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Below is one of two articles in this weeks Columbus Business First where Rich Kruse of Gryphon is relied upon as an industry expert.

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Utah investors hunting for house bargains

Business First of Columbus December 12, 2008 - by Brian R. Ball and Lucy May

A Utah investment group has bought 137 foreclosed houses in five Ohio cities as part of a plan to purchase 1,000 housing units in the state by the end of next year.

JD4 Investments LLC of Pleasant Grove paid about $65,000 since June for seven single-family properties in Columbus and two in Clinton Township. It has 20 other houses in contract or is transferring ownership, with plans to buy as many as 100 homes in Central Ohio.

JD4 partner John Sorensen said the partnership has 200 properties in contract in Columbus, Toledo, Cleveland, Dayton and Cincinnati. It is buying about 60 houses in Michigan, where it owns about 250 properties, and has 100 lined up for acquisition in Indiana.

Sorensen said JD4 chose Ohio and Michigan because the states have been hit hard by the foreclosure crisis and their economies are weak.

"The housing market is really the pits in Ohio right now," he said. "We're trying to help see if we can stimulate the economy."

Bargain basement

Sorensen and his partners, many connected through the Real Estate Investors Club of Utah County, have spent more than $10 million on hundreds of houses, condominiums and apartment buildings over the past six months in the three Midwestern states and Texas.

According to the Franklin County Auditor, the most they have paid in Central Ohio was $17,436 for a house at 4766 Huxley Court on Columbus' east side. The cheapest house in their portfolio was at 2382 Howey Road in South Linden; the partners paid $3,072 paid for it.

In one June deal, JD4 bought four properties for a combined $21,866, or an average of less than $5,500 per house.

Sorensen said Fannie Mae, the government-sponsored mortgage company, had foreclosed on all the properties before JD4 won bids for them.

"We're trying to get it so we're buying properties at reasonable prices," he said, "then sell them at a huge discount (compared with the broader market) or lease them at a reasonable rate."

A Columbus marketer of distressed real estate said groups like JD4 compete against hedge funds and large investors hoping for deals.

"They're buying it on the cheap and doing some repairs," said Rich Kruse, president of Gryphon USA Ltd. "In two or three years they may sell when the market rebounds."

Kruse said Fannie Mae and banks sell foreclosed properties at heavy discounts to avoid the cost of managing the vacant houses. Getting rid of them at fire-sale prices, he said, "ends up being cheaper."

That offers a high rate of return if investors can rent at $500 a month for a home costing $20,000. Money can be made even if some of the homes end up as complete losses.

"It's a risky play, but it's a calculated risk," Kruse said. "When you look at the cash flow, maybe it's not so risky."

JD4's properties in Columbus are single-family homes in low-income neighborhoods, though Sorensen said the partners didn't set out to focus on urban neighborhoods.

They originally were inspired by the events following Hurricane Katrina in 2005. Sorensen said he and his partners bought properties in Texas to help house Louisianans displaced by the storm, getting contributions from all over the country to help cover their costs.

JD4's goal has expanded, Sorensen said, to help people seeking housing in the wake of the foreclosure wave, while at the same time giving the economy a boost.

"We've invested in real estate for a while," he said. "We thought, ‘I wonder if we can do something? How can we take those so it's a win-win, and make a little bit in the process?' "

Ownership goal

Many of the properties JD4 has purchased are distressed, with thousands of dollars of city fines, back taxes and fees owed on top of the cost of repairs. Four of the seven Columbus properties, for instance, had building code violations, according to the city Department of Development.

Sorensen expects about 10 percent of JD4's houses could be demolished or donated to churches and nonprofit groups. Another 10 percent will be repaired and put back on the market within months, he said, with about 40 percent of the portfolio resold by late 2009. The remainder will be renovated and held longer as rentals.

"I don't want the rents," Sorensen said. "I want someone to come in and eventually buy them."

Sorensen said JD4 prefers not to sell to investors that will rent the properties. "Otherwise, you end up with the same problem (the market) has now," he said.

Sorensen said JD4 could face competition from investment groups with Wall Street financing as the lending market improves, which could raise prices.

In the meantime, he said his partners likely will continue to avoid multifamily deals other than the occasional duplex.

"We're not getting into any of the apartment complexes," Sorensen said. "More people are willing to buy those as investments."

Lucy May is a reporter for the Cincinnati Business Courier, an affiliated newspaper. bball@bizjournals.com and lmay@bizjournals.com