Wednesday, December 12, 2012

The end of mom and pop investing? NOPE, it's just the beginning!!!

    Recently, there has been a widely discussed rumor going around about the "New Emerging Giant" that is going to buy every foreclosure in the U.S.  The webinar I watched, which happens to be the main conspirator of this topic, is also stating that the housing industry is going to be completely institutional and that owning real estate will be a thing of the past.  The rumor states that these institutions will buy directly from banks and the properties will never make it to the marketplace, ultimately leaving no distressed properties for investors to buy. I can assure you that the rumors are nothing short of a scare tactic used to create urgency towards purchasing real estate guru educational material.

     The argument is that large institutions, private equity firms, and REITs have been raising billions of dollars to purchase real estate due to double digit returns in a bearish stock market.  That speculation is factual and of complete merit.  Several corporations, including Warren Buffet's "Blackstone Group, LP" have purchased close to $1 billion in foreclosed homes. the amount of property purchased equals roughly 6500 properties.  Other private equity firms have been speculated to have raised somewhere between $6-$8 billion for the purpose of purchasing SFR foreclosures.  A quote from a recent article in The Wall Street Journal states "People involved in the market estimate that private-equity firms and other investors have raised $6 billion to $8 billion to invest in the sector, as they try to take advantage of prices that have fallen nationwide on average by more than a third. That could buy 40,000 to 80,000 properties, according to a recent report from Keefe Bruyette & Woods."

     A few months ago, I was approached by one of these institutional "GIANT" buyers.  I was given  specific criteria as to the types of homes that were of interest.  Primarily, they were looking for newer builds and wanting to buy at around 80% give or take.  The criteria became more and more precise and eventually our firm re-shifted our focus back to servicing the "mom and pop" investors.  Tried and true, the "mom and pop" investors have always been there and will always be here.  While the individual investor is buying the unwanted homes in the marketplace, the Giant buyer is looking to purchase the homes that are marketable to owner occupants.  The unrealized factor that the institutions have miraculously failed to calculate is the margin of error that comes into place with being an landlord.  Primarily vacancy, but maintenance and vandalism are  the difference between the speculated double digit return and the reality of the single digit return when rentals are poorly managed.

     Aside from the staggering amount of current foreclosures (which is addressed below), a booming real estate market and robust economy will still generate nearly 8% distressed properties to be purchased in any given marketplace.  An investment firm I once worked with in South Florida was one of the largest purchasers and distributors of investment property.  Prior to the mortgage meltdown in 2007 and the market collapse in 2008, there were not very many foreclosures.  Out of the firms 300+ home purchases in 2006, less than 3% were purchased from MLS and less than 1% were purchased from REO agents.  There were still more than enough discounted investment properties to go around and there were several avenues to purchase them from.

Current U.S. Foreclosures
    The fact that there are so many foreclosures (more than 1.5 million nationwide) is really more of a huge opportunity with about a 5 to 7 year window for "mom and pop" investors to take advantage of.  A calculation from estimates that there are currently  1,554,156 foreclosed homes.  The so called "Giant" buyer will not make a dent in the amount of foreclosures in the marketplace and here is why:
The average sales price for a foreclosure, nationwide, is $179,844.  The institutions claim to have $8 billion in raised capital to purchase foreclosures.  If that is the case, these corporations have the capability of purchasing 44,483 homes.  That still leaves us with 1,509,673 foreclosed homes in the U.S.   Even if owner occupants purchase 90% of the remaining 1.5 million foreclosed homes, that still would leave 150,967 foreclosures to buy, not to mention the average 8% of non-foreclosed distressed properties within the marketplace.

The bottom line: mom and pop real estate investing is as plentiful as it has ever been and will continue to flourish.


Friday, December 7, 2012

Do the banks have a heart or are they trying to re-shape public opinion?

GSE's Halt Reposessions...

     In recent press releases, mortgage giant GSEs Fannie Mae and Freddie Mac have vowed to halt foreclosure and eviction filings for the upcoming holidays.  Terry Edward, Executive Vice President of Credit Portfolio Management with Fannie Mae made a statement this week saying "The holidays are a chance to be with loved ones and we want to relieve some stress at this time of the year."  The filings will be suspended beginning December 17th, and will resume on January 2nd... (Happy New Year!)

    Freddie Mac Spokesperson Brad German mentioned that this would not effect other pre or post foreclosure activities such as filing for default and scheduling auction sales.

     Bank of America quickly followed suit and also postponing evictions and foreclosures during the holiday period as well.  If any bank needs some positive PR, it's Bank of America.  Looks like they recognize their public image and jumped at the opportunity to enter the spot light.

     Other banks such as Wells Fargo, JP Morgan Chase, and Citibank have postponed such activities in previous years, but have yet to make a statement regarding the topic for 2012.

     For investors, this means nothing.  Business will resume as usual.  There is still inventory and there will still be inventory.  A minor lag may be felt in January from this action, but it will be short lived.  

     As for troubled home owners, this also means nothing.  Unless people facing foreclosure have a very generous stocking stuffer coming their way, the foreclosure will continue as processed, just slightly later.