Real Estate Marketing & Beyond
Institutional investors continue to impact small real estate investors as they move heavily into buying on courthouse steps. This is having a bigger impact on small investors than many realize. The reason is that small investors take a risk buying on courthouse steps that is rewarded with a deep discount (typically 30%) so they can make a profit flipping the house. But now, the institutional investors are bidding up these prices with the philosophy they will make money in the long term renting the houses out instead of flipping them for a short term profit.
While the foreclosure auction is a quick and easy way for institutional investors to pick up a large number of homes, they are taking a huge risk. The typical built in 30% discount that small investors expect is to protect against a house that has been stripped and trashed by disgruntled owners that were foreclosed on. Institutional investors paying close to full market value, sight unseen, are facing major expenses to repair these houses to a rentable condition. As a result, they are creating an unstable real estate investment market.
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Another Real Estate Bubble on the Way
According to RealtyTrac, a full 49% of all home sales in September were all cash purchases. That is up from 30% a year ago and indicates that institutional buyers now dominate the market. They are bidding against each other and the mom and pop investors are leaving the courthouse steps.
The take away from this is that mom and pop investors know the value of the local market. When they walk away from deals, you can be sure that the institutional investors are over paying. They are inflating local markets and building another real estate bubble. Institutional investors are busy in specific markets. These include:
These are sales that complete at sheriff sales. What's different from previous years is many of these sales never occurred. Instead, the properties became bank owned because the bidding was less than what the banks were willing to sell for.
Institutional Investors Are Driving the Market
It's estimated that institutional investors have flooded the real estate market with $20 billion over the past two years. That amounts to approximately 200,000 houses. Blackstone Group’s Invitation Homes is the clear leader with $7.5 billion invested in an estimated 40,000 houses.
The point being is that Wall Street investors are now driving the market. This is not a good thing. Wall Street investment managers have a long history of driving prices of any commodity to unhealthy levels. They take huge salaries and bonuses during the upswing and then leave investors holding an empty bag when the bubble pops.
This is exactly why people invest in real estate. They don't want to be exposed to investment managers that are self-serving. They want investments that are backed up with real property and equity that exceeds the investment cost. Smart small time investors are moving up stream to buy distressed properties before they reach the courthouse steps. There will be fewer short sales in 2014 but this is where smaller investors continue to make the best deals.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
Great article Brian, your comments are right on the money. This will certainly lead to more destabilization of housing prices down the road.
Donna,
Thanks for taking the time to comment. My thought exactly, with the big institutions in the residential real estate market, we are entering an unprecedented area. More than likely, it will be a game changer.
Brian
Yes I think it's a total game changer. Given that their intention is to securitize the cash flows from rentals, and create a new class of real estate investment, the points in your article about paying too much are something that I find very troubling.
I would add that I KNOW they have been paying too much in Atlanta.
Hi Donna,
Thanks for commenting. I too think it's a game changer. That's a big part of why I wrote the article.
Brian