>Be Careful Buying Foreclosures In Bulk

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September 24, 2008

There’s a Wall Street Journal story out today warning the public away from buying foreclosures

I have personal friends who have bought several such homes and lost their shirts. It is risky business right now. I would be extra cautious also if someone offered me some shares in a company that specialized in buying and selling foreclosures.

Many investors have been tempted by the idea of buying foreclosed homes in bulk from banks, at a steep discount. But the experiences of a Washington, D.C.-based property investment firm, Redbrick Partners LLC, show it can be difficult to manage a large number of single-family rental homes scattered across a metropolitan area as opposed to all of them in one building as shown below.

Reuters

With the number of foreclosures skyrocketing, banks and other creditors have said they are getting lots of feelers from investors interested in buying large numbers of homes, but few if any large bulk sales have been completed so far. That is partly because of the difficulties of managing lots of homes–two in one city, ten in another, and twenty all over the place in another area.

Barclays Capital estimates that there are 811,000 bank-owned homes in the U.S., up from 129,000 two years ago, and predicts that the total will rise 60% more before peaking late next year. So far, banks typically are selling the homes one by one, through real-estate agents, and to a lesser extent at auctions.

The WSJ story today highlights the problems a company named Redbrick. They had never been in the business of buying up foreclosures in bulk, but due to the economic downturn they got into it and got stung.

They found a widely disbursed number of foreclosures is expensive to maintain until sale or during rental. Of course, the mom and pop rental business where the rental is next door is ideal, where they can fix their own toilets with far less expense than outsourcing the repairs. Owners of rental housing are more motivated than employees hired to do the dirty work,

Though Redbrick was never in the business of buying foreclosed homes, the firm in recent years bought hundreds of properties in working-class areas of East Coast cities including Baltimore, Philadelphia and Trenton, N.J. It hired local managers to handle rentals and maintenance.

Now Redbrick, formed in 2003, has concluded that it is too costly to manage those homes and is trying to sell most of them.The firm has raised a total of nearly $50 million in equity for four investment funds, selling limited partnership interests in them to individuals and institutions. Beware of such ploys. They could go sour in a hurry and if they ever do catch on and make some money it could take years. Why do you think Redbrick is getting rid of them? I have had some experience in real estate investment trusts (REITS). They may even sound interesting at first, but operating costs take up most of the profits, even when the consortium decides to dump a property or a location. Don’t go there.

In Baltimore and Trenton, Redbrick said in a recent letter to investors in one of its funds, “we have not been able to generate positive cash flow from these assets through our internal property management organization and have also been unable to identify satisfactory third-party property managers.” I’ll bet they haven’t.

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