While the bulk sale of REO properties owned by the GSE's, Fannie Mae and Freddie Mac is getting a lot of attention in the media, I'm not sure that anyone has considered the investor side of this equation, and how investor expectations might play out.
In my previous article, I briefly touched on the investor side of the equation, with some general comments about the logistics of purchasing a pool of 500 to 1,000 properties in a single bulk sale. With this article I'd like to look at the investor thought process in more detail.
To get an independent perspective from someone who is an active real estate investor, with years of experience in the real estate industry, I interviewed Buddy Corbin, a real estate broker with over 20 years experience in the industry, and Director of the North Metro Real Estate Investors Association of Atlanta, GA. Buddy has experience with a large variety of property types, and is an active buyer and seller of investment properties ranging from single family rental property, to multi-unit properties, mobile home parks and commercial property. As a real estate broker, Buddy also represents clients who are professional investors who regularly purchase foreclosed properties through him, so he has an in-depth understanding of the investor side of the real estate industry as it relates to investing in REO properties.
In our conversation, Buddy made some great points about how investors would view bulk sales of REO properties as it pertains to buying in blocks of 500 to 1000, (or any sizeable block, even if the actual number is somewhat higher or lower).
Question: "How do you think investors will view the opportunity to purchase blocks of 500 or more properties, with the idea that they will be required to hold them as rental properties?"
Answer: "Since the blocks will have to be fairly large to make any kind of significant dent in the total number of available REO's, investors will pretty much be forced to purchase homes they do NOT want, in order to buy the homes that they do want. This essentially means that investors will price the losses on "throw-away" homes into their buying equation, so they would only be willing to pay enough to justify the cost of the properties they do want, while essentially writing off the properties they don't want."
"For example, a pool of bulk properties is put together based on certain criteria such as general geographical location, or other factors such as price range, that the GSE's might use to put together each pool. In many cases, a pool is likely to be composed of a combination of single family homes located in both the inner city and suburban areas. So, investors will take this into account when considering what price to pay for the entire pool. In your previous article you mentioned investors paying around 20 cents on the dollar. I'd say that might be the best possible price, and would not be surprised if the actual bid price is more like 10 cents on the dollar, to compensate for losses on the ones that will not be renovated."
Question: "That is a great point...you are essentially saying that even though an investor may buy 1,000 homes in a given pool, they will simply ignore the least desirable of those homes, in the worst areas, and focus their attention on the better homes in the better areas?"
Answer: "Exactly. When you are dealing with a pool of this size, and given the general investor qualifying criteria noted by the government, you are talking about only the most savvy of investors. They are not people who are emotional about it. They are strictly dollars and cents guys. They are not going to pay for properties they don't want, even if they are forced to buy them in the pool. So this will definitely have an impact on the bid prices, and will drive them down according to the actual contents of the pool itself."
Question: "I'm thinking that the requirement to hold the homes for rental will also have a negative impact on the bid prices for the pool, what do you think?"
Answer: "You bet it will. This is tantamount to government regulation of free enterprise, in a sector that is already a high risk investment. And among high level investors, only a small percentage will be the type of investor that actually wants to buy specifically to rent. The government may not realize that real estate investors tend to specialize in one specific area. There are not a large number of big players who are specifically into holding single family houses for rental property. Those who are know that holding will add to risk factors such as vandalism and theft of infrastructure such as copper plumbing, appliances and air conditioning units. These are already common problems plaguing investors, and having hundreds of homes at risk due to requirements to hold them long term will make this problem worse. That will lead to even lower buy prices for these pools as this risk will also be factored in."
In part 2, we'll discuss more on the investor thought process for buying bulk REO properties, and detail some potential solutions that could help the government make this program a success.
Editors note: This article is continued in part 2, which will be published on Friday, Feb 17th.
Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for RealtyBizNews.com. She is an active real estate investor who also provides coaching and consulting services. Contact her at [email protected] or call her office at 888-915-9968.
Excellent points , until Fannie/Freddie abolish the limit on number of mortgages the small investor can hold, the market will remain stalled. As of now many qualified little guys are locked out...
Yes Brian, you are correct. I will address your point in more detail in part 2 of this article.