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Investors continue to look for deals in neighborhoods they expect to revive the fastest

When residents in most flooded neighborhoods were just beginning to gut their homes last fall, the signs dotting the neighborhood were tempting: “We Buy Flooded Homes–Any Condition.”

Real estate speculators like Ted Davis blanketed Broadmoor, Lakeview and Mid-City with the fliers, hoping to snap up properties at fire sale prices, fix them and sell them at a premium. “It doesn’t have to be flooded,” Davis said in January. “We just want to buy them at 50 cents on the dollar. That’s our goal, flooded or unflooded, whether it needs work or not. It doesn’t matter as long as we get a decent deal.”

Fast-forward eight months and Davis is still looking for deals among the ruins, but now they’re tougher to find in hot spots that are clearly coming back to life.

“Properties have been going up and up,” said Davis, chief executive officer of Solid Rock Investments LLC. “It is harder to get something cheap. Something that you bought for $100,000 five or six months ago, that same property would be between $150,000 and $200,000 now.”

That’s just one of several surprises in the city’s perplexing new real estate market. Sales volumes and home prices for the metro area spiked dramatically during the first half of the year despite the massive destruction following Hurricane Katrina. The average cost of a home in the metro area surged almost 15 percent to $221,244, compared with $193,097 in the same period in 2005, according to statistics compiled by the New Orleans Metropolitan Association of Realtors.

Speculators or investors?
There are several reasons for the increase, real estate experts say. The lack of housing overall is driving up demand for move-in ready homes. Displaced residents are buying in unflooded areas where properties are commanding a premium.

The average price for a home in dry neighborhoods of Orleans Parish has skyrocketed 26 percent since the storm, according to a published report compiled by researcher Wade Ragas. Prices for homes in damaged areas fell by 48 percent compared with pre-Katrina sales.

Speculators are buoying prices for damaged homes, but industry watchers say it’s too soon to gauge their impact. For one, bargain hunters typically buy directly from owners so the transactions don’t show up on industry listing databases. Yet, some brokers are fielding calls from out-of-state investors, but they say these are rare. Paul Gilmore, president of Paul Gilmore & Associates Inc., says he represents three out-of-state companies and three individuals who have a total of $25 million in damaged properties purchased or under contract since the storm.

“Several of the investors or investor representatives will move to New Orleans…live in one of the renovated properties while they supervise construction and possibly acquire more,” Gilmore says. Latter & Blum Realtor Kelli Wright represents a Washington firm looking to sell 11 properties under renovation. The company bought nine in Broadmoor where flooded homes are selling at 50 cents to 60 cents on the dollar. Wright, who is also the repopulation chairwoman for the Broadmoor Improvement Association, says that company is by far the exception. Most buyers are residents tempted by deals in their own neighborhood. “Broadmoor people are snapping them up,” she says.

Joe Ory, broker for RE/MAX New Orleans Properties, also sees the city’s rebirth in the hands of local investors who are buying few houses–less than five at a time–in neighborhoods where they already own damaged homes.

“It is the small-time investors who are really cleaning the clock here,” says Ory, who singles out Broadmoor as a particularly active area.

Arthur Sterbcow, president of Latter & Blum, agrees but bristles at the term “speculator.”

“They are people that are local. To them it’s not speculation. They feel like they are buying a heck of a deal,” he says. “I’d call it someone who is extremely confident about the future valuation of that neighborhood as opposed to someone who is speculating or rolling the dice and hoping that they are going to come up lucky.”

Risky business
Davis of Solid Rock Investments has purchased 20 homes since the storm. He is buying close to the Uptown area between South Claiborne Avenue and Fontainebleau Drive; he has also bought properties in Slidell and Oak Harbor on the North Shore.

He thought he could repair and flip houses in a matter of months, but demand for workers and materials slowed progress and drove up costs. A house on Vincennes Place that had two feet of water for almost two weeks cost $70,000 to repair instead of initial estimates closer to $40,000. Davis bought the 2,200-square-foot house for $180,000. It recently appraised for $390,000. He expects to put it on the market for $340,000. There is little data for sales of repaired homes.

Few are ready for market because of the slow pace of the recovery and increasing pressure on the construction industry. And many investors aren’t selling because they can make more money renting them out.

Local real estate investor George Ruckman says he is much pickier about buying residential property since the storm. He used to buy two to three homes per month before Katrina. He has only bought three this year.

“I think there are people investing cautiously, not heavily. My purchasing is down quite a bit,” Ruckman says.

Part of the reason is that many investors are trying to repair property they already own. Ruckman owns 44 houses and is working to repair 30 to sell or lease. He chose to repair properties in areas he thinks will recover the quickest–Broadmoor, Mid-City and Lakeview.

He recently purchased two houses in Lakeview and one in Mid-City, where he continues to pursue deals. He sees the area along Canal Street from Jefferson Davis Parkway to the cemetery as ripe for investment.

“That’s where I would place money. I think Lakeview will take a while, and I think prices will be down there for at least a year,” he says.

Like many, Ruckman is waiting to see if repaired homes fetch prices close to their pre-Katrina values. “We don’t kno where that is going to end up,” he says. “If something is worth $200,000 before the storm, will it be worth that again at the end of the day?”

Sterbcow, of Latter & Blum, says the rental market is so strong that monthly rates should more than cover any risk in sales prices. A smart investor can afford to hold a property as it appreciates and charge premium rent in the interim.

He sees Mid-City as a smart buy for rental property. The area has been slower to recover because many residents there depended on the tourism, convention and service industries, which are still struggling. He predicts the tourism sector will begin to improve by first quarter 2007, giving owners enough time to make repairs for future tenants.

“Areas that you might not have ever considered before are phenomenal buying opportunities,” he says.

Mervin Jefferson thinks eastern New Orleans is being overlooked by most small investors.

While some are paying as much as $250,000 for gutted homes in premium sections of Lakeview, he says he could buy five for that sum in rebounding subdivisions in the east. He owns 15 homes that were damaged in the storm and has purchased two since Katrina. He is on the hunt for three-bedrooms in the $30,000 to $35,000 range. His goal is to find the cheapest houses in the most expensive neighborhoods before the storm.

“I’m just taking the chance that it is going to pay off in three to five years,” he says. “New Orleans will come back, why not get in on the ground floor?”