Insurance and Education & Workforce Development and Real Estate & Retail

Home investors fill portfolios with bricks and mortar: Membership in local investor group grows; national trend, foreclosures are playing a part

February 27, 2006

Mike Wilson recalls going to meetings of the Indianapolis Landlords Association in the late 1990s and listening to a "good old boys club" talk about property management problems such as how to fix toilets and get rid of cockroaches.

"They were managing properties, not buying," said Wilson, who at the time had just started purchasing single-family homes as investments.

With a hunger for knowledge and a hunch that there were others like him, Wilson took a spot on the board of the association and set about to change it with a few other like-minded investors.

Today, the organization, since renamed the Central Indiana Real Estate Investors Association, boasts more than 600 members, up from about 50 when Wilson started attending.

Plumbing and pests aren't on the meeting agendas anymore. Instead, local and national speakers discuss topics such as bank-owned homes, finances, negotiations and economic trends.

Organizational changes fueled some of CIREIA's growth, but Wilson gives much of the credit to a national trend: A lot more people are investing in real estate these days.

CIREIA's not the only evidence of that. Several other groups, including Indy Property Investors, Indianapolis Real Estate Exchangers and the newly formed Indiana Real Estate Investors Association Inc., have sprung up in recent years to provide education and networking for a growing number of investors whose deals are typically counted in tens of thousands of dollars, rather than millions.

In Indiana, such investors might also be encouraged by a steady supply of distressed homes, courtesy of the state's nation-high foreclosure rate. Local investors disagree on how much that affects the number of people looking to profit from foreclosed-upon homes, but several said it is a growing part of many investors' businesses.

"That's a large part of it," said Raymond Modglin, a local investor known as "The Real Estate Monkey" and host of "Real Estate with Raymond" on WXNT-AM 1430. "Some home buyers and rehabbers go to a sheriff's sale and buy four or five homes, then sell them as a lease option or land contract to somebody who has bad credit."

Sheriff's sales, monthly auctions of foreclosed homes, typically include 300 to 600 homes in Marion County. If a property doesn't sell at the auction, the lending bank becomes the owner.

Other home investors have recently made a specialty of preventing foreclosures, Modglin and Wilson said. Once a bank has filed a lawsuit seeking foreclosure, these investors offer to, for a fee, negotiate with the bank on behalf of the homeowner to accept a buyout. The investor then takes ownership of the home and makes a rent-to-buy arrangement with the homeowner, who becomes a tenant in his or her home.

Such arrangements can benefit the bank, which gets a potentially money-losing loan off its books; the homeowner, who avoids foreclosure; and the investor, who makes a profit from the upfront fee and the rent-to-buy contract.

The residential real estate climate in Indiana is also starting to attract investors from other states, several in the industry said. Although home values appreciate slower here than in many parts of the country, they appreciate steadily, luring investors who fear the home bubble is about to burst in hot markets on the coasts. A relatively large number of downright cheap foreclosed-upon homes-some for less than $50,000-is also attractive to out-of-state investors.

"There's an enormous amount of opportunity here," said Wilson, now the treasurer of CIREIA and president of IREIA, the new statewide group. "It's driven a lot of people here from Nevada and California who have made $600,000 or $700,000 on a house. ... They can come here and buy a house for $40,000."

Stocks vs. homes

When the stock market went south in 2001, individuals of modest means joined multimillion-dollar pension funds in yanking money from stocks in favor of the seemingly more stable real estate market.

"Anytime you get violent swings in the market, people pull out of stocks," Wilson said. Faced with a decision of where to invest, many people choose real estate, he said. "It's easy for a $100,000 stock to drop to $50,000 overnight. You don't see a $100,000 house drop to a $50,000 house overnight."

In the commercial market, a flood of investor money has pushed up prices on prime properties such as office complexes and industrial portfolios. In central Indiana, local investors have been priced out of the market by competitors from the coasts drawn to the Midwest by higher yields, lower prices and more stability than they can find in top real estate markets. In 2005, several Indianapolis properties changed hands at prices never before seen in central Indiana.

That hasn't happened in the residential market, however. Local residential investors say Indiana has a steady supply of distressed homes, both in older innercity neighborhoods and in new subdivisions where low interest rates and builder incentives entice home buyers who later discover they can't really afford to own a home.

Lenders and real estate groups continue to study why Indiana, along with Ohio, continually leads the national pack for foreclosures. In the third quarter of 2005, the most recent data available, 2.7 percent of all home loans in Indiana were in foreclosure, according to the Washington, D.C.-based Mortgage Bankers Association. That's down from 3 percent in the first quarter of 2003, but far above the 1.5 percent in early 2000.

By comparison, California in recent years has had a foreclosure rate of less than 1 percent.

The state's high foreclosure rate also helps provide a ready pool of tenants for home investors who choose to be landlords, local investors said. It's not uncommon for an investor to buy and rehab a foreclosed property, then rent it to someone who was forced out of a different home by foreclosure.

Focus on education

Despite a plethora of real estate gurus advertising easy money and a road to riches through real estate on late-night infomercials, most real estate investors quickly discover making money in real estate, like any other profession, requires hard work and education.

When Wilson started investing in real estate, he spent three or four hours every night educating himself on issues like insurance and setting up corporations. Modglin spent a year after leaving his corporate job traveling to seminars and workshops on real estate investing before he started buying in earnest.

They and others say one of the main goals of not-for-profit investor groups like CIREIA is to share knowledge.

CIREIA and Indy Property Investors both hold meetings twice a month. One meeting typically features a speaker on a particular topic. The other meeting is a "teaching" or help meeting, where individuals can ask the group for help on everything from how to write leasing contracts to where to get for-sale signs, said Randy France, co-founder of Indy Property Investors.

Both France's group and CIREIA are members of the Indiana Real Estate Investors Association Inc., started in late 2003. IREIA will hold its second statewide conference for its two dozen member organizations March 3-5 at the Indianapolis Marriott East.

More than 200 people are expected to attend the conference, which includes breakout sessions on topics such as helping tenants restore their credit, estate planning, the multifamily market and taxdeferred 1031 property exchanges.

It's a far cry from the days of meeting to discuss toilets and cockroaches, said Matt Griffith, who serves with Wilson on the IREIA board.

"The emphasis is to distinguish members of this group from the stereotypical slumlord," Griffith said. "The point of these groups is to establish a level of professionalism that benefits everybody."
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