BluefoxToday blog : Big money investors buying foreclosures in bulk - a caution flag?

Big money investors buying foreclosures in bulk - a caution flag?

 

Rockville Townsquare, MDThe housing market continues to display signs of slowly shedding its recent bad reputation and is actually gaining real recovery traction. Prices in many areas are firming up and even rising, listing inventories are shrinking, permits for new homes show improvement and mortgage money is still quite affordable, so long as the applicant manages to qualify under today’s rigorous underwriting guidelines.

 

Life seems to be good in the real estate business. And predictably getting better.

 

At least that’s what large investors like equity shops and hedge funds, among them Blackstone Group, Apollo Global Management and Colony Capital, firmly believe. They are now moving in aggressively to purchase REO – real estate owned - single-family houses in bulk in states such as Arizona, California, Florida and Nevada, the original four who were mauled rather severely when the infamous housing bubble let out all its hyped-up air. The recipe is simple. Acquire homes – hundreds and often thousands of them - on the cheap, turn them around, rent them out and according to their secret formula sell them later for a handsome gain. Billions have been and will be spent on this particular scenario. The pace is actually accelerating as the market metrics keep perking up.

 

It certainly will help banks and the likes of Fannie Mae and Freddie Mac to move foreclosed inventory from their books and refresh their balance sheets. Vacant and frequently tarnished REOs will be renovated and eventually occupied with tenants to stop potential further deterioration of the housing stock and also give affected neighborhoods a welcome lift, likely beginning to stabilize any value imbalances.

 

On the other hand, existing homeowners may have mixed feelings about a house four doors down being sold for, say, $200K less than what they paid for theirs. True, it has been fixed inside and out and will get occupants, but it still hurts. How long does it take for the real estate market to relieve them from their chilling underwater status? Are they reasonable candidates for a mortgage walkout? Possibly so. Besides, tenants generally spend less time and money in property upkeep than owner-occupants, so the price stability prediction may be longer than expected in coming.

 

It appears there is an actual investor rush on now to get in on the gravy train to acquire attractive housing assets with rosy future returns. It could well lead into another bubble as more and more institutional funds chase an apparently shrinking inventory. In fact, buying today may already be too late in several regions where values have gone up at least partly due to the demand generated by these bulk purchasers and the rent won’t be able to cover their mortgage and other costs.

 

Then what? The acquisitions come to a halt. The nascent housing upturn could well face a new no-growth period. Deep down this process somehow looks like an artificial remedy with little long-term foresight. A strong and sustainable real estate market is built on owner-occupied homes, some might argue. There certainly is some truth to that. 

 

 

_______________________________________________________________________________

Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Comment balloon 33 commentsEsko Kiuru • February 28 2013 01:57PM

Comments

With these large REITs and investment companies scooping up the RE assets, I fear that real estate is rapidly becoming a tradeable commodity, much to the negative effect on neighborhoods and those that will not be able to afford even the rental rates with the inflation expected to follow. I see it happening on a grand scale here in Sarasota, Florida.

Posted by Sandy Padula and Norm Padula, JD, GRI NMLS#1483386, Presence, Persistence & Perseverance (Realty One Group) over 4 years ago

Esko, another housing bubble created by the feds. It's all about Fannie and Freddie, not homeownership. There's something so twisted in all of this I fear what next year will be like. Excellent post. 

Posted by Pamela Seley, Residential Real Estate Agent serving SW RivCo CA (West Coast Realty Division) over 4 years ago

My husband works with an economist who said the economy's recovery is the slowest in 100 years.  I don't think that investors who buy in bulk will get it fired up.  

Posted by Margaret Goss, Chicago's North Shore & Winnetka Real Estate (Baird & Warner Real Estate) over 4 years ago

Esko, you paint a bleak picture.  Most out there are working under the assumption that our housing recovery has begun.  If what you say proves true, then they're in for a rude awakening and as yo say, another bubble burst.

Posted by Lora "Leah" Stern 914-772-4528, Real Estate Salesperson (Coldwell Banker, 170 N Main Street, New City NY 10956) over 4 years ago

This is outside my area of expertise, but it seems to me that a scenario with investors purchasing in bulk at fire-sale prices is only one phase of a longer process.  Eventually, the houses need to get back into private ownership, presumably after the investors have made the properties habitable.  

For someone who doesn't live there, the house is little more than a liability until it is sold.  Selling the house at a profit would be the investor's ultimate goal, wouldn't it?  It doesn't seem likely (to me) that these investors are interested in becoming landlords.

Posted by Tom Jansson, Chicago Area Home Inspector - InterNACHI Certified (Acuity Home Inspections) over 4 years ago

This is happening in my market too and it's really a shame for the regular homebuyers who are trying to purchase a home that keep getting outbid by these large investors.

