Investors with cash drive Baltimore's housing market

House beautiful, this isn't: The yard is overgrown, the windows are boarded up, there's a big gash in the first-floor ceiling and the roof has holes.

Mark Whitten was delighted. The real estate investor, who looks for homes he can flip to landlords and rehabbers, figured he could immediately find a buyer for the vacant North Baltimore rowhouse, probably someone who would fix it up and rent it out.

"I'm going to make an offer and try to get this property under contract today," Whitten, 29, said as he walked through the derelict home last week. "There's a lot of investors coming into the market, buying up as many houses as they can."

More than half the homes sold in Baltimore over the past six months went to buyers who didn't use bank loans, a sign of how investors are driving the battered city housing market these days. Hard-pressed to get traditional mortgages in this post-bubble era, they're paying in cash, either their own or money tapped from other investors.

This is a city that has years of experience with the extremes of investing, from rehabbers turning shells into showpieces to slumlords letting their properties rot. Investors played an outsized role in the market over the past decade, pouring in from across the country as prices began to spike, helping press values even higher and then — when the market reversed — accelerating the decline as they fell en masse into foreclosure.

A variety of housing-bubble cities along the coasts can tell similar tales. Now they're also seeing a rise in cash deals. Nationwide, a record 35 percent of homes sold in March were paid for entirely in cash, according to the National Association of Realtors. Some of those buyers were regular homeowners, but many were investors.

Moody's Analytics' chief economist, Mark Zandi, sees in this trend more potential for positive results than negative, calling it a mirror image of sorts to the housing bubble.

"I view this as … part of the process of cleaning up the mess that was created during the bubble," he said. "It indicates that we're nearer to the end of this cleanup. … Real cash is willing to put itself on the line in these markets."

The buyers, both mom-and-pop and institutional investors, strike him as a different breed from the make-a-quick-buck speculators who brought a day-trader mentality to the housing market in the mid-2000s. "These investors are in for the long haul," Zandi said.

The number of homes bought with cash doubled in the past two years in the Baltimore region — in the suburbs as well as in the city. But much of the action is inside city lines. The 290 cash deals in the city's housing market in March outnumbered cash purchases in the five counties around Baltimore combined, according to figures from Metropolitan Regional Information Systems, which runs the local multiple-listing service.

Cash buyers make up a big share of the city's housing market. About six in every 10 city buyers paid cash in March, compared with about two in 10 in the suburbs. That's a large part of the reason why the median price for homes sold in Baltimore was just $50,000 in March even though three years earlier it topped $150,000.

It's no mystery why investor money is pouring in: House prices keep dropping while rents are rising. Several years ago, it was practically impossible to buy a home in Baltimore and break even renting it out, let alone profit from it. Now investors can find homes for sale at a price that works — even with renovation costs added in.

"Your cash flow is so much better," said Pablo Simmonds, 30, a full-time investor from College Park who owns rental properties in Baltimore.

Between banks overwhelmed with foreclosures and homeowners trying to do short sales to avoid the auction block, there's a plentiful supply of homes for investors to sift through. That's drawn some first-timers into the mix. The Baltimore Real Estate Investors Association and the Owings Mills-based Mid-Atlantic Real Estate Investors Association each have about 250 members, and both say they're regularly drawing newcomers.

But those in the field say there are unquestionably fewer real estate investors now than there were in the frenzied years of 2004 and 2005, even though there are more cash deals these days.

Alex Cooper Auctioneers used to hold jam-packed events at its Towson gallery every four to six weeks, selling dozens of investor properties each time — most of them financed. Bank representatives lined up to connect the winners with mortgages.

The housing bust, financial crisis and recession put an end to that. Investors say they can't get bank loans to buy and fix up homes. Landlords also report having a hard time refinancing into a mortgage once they're done with renovations and have rented a new acquisition for a profit.

Now Alex Cooper auctions off a "relatively minimal" amount of residential investor properties in a typical month — so few that the auctions are done individually on site rather than together in the gallery, said Vice President Paul R. Cooper. Buyers are mostly paying in cash, just like the investors snapping properties off the multiple-listing service. A lot more people would be investing if banks got back into that line of lending, Cooper says.

Instead, real estate investors are drawing on savings and tapping their own homes' equity — when they have it. They're also turning to other local investors with cash to lend. Such "hard money" loans are short term and usually have interest rates of around 15 percent. The idea is to get in, fix up the house, and either sell or refinance it as a rental. These nonbank loans look like cash at the settlement table and are generally recorded as such, investors say.

"There is a fair amount of capital looking to be invested through these channels, but it's not easy money," said Jim Woodruff, an owner of Private Mortgage LLC in Owings Mills, which makes hard-money loans to rehabbers. Private funders "are being very careful," he said.

In a declining market, rehabbers fixing up dilapidated homes and selling them to homeowners have to be both good and lucky to stay profitable. Between the time they buy and the time they're ready to sell, values are likely to fall further.

"It's very, very commonplace to have a house that will lose money," said Andy Hofert, a former electrical engineer who has renovated homes in Baltimore for 11 years.

More than 40 percent of the city homes lenders were trying to foreclose on in 2010 were investor-owned, according to the Baltimore Homeownership Preservation Coalition. After several years of watching half-finished rehabs and rentals owned by overextended landlords end up on bank-owned rolls, neighborhood advocates are nervously watching today's crop of cash buyers, hoping these investors will be better equipped to succeed.

Cash transactions jumped to 77 percent of all home sales in Belair-Edison in the first three months of this year, up from about 58 percent last year, according to Belair-Edison Neighborhoods Inc., a nonprofit community revitalization group. "That's a little disconcerting," said Mary Warlow, director of programs at the nonprofit.

"My biggest fear is vacancy, and just obvious vacancy," she said. "I'm OK with investment activity, whatever it may be, as long as those properties — even if they're vacant — [are] still reasonably maintained."

Michael Braverman, the city's deputy housing commissioner for permits and code enforcement, is feeling optimistic. The sea change in financing seems to have transformed the real estate investment community, he said.

Anyone had the means to invest when the financing was easy, no matter how inexperienced, "and that created problems," he said.

"For the most part, the folks I'm seeing today are much smarter investors and better developers," he said.