Investors Flipping Over Second Homes

Second-home purchases helping to pace real estate boom
RISMedia
Houman Sarmasti took up a new hobby a few years ago: flipping real estate.

Sarmasti began putting down deposits on condos and town houses before they were built and then cashed them out as their value appreciated. The 33-year-old electronics distributor says he has pocketed more than $160,000 by buying and quickly reselling homes in Teaneck and Edgewater, New Jersey, and Cocoa Beach, Fla.

He recently put a deposit on a $399,000 condo at the planned Grand Cascades Lodge condo-hotel, part of the Crystal Springs golf resort in Sussex County. Sarmasti isn’t sure whether he’ll flip the new condo or keep it as a weekend retreat, but he’s confident things will work out fine.

“I don’t see how you can lose money,” he says. “You might not gain a lot, but I don’t think you can lose, especially the way real estate is going.”

That faith in real estate values has convinced an ever-growing number of homeowners that one home is just not enough. And this surge in second-home purchases is helping to pace the real estate boom, while raising concerns about a bubble nearing the bursting point.

More than one-third of all American homes purchased in 2004 were for investment or vacation purposes, according to a recent study by the National Association of Realtors.
And buyers are increasingly taking on debt for the properties. Federal Reserve Chairman Alan Greenspan, who has warned of “froth in certain housing markets,” noted last month that “mortgage originations for second-home purchases rose from 7 percent of total purchase originations in 2000 to twice that at the end of last year.”

There is evidence the trend is especially strong in New Jersey, with its wealth and vacation destinations. In Atlantic and Cape May counties, about 38 percent of mortgages this year were for second homes, according to LoanPerformance, a subsidiary of First American Real Estate Solutions. Only Myrtle Beach, S.C., and Naples, Fla., have a higher percentage of second mortgages, the company says.

And the second-home market isn’t limited to vacation communities. Investors are buying houses and renting them out. Couples are deciding that rather than drive into Manhattan for that occasional night on the town, or even renting a hotel room for a special weekend, it makes more sense to own a little pied-à-terre. Still others, like Sarmasti, are investing in homes before they are even built.

But this enthusiasm for second homes has risks -- for the buyers and for the national economy. This market niche involves a lot of speculation and volatility, and some fear that the desire for quick profits could distort the entire housing market.

“It’s the expectation that prices will continue to rise that leads people to spend much more than they otherwise would,” says Dean Baker, co-director of the nonprofit Center for Economic and Policy Research in Washington, D.C.

“In the past, a typical buyer might have looked at a place listed at $400,000 and said, ‘Can I afford $400,000?’ If the answer was no, they wouldn’t buy it. Now, if they think they can sell it for $600,000, it’s a different equation.”

Economists say several factors in the owner-occupied market have traditionally limited volatility. First, it’s much harder to sell a house than, say, a stock portfolio. If you sell a home, you’ll need to find a new place to live, and the cost -- including commission, legal fees and moving expenses -- can be discouraging.

Last month, Greenspan told bankers that speculative second-home sales are “not restrained to the same degree -- an individual can sell without having to move.” He said speculative activity most likely has played a significant role in driving up prices.

Perhaps nowhere is the speculative fervor as great as in South Florida, where huge profits can be made by selling pre-construction condo contracts. The practice is so popular that Miami real estate agent Mark Zilbert launched a Web site, condoflip.com, this past summer. It will allow buyers from around the world to bid in real time on construction contracts for Miami condos that haven’t yet been built.

Thousands of new condos are going up around Miami, and a large proportion of people with deposits on the units -- mainly from the Northeast U.S., Europe and South America -- have no plans to move in, Zilbert says.

Zilbert predicts his Web site will add to the pool of potential occupants, which needs to expand to justify the growth.

“All the people who bought have a clear expectation that there are other people here to buy it from them,” Zilbert says. “But that’s not necessarily true. The amount of condos that are going up is not driven by demand, it’s driven by hope.”

Even some developers are concerned about the trend.

They fear that when a 40-unit project is complete, 10 families may be moving in but 30 owners will be putting up for-sale signs, looking for a quick profit and dampening the local market for future development.

In New Jersey, builders who encourage owner occupancy talk about a common cat-and-mouse game where speculators scoping out a project act as if they plan to live there -- perhaps talking about play areas for the pet, or a nice place for the computers -- without ever intending to move in.

Some large builders such as Red Bank-based Hovnanian Enterprises have added provisions to pre-construction contracts that prohibit resales within the first year. Hovnanian’s contracts also require flippers to return any profits to the builder.
Meanwhile, plenty of buyers simply intend to hold two properties for a while.

Michael Rodriguez, 32, of Hoboken, recently put a deposit on a one-room condo still under construction in Asbury Park. Rodriguez says he has heard the condo has already appreciated since he put down his deposit in July. And he figures the condo is likely to keep appreciating because there’s only so much shoreline to develop.

But regardless of the market, Rodriguez says he’s thinking more about the long term.

“My wife and I will most likely use it as a summer home,” Rodriguez says. “Eventually we’d like to move down to Asbury.”

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