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These days, there is a big change in the housing industry that deserves our attention. It is a time when the professional investor is entering the market in a big way and changing the way business is done and houses are bought and sold. This professional investor participation is now at an all-time high and making things quite difficult for many millennials and first-time home buyers. Numbers are beginning to tell the story. These numbers just released tell us that 11% of 2018’s homebuyers were real estate speculators, big private-equity firms, or other real estate investment players.
A Heavy Investor Hand
This is the highest level investor purchases have been, ever!—and it’s approximately two times the amount of investor-buying that we saw right after the housing market crashed in 2008. This is creating a problem for people trying to buy their first homes because they’re having to compete against buyers with deep pockets. Investors are upping the ante further by paying in cash, making it even more difficult for traditional buyers to get a foot in the door.
This all started following the housing market bust when commercial property giants like Blackstone Group and Starwood Group started buying thousands of foreclosed homes to take advantage of very low prices. While these purchases were credited with stabilizing the market, investors purchases have continued to increase sharply since then.
Impact On The Market
So, what kind of impact are these power players having on the market? A big one. These professional investors are shaping the way homes are priced. Specifically, they’re dominating the bottom of the market by paying cash. These types of investors have bought up one out of every five homes in the lower tier of prices, according to the latest stats1. That’s roughly 33% more homes than they were buying years ago.
The economists at CoreLogic have written that these are the homes that first-time homebuyers would logically be buying. So now, young inexperienced adults looking to buy their first home are getting into bidding wars with professional investment buyers – and, of course, mostly losing.
The Rise Of iBuying
The increase in professional investor participation is also due, in part, to entrepreneurs like Gregor Watson. He and his partners scooped up 6,000 homes around the country following the housing bust, successfully turning them into single-family rentals. He then started Roofstock, a company that enables investors to buy property online. The internet now makes it easy for small investors in real estate, and even foreign investors, to purchase properties they’ve never even seen in person. Needless to say, this is shifting the supply-demand equation and throwing more challenges in front of young homebuyers.
Also, this shifting of demand is continually re-locating to new low-priced areas where there are still plenty of cheaper homes available. Currently, areas in the Northeast and Midwest, like around Detroit, are hot. That’s why companies like Roofstock are so helpful to investors. Investors may not have enough money to buy properties where they live, but they may have enough to buy property in a down-market in the Midwest.
Top Real Estate Investing Markets
In 2018, Detroit had the largest market for investor purchases. It was followed closely by Philadelphia and Memphis, Tennessee. Investors bought about half of the starter homes in Philly in 2018 and roughly 40% of all of Detroit’s lower-priced homes. Home prices in those markets are low enough that investors can make smart buys, put a little money into the homes, and then turn around and profitably sell them or turn them into rental properties.
In Philadelphia, for example, an investor can buy homes in the $75,000 to $95,000 price range and after spending up to another $80,000 on renovation work, rent those homes out for $1,300 per month. The simple math on these numbers suggests a return of about 9% before all other expenses are considered.
Why Sellers Like Real Estate Investors
It’s not only buyers that are seeing big changes in the market. Sellers, as it turns out, are reaping some benefits as well. Let’s say you need to sell your home, maybe your job is making you move or perhaps you’ve inherited a home that you want to sell. There are a number of advantages for you in dealing directly with a real estate investor. Here are the top three:
1. Speed
Listing with real estate agents can be time-consuming and there’s the need for things like holding open houses. Then there’s the time you’ll need to vet a prospective buyer and wait for them to secure financing. If you go with an investor, then speed is the name of the game. They’re typically ready to buy, with cash in hand, so there are no potential lender problems to worry about. And they’re often looking to close the deal as quickly as possible which can be very advantageous for the seller.
2. Saving You Money
An investor is buying your home for one of two reasons: either to flip it or to rent it. Either way, they’re expecting to spend money on the home to get it in the best shape in order to command a high sales price or a high rental rate. That means you can save money. You don’t have to spend a lot of money to make major repairs or renovations to get your home ready to sell. Investors are more than happy to buy your home “as is” and then make exactly the renovations they want.
3. Skip The Commission Fees
Real estate agents, of course, need to get paid for their work. When you list with an agent, you pay a commission fee at closing—a percentage of the sales price that goes to the agent. Wouldn’t you rather pocket the whole purchase price yourself? Dealing with an investor often means you can cut out the need for an agent, and that means several thousand more dollars for you.
Whether you’re a prospective homebuyer, looking to sell your home, or maybe thinking about doing some real estate investing yourself, it pays to know the housing market in which you plan to operate. And now that you know there are a lot of investor-dollars available in certain markets, this is new information that can help you make a better decision. You can talk with an agent or do your own research to figure out precisely what forces are currently driving the housing market in your area. But remember, always do your homework and don’t invest until you know the risks as well as the potential rewards.
Best of Luck.
1CoreLogic
Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. There are no investment strategies, including diversification, that guarantee a profit or protect against loss. Past performance doesn’t guarantee future results. Equity investing involves market risk, including possible loss of principal. All data quoted in this piece is for informational purposes only, and author does not warrant the accuracy, completeness, timeliness, or any other characteristic of the data. All data are driven from publicly available information and has not been independently verified by the author.
