Doors Close for Real Estate Speculators
After Pushing Up Prices, Investors Are Left Holding Too Many Homes
By Kirstin Downey
Washington Post Staff Writer
Saturday, April 22, 2006; A01
Investors who sought quick profits buying and selling real estate in
the Washington region are in full retreat, dampening demand for homes,
most notably for condos.
What is becoming apparent, market watchers say, is how big a part
speculators played in the region's real estate boom of the past few
years. Not just condominiums, but also townhouses and single-family
houses, were snapped up by investors using no-money-down financing and
non-traditional loans. They helped send prices soaring at
unprecedented rates. And now many are trying to sell, or rent at a
loss. Some may eventually dump properties at low prices to get rid of
them. That could weigh down values for everyone.
Sales of new condos fell 43 percent in the first quarter of the year,
compared with the first quarter of 2005, according to one report, and
there are almost four times as many existing condos for sale than last
"We think the softness of the market is largely due to the pulling out
of investors," said Gopal Ahluwalia, staff vice president for research
at the National Association of Home Builders. "They have not only
pulled back, they are canceling purchases."
David Bath, a retired dentist in Reston, rode the boom up. A condo he
bought in Vienna for $97,000 sold for $250,000 in a single day. He was
able to sell another condo in Herndon for an even bigger profit.
Now he wants out. He has had no luck finding buyers for two investment
houses and a four-unit apartment building he owns in Florida. He has
been stuck making mortgage payments on vacant houses that took a lot
of time and money to repair.
"It's a lot of work and I don't see the returns anymore," he said.
"I'm going to the table to cash my chips in."
While condominiums were the product of choice for investors, luxury
neighborhoods also fell prey to real estate speculation, leading to
the prospect of price drops even in affluent subdivisions.
"Here we had it even in $1 million homes," said Kenneth Wenhold,
Virginia and Maryland director for Metrostudy, a real estate
Robert Toll, chairman and chief executive of Toll Brothers Inc., which
builds luxury homes, said in a recent conference call with analysts
that the Washington market was the hardest-hit in the nation by
investors who bought properties intending to flip them, and who have
put the homes up for sale. "We can feel the impact of speculative play
coming back into the market," he said.
Nobody knows exactly how much of the real estate boom was driven by
investment and speculation. Experts say that between 15 and 30 percent
of all purchases were made by investors, rather than by people who
bought homes intending to live in them. Some bought the properties for
cash, sometimes with equity they pulled out of their own homes, so
there is no loan record. Other buyers pretended on loan applications
that they would live in homes they really intended to flip, so that
they could qualify for better loan terms or get around developer
restrictions on investor-buyers.
Some projects became particular investor magnets, and, more recently,
the subject of real estate blogs criticizing speculative excesses. For
example, the local Internet blog Bubble Meter focused last month on
what it called "the bubblicious bench." At one recently completed
condominium called the Halstead at Dunn Loring, a luxury condominium
complex in Fairfax County, a park bench outside the building bristles
with real estate agent lockboxes to permit vacant units to be shown to
prospective buyers or renters. On a recent morning, there were 49
lockboxes there, outside a building that has about 200 units.
Manuel Tagle, a real estate agent with Fairfax Realty in Falls Church,
is representing two units there, both owned by investors, one of which
is for sale and one for rent. He owns a unit there himself, which he
has rented out.
"There's a very high concentration of investors," he said. "I have
seen a lot of investors selling now. They see values going downhill."
The prevalence of investors -- and now their disappearance -- is
causing real problems for owner-occupants who want to sell, sometimes
against competitors willing to cut prices substantially because of
profits they made in 2003 or 2004. Mike Pugh, a real estate agent with
Re/Max Allegiance in Arlington, is trying to sell a condo at the
Halstead for a woman he says bought it for her retirement home, then
became ill and went to live with family. Pugh said his client, who he
believes was one of the few purely owner-occupants in the complex, is
likely to lose money she had saved over a lifetime.
"We aren't investors, but we are being punished by the market as
though we were," he said.
They face plenty of competition. Delta Associates, an Alexandria real
estate research firm, said there are about 25,853 new condos being
marketed locally now. But only about 1,996 new condos were sold from
January to March, down from 3,520 in the first three months of last
year. And the area's multiple-listing service, which lists mostly
previously owned properties, showed about 5,500 condos and co-ops for
sale in March in Washington and the close-in suburbs. That was about a
fourfold increase from about 1,400 listed in March 2005 with the
service, Metropolitan Regional Information Systems Inc.
Some developers are struggling to sell units in the face of
competition from the investor-buyers who want to dump the properties.
Many had sought to protect themselves against an invasion of investors
for just this reason.
A National Association of Home Builders survey of builders last year
found that about 52 percent of builders tried to sell only to
owner-occupants, 33 percent prohibited renting the unit out during the
first year after settlement, 29 percent declined to make multiple
sales to people with the same last name and about 28 percent kept the
right to buy back the unit at the same price if the owner sold in the
But many failed to ferret out investors or could not resist the buzz
of a fast sell-out when speculators flocked to purchase. A quick sales
pace allowed the builders to ratchet up prices more quickly for those
who got to their doors behind the early birds.
Speculative buyers at the hottest part of the market were able to put
down a $20,000 deposit on an uncompleted unit, then close on the
transaction and sell it to someone else the next day, pocketing
$60,000 or $70,000.
That spawned a "get-rich-quick" mentality, said real estate agent
Frank Borges Llosa, of FranklyRealty.com, who said that the people who
got in earliest made the most money, while those who came later are at
greater risk. Unlike with stocks or bonds, which can simply be sold, a
seller of real estate has to find a willing buyer or renter because a
mortgage obligates the owner regardless of the value of the asset.
"People who got caught are in trouble," Borges Llosa said.
Some investors are holding on to the properties they have, but they
are not expanding their empires. Ruben Cuya, 37, a Peruvian immigrant
who works as a quality control technician at Cuisine Solutions Inc. in
Alexandria, bought his first rental property, a townhouse in Lorton,
in 2002, using the equity from his own home for the down payment. Then
he bought an additional rental property in that same way each of the
next two years.
"This year I'm not buying," Cuya said. "It's not a good year to buy."
The situation has made home shoppers more wary about making purchases.
Real estate agents say many are so leery about where prices are headed
that they are engaged in a kind of stare-down with sellers as they
seek to negotiate for lower prices and more concessions.
"The buyers are there, there are people who want to buy," Borges Llosa
said. "But they see no immediacy to buy now versus next week."
Some buyers are even walking away from transactions. Lawyer Angana
Shah, 36, almost bought a new one-bedroom apartment in Adams Morgan
last month for $454,000, but as the settlement date approached, she
found herself "petrified" over the high price and worried that values
Then, during the walkthrough, she learned the place was smaller than
she had been promised. The developer was unwilling to cut the price,
so she decided to walk away from the sale and got her money back. She
was glad she did because prices have flattened and she can now afford
a two-bedroom instead.
"I don't want a one-bedroom anymore," she said. "I want a two-bedroom.
Now people are begging people to buy one-bedrooms. The market is
better. I couldn't have bought a two-bedroom last fall and prices for
one-bedrooms are falling."