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 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.