The Silver Lining Strategy

In a bear market, there are lots of good buys — you just have
to know where to look

“The market is strong and steady,” says real estate developer Tim Welbes.

Obviously, those are words that would make many real estate brokers, homebuilders, and buyers and sellers jealous, or certain that the speaker was crazy. But the truth is, while the subprime debacle has been a drain on the economy and a cause of pain for many, it’s not the whole story. Certain areas of the United States, and the rest of the world, are enjoying a solid real estate market, and there are unique investment and second-home opportunities out there, if you know where to look.

As co-president of the Woodlands Development Company, Welbes follows the news in real estate with a passion. He says that whenever he sees a television report or reads a news story these days, he notices something missing: reporters never seem to mention the region he calls home. “I see these national stories, but they rarely show Houston,” says Welbes, whose company developed The Woodlands, one of Texas’ first master-planned communities, located about 30 miles north of downtown Houston.

Welbes believes that Houston, and Texas in general, has a story to tell when it comes to real estate, one that is quite a bit different from the unremittingly sour news coming out of much of the country. Business at The Woodlands — which, as a master-planned community, includes not just housing, but schools, churches, parks, shopping, and office space — is brisk, with sales actually up from last year.

Crowds gather for the premiere of the Fountains At Waterway Square, located in The Woodland, Texas.

The silver lining to what is inarguably a troubling real estate market overall isn’t limited to certain regions, either. For instance, one of the upshots of the subprime mess is likely to be a much-needed strengthening of the criteria lenders use to evaluate applicants. As Daniel Tobin, a partner at the national law firm Ballard Spahr Andrews & Ingersoll, points out, the fact that lenders no longer want to churn out as many loans as possible in order to sell them to capital markets is a good thing. “Lenders are going to go back to more old-fashioned ways of doing business and are being more careful about the types of loans they make,” he says. “That’s very positive for all of us.”

Investing 101: Look for Regional Strength

Still, while systemic changes like those may take some time to benefit everyone, there are places, many of them in Texas, where real estate is doing just fine. Robin Parsley, CEO of Endeavour Holdings, a company that specializes in waterfront developments, recently attended the Corpus Christi boat show and was surprised at the large contingent of residential real estate developers who showed up. “It was a funny thing, but there were probably 20 booths of developers there showing off current projects,” says Parsley, whose own developments include Endeavour Clear Lake, a luxury high-rise — complete with 24-hour concierge services, valet parking, a movie theater, and a heated infinity pool — southeast of Houston, near NASA’s Johnson Space Center. For his part, Parsley has seen strong sales at existing developments, with buyers coming in from places like California, and he also has a number of new projects moving ahead, including a mega hotel, condo, and marina development in Galveston.

Beachfront property in South Florida will always be attractive to real estate investors and buyers.

So why such a different real estate picture in Texas compared with other U.S. regions? One big reason is that, unlike on the East and West coasts, Texas never had a big spike in home prices. “While either coast had a run-up in price and demand, Houston didn’t have that,” says the Woodlands Development Company’s Welbes. “Our average annual home price increase for the past 20 years is in the 4 percent range.” That means real estate speculators were never tempted to overbuild — there was just no way to make the kind of quick windfall profit that became possible elsewhere. “The man on the street pooling money with his friends to buy a condo and flip it without ever occupying it never happened here,” Welbes adds.

Also keeping the Texas real estate market strong has been a vibrant economy, particularly in Houston, where, much to the chagrin of America’s motorists, the steep price for a gallon of gas has kept the energy industry flush with profits. The current boom, and the ripple effect it has caused throughout the regional economy, has created lots of jobs and kept demand for housing steady. Also helpful, says Welbes, has been an influx of newly minted baby boomer grandparents. “The baby boom generation seems to have the grandparent gene,” he says. “The desire to be very near grandkids is fueling a lot of home sales for us.”

Market Opportunities

For almost 30 years, Hugh Bromma has been a diligent student of the real estate market. Bromma, founder and CEO of the Entrust Group, a nationwide administrator of self-directed retirement plans, has long helped customers utilize real estate as a way to improve their retirement prospects. Recently he was at a conference in Las Vegas and ran into a colleague, now in his 80s, who has been a real estate investor since 1963. The man was far from glum; in fact, he was ebullient. “He has been through many of these [real estate cycles],” says Bromma. “He was having a ball, saying that another great opportunity has arisen.”

For investors and people seeking a second home, there are increasingly appealing options, although, as with any investment, the key is being in a solid enough position to take advantage of them. Bromma points to south Florida, one of the areas hit hardest by foreclosures, as having a glut of suddenly affordable property. “Values have dropped, so people are looking at bargains available in Florida,” he says. “We’re talking about 40 percent to 50 percent reductions in price [in some areas].”

The golf course at the Trump International Golf Club
in Puerto Rico

It’s one thing to see this as an opportune time to purchase a second home in a previously unaffordable location. But to think about real estate properly as an investment opportunity does require something of a mental shift. Leslie Tyler, a vice president of marketing at the nationwide real estate broker ZipRealty, says that while there are plenty of good areas for real estate investors these days, investing successfully now requires a longer time horizon. “If you are trying to buy the house and paint the cabinets and sell it for a profit next month, that’s not going to happen. But it could work to buy some duplexes, put some money in them and rent them out and manage them as investment properties over a long period of time,” she says. “It’s a different type of investment.”

