High home prices help offset rising foreclosure rate

Given Hawaii's slowly appreciating real estate climate, more and more investors are turning to distressed and pre-distressed homes where an equity gain may offset their outlays.

In Hawaii and elsewhere, there is a growing pool of folks who buy and sell foreclosure and distressed properties. While Rob and Christina Farrow and David Buck are among those who are dabbling in this trend, there are others who have found career opportunities in this market.

Hilo-based Tom Mitchell, who owns We Buy Hawaii Homes, is in the process of completing his 15th single-family home purchase since 2004.

Mitchell, who doesn't have a real estate background, began buying distressed properties after an ovulation tester that he developed went bust and he needed to find another primary source of income for his young family

Although Mitchell bought three properties after shifting through the multiple listing service, he found his niche when he struck deals with eight owners who were in pre-foreclosure and bought three foreclosure properties at auction.

"It's better for the homeowner and for me if I can work out a deal with them to buy the property before it's been foreclosed on," Mitchell said, adding that every transaction is different but that he is often able to work out an equity split with the homeowner.

"I got into the first deal for $7,000 and I financed it on credit cards," Mitchell said. "That deal gave us both a new start. The family lost their home, but they made enough in equity from the sale to buy a bulldozer and start a new business."

While Hawaii's annual foreclosure rate has continued to run ahead of last year along with the nation as a whole, foreclosures still have a limited footprint throughout the islands.

And foreclosure rates here seem to be improving as activity has begun to level off.

Hawaii had 113 foreclosure filings in November, the latest report from RealtyTrac indicated, or one foreclosure filing per every 4,346 households. The report showed a national rate of one foreclosure filing for every 617 U.S. households.

Experts have said that continued price appreciation and strong demand for Hawaii real estate appear to have insulated the Aloha State from developing the foreclosure-driving market conditions that many mainland markets are experiencing.

"I've seen a rise in foreclosures, but not in business," Mitchell said.

While a softening real estate market has led to more foreclosures, it also has eaten up equity and made short-term sales challenging, he said. For every 20 or so possible foreclosure or distressed buys, Mitchell finds maybe one or two that have enough equity to yield positive cash flow, he said.

"Ask me how I like this market after I've sold the three homes that I have listed on the MLS," Mitchell said. "It's easy to get hurt bad in this business."

While Mitchell is still sitting on three properties, he's made money on all but one investment buy.

"I've lost $10,000 and I've made $100,000 on another deal. This is a very volatile business," Mitchell said. "Usually, I invest about $50,000 and I expect to make half to two-thirds of that back."

Still, it's not easy money for Mitchell or the many other would-be distressed buyers who have begun to hang their "We buy Houses," signs and bumper stickers throughout the islands.

"It's an awful lot of door knocking and working weekends," Mitchell said. "I'm not so worried about the competition. Not that many people are willing to do this much work."

It's also more difficult to make distressed buying pay off in Hawaii, said Honolulu-based real estate analyst Stephany Sofos.

"Home prices are so much higher here that's it's difficult to get a positive cash flow," Sofos said. Softening sales also have caused many would-be investors to shy away for fear that they might have trouble selling the property when they want to change out their portfolios, she said.

However there are still profits to be made for those that are willing to work and can hang in for the long haul, said David Buck, a real estate agent with Re/Max 808 Realty.

Buck recently bought a premium co-op in the oceanfront Diamond Ambassador for $560,000, approximately $115,000 below appraisal, because the mainland owner had overpaid in 2005 -- the peak year of the last real estate cycle.

"He had to let it go for less than it was worth because he needed out of the deal," Buck said. "The people that make money are the ones that buy right."