists say companies are seeing disadvantages of offshore production, including shipping costs, complicated logistics, and quality issues. Political unrest and theft of intellectual property pose additional risks.

"If you want to keep your supply chain tight it's hard to do that with a 16-hour plane ride from Shanghai to Ohio," said Cliff Waldman, an economist with the Manufacturers Alliance/MAPI, a public policy and economics research group in Arlington, Va.

General Electric Co. said last June it would move production of some water heaters from China to its facility in Louisville, Ky., starting in 2011. A GE spokeswoman said a 2005 labor agreement under which new employees would be paid $13 an hour, from nearly $20 an hour, "enabled us to be more competitive."

Last year, U.S. Block Windows Inc. purchased a company with a China-based molding operation. After studying logistics, which included shipping raw materials to China before finished products came back to the U.S, the company decided to move production from China to its headquarters in Pensacola, Fla.

"When we started looking at the costs and complexities of the inventory and lead times, there really wasn't any savings," said Block Windows' president, Roger Murphy. The company added 10 workers, increasing employment to 120, and can keep inventory levels lower because shipping times have been cut.

U.S-based suppliers are also seeing an opportunity to push manufacturers to source parts domestically. Three manufacturing groups, the National Tooling and Machining Association, the Precision Metalforming Association and the Association for Manufacturing Technology, will host a supplier fair in May for manufacturers to see what suppliers can offer.

"For the first time ever, we're asking them to bring back their offshored work," said Harry Moser, a former machine tool company executive and member of the National Tooling group, who conceived the idea for the fair.

Still, some groups play down the impact that recent reshoring moves have had to jobs and overall industrial production.

"I would call it a trickle. Every little bit helps but the net result is that we're still offshoring more than we're onshoring," said Scott Paul, executive director of a lobbying group Alliance for American Manufacturing.

Caterpillar said Thursday it could triple its domestic output of construction excavators by consolidating production from an existing factory in Akashi, Japan, and one near Chicago to a new U.S. plant whose location is yet to be determined.

The company doesn't anticipate any negative job impact at the Akashi plant, said Jim Dugan, a Caterpillar spokesman.

By combining the production of most Caterpillar excavator models at a new domestic plant, the Akashi plant would have more capacity to supply excavators to growing markets in the Asia-Pacific region, the company said. In recent years, Caterpillar also has invested in excavator production capacity in China.

For the other plant, in Aurora, Ill., which builds wheel loaders and other machinery, "it's too early to know if there would be any job losses. We would hope to find positions within that facility," said Mr. Dugan. There are about 250 employees in Aurora engaged in excavator production out of a total work force in the plant of about 2,300.

Meeting anticipated demand in the U.S. will outweigh other considerations, like the strength of the U.S. dollar, Mr. Dugan said. "It really is a long-term look at where we think this market and this product is going globally and how can we best get ourselves positioned," he said.

Caterpillar's possible move will likely attract a blizzard of site proposals from state economic development agencies, analysts said.

"Who wouldn't want a big industrial business in their state?" said Frank Manfredi, an equipment market consultant from Mundelein, Ill. "The jobs are good and they pay well."

The U.S. manufacturing sector has been devastated by the economic recession. Industrial companies have lowered overhead by slashing their U.S. work forces, idling factories or relocating manufacturing to low-cost locations overseas.

Caterpillar has slashed about 20,000 U.S. jobs from its payroll since late 2008 as demand for its construction equipment plunged following years of record sales and profit. In 2009, the company's world-wide employment dropped 17% to 93,813.