It’s not just investors and those looking for second homes who can find a silver lining in the current real estate morass. Tyler also points out that people in the market for a new, long-term primary home — whether as the result of a job relocation, to get more space, or to move into a better school district — are also in a good position, particularly in areas where people are eager to sell. “It’s a good time to buy, if you can get financed, because [there’s less] competition with other buyers,” she says. “You have more power to negotiate with sellers.”

Whether you’re buying a home for an investment, a vacation home, or a primary home — or, in fact, whether it’s a bargain price or a purchase during a boom market — one thing buyers need to remember is to do your due diligence, something Bromma says very few investors do. It includes actually visiting a piece of land or a home. At times, it is tempting to jump at a really great deal sight-unseen. Bromma says that happens more than you might expect. “Number one, see what the property is. Know what market you’re buying into, and visit that market and spend a week or two if you’ve never been there,” he recommends. “Get good local advice from real estate professionals and look at market trends, like what values have done over time. Those are the primary things, and investors mostly fail to do them.”

An interior at Trump Ocean Club in Panama

Looking Beyond the Border

Jack Studnicky is glad he doesn’t have to focus on making real estate sales in the United States. A vice president with the Miami-based luxury broker International Sales Group, Studnicky fixes his attention on drawing buyers to the Trump Ocean Club in Panama City. “The U.S. is flat,” he says. “We are making scant sales, and the sales we are making are at discounted prices, as much as 40 percent less than 2005.”

Not so overseas. For instance, Studnicky says that sales for the Trump Ocean Club — a high-end development with a hotel, casino, residences, marina, and spa, located right on the water on Panama City’s Punta Pacifica peninsula — broke records this past March, and then again in April. “We are selling at great speed, and a lot of that has to do with the fact that Panama is a hot market.”

Indeed, Panama — like much of the rest of Central America and the Caribbean, including parts of Puerto Rico, the Dominican Republic, Belize, Costa Rica, and even Honduras and Nicaragua — is still very much in the midst of a development boom, as American baby boomers look for investment properties or an affordable place to retire and Europeans seek to take advantage of their strong currency to snap up bargains.

Panama is currently a popular destination for investors and buyers for many reasons, including good infrastructure, a stable government that offers generous incentives to both developers and expatriates, and, thanks to the Panama Canal, a high level of familiarity with foreigners, particularly Americans.

The Isla Main resort, residences, and marina, on the
Caribbean coast

Richard Kiibler, a vice president of operations with Six Diamond Resorts, says it was that stability and inviting atmosphere that led his company, which is in the process of going public, to launch its Central American activities in Panama. An even more compelling reason to launch in Panama, he adds, is the country’s spectacular natural settings — from the mountain highlands near Boquete to Panama City, which has been compared to Miami for its culture and vitality, to the quiet tropical islands of Bocas del Toro in the north, near the Costa Rican border.

Six Diamonds’ first project in Panama, Palacio del Mar, will be in Bocas del Toro, on a strip of land between Almirante Bay and the Caribbean. “You can come out on your front porch and see the sun rise over the beach, and you can go to the back and watch the sun set,” Kiibler says. “It’s a spectacular piece of property.”

Although Panama is attracting a lot of attention and investment dollars today, it was preceded in popularity by Costa Rica, which initially attracted Americans because of its inexpensive real estate and incredible ecological attractions, including lush rain forests. (Amazingly, this country, with only about 0.01 percent of the world’s landmass, holds 5 percent of its biodiversity.) Costa Rica has been so popular, and so effective at attracting investors and second-home buyers, that prices spiked to the point where people started venturing into Panama and elsewhere around the region, looking for better deals.

Palacio Del Mar is just one property that takes advantage of Panama’s natural beauty

But according to Will Roadhouse, founder and CEO of the real estate consultancy Compass Group International, the downturn in the United States has had an impact on prices in Costa Rica, since fewer Americans are able to tap their equity in order to pay for homes there. “Everyone was riding the boom of the real estate market, and then developers were increasing prices,” says Roadhouse, who oversees projects in Belize, Mexico, Costa Rica, Nicaragua, Panama, and the Dominican Republic. “Ocean-view condos were in the high $300,000s [in Costa Rica], but now things have slowed down and developers are lowering their prices to where they should be.”

Still, while some prices are going down, there is plenty of development activity continuing. Until recently, virtually all oceanfront projects in Costa Rica were on the Pacific side. Now, though, a project called Isla Moin, which will have a combination of high-density condo residences and larger luxury homes as well as a marina and a host of other high-end amenities, is being built on the Caribbean coast.

In addition to its location alongside the water and adjacent to a lush forest, Roadhouse says Isla Moin is also unique because it is geared toward attracting a range of buyers. “What makes it interesting is that there is a flavor for everyone,” he says. “The price points range from the high, mid, to lower markets. Nobody really does that.”

Of course, you don’t have to look outside the United States to find a silver lining to the real estate market. Then again, if it means searching while on a Caribbean beach or on a hike through a rain forest, you might just want to.