REVIEW SUMMARY
Company. Carney Properties & Investment Group
Industry. Residential real estate
Key. Following successful real estate entrepreneurs like John Carney could pay off.

John Carney was selling mortgages to low-income borrowers 12 years ago when an investor from Naples approached him to buy foreclosed homes, renovate them and sell them at a profit.

Using borrowed money, Carney turned $16,000 profit in 90 days on the first home he renovated in Cape Coral. “Next thing you know, we’re cranking 10 a month until 2005,” says Carney, 43.

The Cape Coral entrepreneur and president of Carney Properties & Investment Group remembers the day in October 2005 when he realized the market was headed for a fall: Just one house in the entire city was priced under $200,000.

“I got into liquidation mode,” Carney recalls. He laid off all 12 of his employees except his brother, Robbie Carney, and worked the phones himself to sell off his inventory of 50 homes. He bought Robbie a riding lawn mower and dispatched him to cut grass at the homes he rushed to sell, losing money on just the last five he sold.

With cash he saved and lining up investors eager to get back into the game, Carney started buying foreclosed homes again in late 2007. Last year, he renovated and sold an astounding 158 homes in Cape Coral, generating $21 million in sales. That’s a 50% increase over the company’s $14 million in sales in 2008.

“The guy’s a freakin’ animal,” chuckles David Diaz, the company’s chief operating officer, who marvels at Carney’s sense of timing and stamina.

Schooled at Publix
To understand Carney, you have to know where he comes from. Forced to walk five miles home from high school after wrestling practice every day, Carney started stocking shelves at Publix supermarkets to make enough money to buy his first car, a Chevrolet Chevelle Malibu for $550. “I was brought up very tough,” Carney says.

By age 27, Carney was overseeing as many as 450 employees as a Publix store manager, the youngest store manager in the chain. It wasn’t uncommon for him to put in 30-hour shifts and 80-hour weeks at Publix.

Carney ran his stores like an army general, obsessing over every detail and demanding the same of his employees. Behind his back, Carney says employees called him “Little Hitler.”

Publix taught Carney the need to pay attention to detail. His stockroom was sparkling clean and every box was perfectly stacked on top of another. Employees were barred from chewing gum or consuming sodas on the job.

Carney was such a taskmaster that Publix would send him to turn around struggling stores. But as the company grew bigger and more corporate, store managers gradually lost power to fire the slackers and Carney resigned. “I wanted to make a difference for the company,” Carney says.

Life after Publix
When he left Publix at age 29, Carney ran three paper routes to pay the bills. Then, he had short stints as a salesman for Pepsi and Keebler, hating every minute.

But Carney’s entrepreneurial spirits were awakened when he started a job helping people with bad credit get approved for mortgages. By 1997, he was putting together 200 deals a month for entry-level builders such as First Home Builders and Holiday Builders. “We’re crankin’ this beast up,” Carney remembers, a prelude to the boom that ensued.

Then, Carney had a chance encounter with an undisclosed Naples investor who offered him money to buy, renovate and sell foreclosed homes. “He provided the capital and I was the mule,” Carney says.

But the money was expensive. Carney had to give up 10% interest on top of the investor’s 50% share of the profits. “Every time I made a nickel I’d put it into the business to save interest,” Carney says.

Carney’s timing was perfect as prices for homes in Cape Coral boomed. The city has always been a speculative hotbed because of its relatively inexpensive housing crisscrossed by 400 miles of canals. At 120 square miles, Cape Coral is Florida’s second-largest city by landmass.

But Carney realized in October 2005 that prices had outpaced reality when the only home in Cape Coral under $200,000 was a ramshackle wood-frame house. He sold the last of 50 homes he acquired in the boom last July, taking a $365,000 hit on a house on a gulf-access canal. Carney says he only lost money on the last five homes he sold from his inventory. “Most people lost a ton of money,” he says.

Land of foreclosures
By late 2007, banks and other lenders were starting to foreclose on the countless investors who had speculated on overpriced Cape Coral homes, powering the region to one of the highest foreclosure rates in the country.

With the capital he had husbanded through the collapse and with money from some outside investors, Carney started buying foreclosures at the rate of about 20 per month. He now has 51 homes in his inventory, priced just below what a builder can charge for new construction. “Right now, banks are dumping houses,” he says.

For every home Carney buys, he’s looked at about 150 others that don’t pass his test. He sometimes spends double what he paid for the home to renovate it with top-quality materials. “I’m like a woman in a shoe store,” he jokes.

Carney sells most of his homes through real estate agents, who earn brokerage fees equal to what they would sell existing homes. About 60% of buyers are from out of town and about 40% pay in cash.

Few are investors. “All of our buyers are end users,” Diaz says.

Carney is obsessive about every detail, importing tile from Spain and installing granite counters and nickel fixtures. Even the screws on light switches line up in the same direction. “It’s no different from merchandising at Publix,” he says. The company spent $2 million in building supplies last year and has 75 people working on homes at any given time.

Carney changes houses as often as some change cars, selling a home and moving to a new one every three years. “I will not sell any home to a customer I wouldn’t live in,” he says. “I don’t band-aid a house.”

Spending more on a home renovation means Carney gives up some profit, but he says that’s for the long-term good of the company. Anyhow, Diaz says the company’s return on equity exceeds General Electric’s by three times (GE’s return on equity recently was about 10%). “I never worry about Goldman Sachs coming into this industry,” Diaz chuckles.

Carney eyes lots
Competition for foreclosures is heating up and there are now more dispositions than filings at the Lee County courthouse. “There’s money coming into this town to buy homes,” Carney says.

Most of the foreclosures until now have been lower-priced homes and Carney expects the next wave will be higher-priced homes. That’s good, because higher-priced homes are more capital intensive and that will thin out the competition.

Carney has started buying lots because he’s betting builders will start construction of new homes in earnest in about three to five years. “By 2013, these foreclosures are out of here,” he forecasts.

While Carney has benefited from the market swings, he is quick to remind visitors he’s in the market for the long haul. “I care what this place looks like,” Carney says. “What we do makes a difference.”