Builders Curb
Home Buyers'
Quick-Sell Plans
By QUEENA SOOK KIM
Staff Reporter of THE WALL STREET JOURNAL
July 14, 2004; Page B1
For nearly two decades, Joseph Russ has bought houses, rented them out, and then sold them a few years later. With prices now rising at an annual clip of 30% in his hometown of Las Vegas, he's taking a different tack: He's flipping them.
Mr. Russ recently closed on a $269,000 home, and is planning to resell, next month. The 62-year-old retired city planner says a prospective buyer has offered him $349,000, nearly a 30% profit on his investment. But when Mr. Russ also tried to buy one of the thousands of new homes popping up in Las Vegas, home builders -- on the lookout for speculators like him who try to make a fast profit -- slammed the door on him. "One builder had a sign on the door saying 'we're no longer taking investors,' " he gripes.
He isn't the only quick-turn investor to face frustration. Builders in parts of California, Arizona, Virginia and other heated markets are adopting similar antispeculation tactics. Related Group of Florida, a closely held Miami developer, requires buyers to disclose whether they have signed contracts to buy homes in other developments that Related is building -- if so, they may be barred from buying at Related properties. KB Home, a big builder based in Los Angeles, demands that buyers promise to occupy the purchased home for one year.
The home builders' crackdown is a big turnaround from the last housing boom in the late 1980s, when they didn't discourage such practices. Fueled by easy access to capital, home builders went on a developing binge and overestimated demand in part because of buying by speculators. Many builders 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," says JoAnne Anderson, vice president of sales and marketing for the northern California division of Shea Homes, a closely held builder in Walnut, Calif.
There's little doubt that speculative activity is "setting us up for a price correction," in some markets, says John Burns, a real estate consultant in Irvine, Calif. In Orange County, Calif., nearly 4% of homes sold in April had been purchased only in the previous six months. A year earlier, such homes accounted for only 2% of the total sold. In April, the homes bought and sold within six months increased by 54% in Chicago, 66% in Harrisburg, Pa., and 83% in Forth Worth, Texas, compared to the six months prior to April, according to Dataquick Information Systems, a real estate data firm in San Diego.
The increases aren't yet cause for alarm, but they distort the market, economists say. One concern is that when prices cool, investors are prone to dump homes quickly, pushing prices down faster. Buyers who live in their homes are more likely to stay put, which helps keep prices firm, says Raphael Bostic, director of the Casden Real Estate Economics Forecast at the University of Southern California's Lusk Center.
Home builders say they are clamping down on speculators to protect customers as well as their own long-term business fortunes. Speculators can drive down the quality of life in a community because they don't invest as much money in the house or on landscaping as live-in owners. Investors also leave a trail of "For Sale" or "For Rent" signs that can turn off home buyers who think the neighborhood looks like a transient community, says Jeff Mezger, chief operating officer of KB Home.
Speculators are more likely than other buyers to walk away before completing a purchase if the market softens, home builders say. Most large builders start construction on homes after receiving an order, but buyers in California and some other places have a legal right to cancel until the house is finished. Construction of homes can take as long as nine months and if prices haven't appreciated significantly, speculators can simply back out of the deal, leaving the builder with costly excess inventory.
Even in states like Florida, where buyers are bound by purchase contracts, builders are clamping down. Home prices in the state jumped by 20% in May from a year earlier and tales of speculative activity abound. Related is concerned that such spectacular gains are pushing ordinary people -- who don't understand the risks -- into real-estate speculation. Earlier this year, the company started requiring disclosure of a buyer's investments in other housing developments. Related's broker, Related Cervera Realty Services, says it reviews such buyers' financial situations on a case-by-case basis before deciding whether to proceed with a sale.
In April, KB Home rolled out a companywide policy that requires would-be home buyers to sign an affidavit stating they will live in the home for at least a year. Previously, KB Home only required the affidavits in hot markets like Las Vegas. In the past year, Standard Pacific Corp., Irvine, Calif., instituted a similar policy in select markets. Shea Homes has over the past year inserted a provision in its contracts to deter flipping. The clause gives the company the preemptive right to buy back a home at the original price within a year of purchase.
KB Home, Standard Pacific and Shea all say they allow for exceptions in hardship cases of divorce, job loss or medical emergencies. Except for the most unscrupulous investors, most people don't want to risk a lawsuit, they say. Real estate attorneys say the provisions appear to be legal, but they aren't aware of any precedent-setting court cases.
There's evidence that the builders' clampdown is keeping a lid on flipping. Gloria Murray cleared $110,000 in profit after she flipped a condominium in Reston, Va., last month. But when she went to buy another condo in a different project nearby, she backed away because the developer required buyers to live in the unit for at least one year. "What if the market starts to soften and I want to sell the minute it's built?" Ms. Murray asks.
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