Posted by Karen Dunn, Sr. Mortgage Consultant (Big Valley Mortgage) over 4 years ago

Good post and very insightful. The big investors have become so big I don't think they can be stopped from what they are doing. I agree the second shoe has not dropped and we may looking at a bleak future. Only time will tell along with a lot of speculation by people like us.

Posted by Cliff Keith, Redwood City Real Estate (Today Sotheby's International Realty) over 4 years ago

Very good insight indeed! Another "twist" in the puzzle ....  thanks for sharing!

Posted by The Temple Team, Specializing in Charlotte/ Lake Norman Real Estate (THE TEMPLE TEAM) over 4 years ago

I hope that the markets stays healthy and that the investors don't contribute to negative effects which will bring things to a halt.

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) over 4 years ago

Thanks for a great insight Esko. I am with Lora that most people out there are working under the assumption that our housing recovery has begun.

Posted by Wika Hutchinson, Broker, CRIS, SFR, CDPE over 4 years ago

Seems like you have your finger on the pulse and go to person for Maryland, god luck to you

Posted by Michelle Cooks, Pensacola, Pace & Gulf Breeze Property Management (Charles Stallions Real Estate Services) over 4 years ago

Investors didn't hurt my market, they helped it by stopping the downward slide.  Individual investors put a floor under our market in 2008-09 when they purchased REOs priced 50-60% below the last sale price.  I suspect institutional investors have done the same in many markets.  They recognized the great values that many individuals didn't.  I'm more worried about what the inevitable increase in interest rates does to my high priced market than I am institutional investors.

Posted by Lloyd Binen, Silicon Valley Realtor since 1976; 408-373-4411 (Certified Realty Services) over 4 years ago

I am a partner in two provate equity groups and yes, they are buying in bulk...one of teh reasons is that most llenders will not offer their portfolio to anyone that wil not purcahse a pretty large tape and the tape includes some hard to move properties

Posted by Paddy Deighan JD PhD, Paddy Deighan J.D. Ph.D (TimeshareLawyers.pro) over 4 years ago

The neighbors weren't complaining when their values went up 25% per year though either.  Thye have to take the good with the bad. 

Posted by Marc McMaster, Putting my clients before myself (RE/MAX Centre Realty) over 4 years ago

I know of groups who made their move just a few short years ago and now are bathing in their returns...Buy low and sell high is at work

Posted by Richie Alan Naggar, agent & author (people first...then business Ran Right Realty ) over 4 years ago

I don't think we will see a true recovery that can sustain until jobs are better.  Between banks holding inventory back and Fannie/Freddie pushing up values with the appraisal issues that are becoming well documented, there is no doubt in most people's minds I know, investor or agent that this recovery is artificial.  It is hard to think it will sustain.  Who knows?  Time will tell!

Posted by Frank Iglesias, Atlanta, GA Real Estate Investor (Working With Houses, LLC - Atlanta Real Estate Investments) over 4 years ago

Norman,

Sarasota seems to be right in the middle of this bulk buying.

Posted by Esko Kiuru over 4 years ago

Pamela,

This is not a typical recession and neither will be the eventual recovery.

Posted by Esko Kiuru over 4 years ago

Margaret,

Slow recovery for sure, despite bulk buying.

Posted by Esko Kiuru over 4 years ago

Lora,

Just trying to stir up a discussion which appears to have worked.

Posted by Esko Kiuru over 4 years ago

Tom,

Investors being involved in the recovery process does seem to stretch it out.

Posted by Esko Kiuru over 4 years ago

Karen,

You are right about that, leaving buyers frustrated.

Posted by Esko Kiuru over 4 years ago

Cliff,

Free market sometimes works things out the long way.

Posted by Esko Kiuru over 4 years ago

Kent,

Thanks for stopping by.

Posted by Esko Kiuru over 4 years ago

Joan,

Let's hope for the best.

Posted by Esko Kiuru over 4 years ago

Wika,

For now at least, it seems so.

Posted by Esko Kiuru over 4 years ago

Charles,

Appreciate your visit.

Posted by Esko Kiuru over 4 years ago

Lloyd,

Some markets have different dynamics.

Posted by Esko Kiuru over 4 years ago

Paddy,

When they acquire hard-to-move inventory, that's really helpful for that particular market.

Posted by Esko Kiuru over 4 years ago

Marc,

I guess. What about those who just bought one before the crash?

Posted by Esko Kiuru over 4 years ago

Richie,

Can't disagree with that formula.

Posted by Esko Kiuru over 4 years ago

Frank,

So many homes being investor-owned is largely untested territory and lots of things, good and bad, can happen.

Posted by Esko Kiuru over 4 years ago

At least that are getting the inventory down and that will lead to increases in the market. This should have been done from the start to reduce all this inventory.

Posted by Joyce Kelley, Buyers Agent 800-309-3414 Pace and Gulf Breeze,Fl. (Charles Stallions Real Estate Services Inc) over 4 years ago

Participate