Vultures in the desert

In her form-fitting power suit, in a beige-toned Calgary hotel conference hall, Nancy Bacon greets a crowd of would-be real estate investors with a question: “How many people in this room like to be told what to do?” Bacon, VP of financial planning development with CBI Group, is flattering the Calgarians in their after-work jeans, who like to think they don’t need Sarah Palin to tell them what a maverick is. And CBI is pitching a scheme only mavericks could love: invest a minimum $10,000 in a foreclosure acquisition fund created to make massive real estate purchases in one of the worst-hit subprime cities in the United States—Phoenix, Ariz.

As of February, prices there had fallen 35.2 per cent in a year, and by slightly more than half from their peak in June 2006, according to the S&P/Case-Shiller index. That annual decline is the worst in the country. One in 40 Phoenix homes received foreclosure notices in the first quarter, according to RealtyTrac, which monitors U.S. foreclosure data, the country’s ninth-highest rate—visible on the desert cityscape as discrete patches of unwatered browns amidst a checkerboard of green lawns.

ALSO AT MACLEANS.CA: For those house hunting in Canada, here’s what you can get these days for $150,000, $350,000, $500,000 and $1 million.

Despite those stomach-churning stats—indeed, because of them—CBI’s Arizona Acquisition Fund of Alberta is aiming to raise $12.5 million to purchase 175 single-family homes around Phoenix. It uses local intelligence, sending teams of scouts at 4 a.m. to assess lender-owned properties slated for auction the next day. A Phoenix property management company will rent the homes—some to the very families the banks have foreclosed upon—for the next five to six years. Then CBI will sell, raking in the appreciation. Investors get six per cent a year on their money and 60 per cent of the net profits.

That is, if there are any profits. Bacon spells out the requisite caveats for the Calgary crowd—that the fund is governed by the Alberta Securities Commission and that it can make no guarantees—but notes the “goal” is to double the capital in four to six years. It’s a target some have taken to heart. “I expect to see the redemption of my $10,000 bond and a dividend of $10,000, and I think I’ll do better than that,” says 60-year-old investor David Boyle, a Calgary civil servant and rental property owner. “In all my years of investing, I’ve never seen anything as good as this.”

But is it too good? For some, banking on a rebound in Phoenix is no gamble. Tom Caldwell, of Gilbert, Ariz.-based Brewer Caldwell Property Management, which rents the CBI properties and provides it with local real estate scuttlebutt, projects a graph of prices on the wall, decades of them—a bouncing India-rubber ball of high times and crashes. Prices, he says, have rebounded time and again. “This time’s different. We’re never going back,” he adds, chuckling. “I’m being a little facetious. I don’t really believe that.”

CBI isn’t alone in seeing gold glittering at the bottom of the U.S. subprime maelstrom. The past year has seen half a dozen such vulture funds spring up. The focus on residential properties may be a Canadian first. Though large institutional investors have ventured south in past crises—in the savings and loan debacle of the ’80s and ’90s, say—they tended to favour land and commercial real estate. “Single-family homes have typically not been an institutional type of investment,” says Jarrett Zielinski, CBI’s vice-president of property acquisitions. “Prices have dropped so low now, and rents have not followed suit, that this type of investment actually has become institutional grade.”

Make no mistake, it’s a high-risk proposition for the average retail investor. And CBI’s backers have been accused of crossing the line in the past. Last year, its principals, Ron and Travis Cadman, came to a $250,000 settlement with the ASC in relation to Keystone Real Estate Investment Corp., of which CBI is an investment arm. Among other things, the Alberta Securities Commision said Keystone ads included “untrue claims with respect to its history of successful past real estate projects,” and that, in contravention of Alberta securities laws, other promotional materials failed to mention the Cadmans’ past bankruptcies. Zielinski acknowledges the trouble, citing poor legal advice. 

Now CBI’s on the road, offering small businessmen, retirees and dentists a share of the action. So is Calgary-based Optimus U.S. Real Estate Fund, which is seeking to raise $30 million to buy condos and garden apartments in Phoenix, Las Vegas and Sacramento, with a parallel venture looking at commercial properties in Denver and Austin. Senior adviser Dan Silvester, a 30-year real estate veteran, has taken advantage of previous downturns—but none this deep and never targeting homes. “You could buy a Tahoe truck for what they’re paying for condos,” says Silvester, who helped acquire U.S. outlet malls for his employer in 1990. “I’m pretty confident these cities are going to come back. I’ve seen it before.”