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Implications of Investment Firms Buying Up Low End Real Estate


By BayArea   Follow   Sat, 1 Dec 2012, 1:33am PST   2,618 views   26 comments
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Hi folks,

It's no secret by now that high dollar investment firms have been buying up a significant fraction of low end real estate in the United States. Just the foreclosure to rental market alone this year is expected to be a $100bil industry. That doesn't include short sale or conventional sale to rental market.

Companies like Waypoint (Oakland based) are buying up property all over CA and currently owns over 1800 homes. Blackstone (NY based) is buying about 40 houses per week in the greater Sacramento area:

http://www.nytimes.com/2012/04/03/business/investors-are-looking-to-buy-homes-by-the-thousands.html?pagewanted=all&_r=0

http://www.sacbee.com/2012/11/25/5008543/big-investment-firm-buys-hundreds.html?source=Patrick.net#storylink=cpy

Low end real estate investment is currently more attractive to many compared to the stock market, CDs, or commodity/materials/currency investment due to greater ROI. For example, there are no shortage of zip codes in the Bay Area that have 7%, 8%, 9% or even larger annual rent:price ratios. And because these investment firms are typically coming with cash and they have very good relationship with realtors and banks due to a reputation of closing very quickly without hick-ups, they are getting first crack at anything worthwhile. Several points:

- This will surely continue for low end real estate as long as it remains significantly cheaper to buy than to rent. With the real estate market surge that we've seen in 2012, it's not quite as attractive to get in this game as it was in 2010-2011 for instance, but it's still difficult to find a better place to put your money today. If the market continues to rise (and rents don't), eventually we'll hit a threshold where it no longer makes sense and the bulk rental investments that we are seeing will cool off.

- How are new families/first time buyers who are needing to finance going to compete with these firms that are bringing cash and already have everyone involved in the home buying process on their side in terms of relationship?

- Most importantly, what will be the short and long term implications of entire neighborhoods in Pittsburg, Vallejo, Bay Point, Antioch, and Concord for example being owned by none owner occupied investment firms and/or private investors? I've thought about this a lot while hunting for my own investment properties as owner occupancy continues to drop in the low end real estate market.

In general, high owner occupied neighborhoods are attractive to new buyers/renters. At the same time, it's in the interest of the landlord to upkeep his/her property to keep vacancy rate low and rental price as high as possible.

As investor owned homes continue to increase in low end areas, this will give landlords more control over rental prices, but of course it will also introduce more landlords which will increase their own competition (unless the same firm owns all/most of the homes within the neighborhood). I guess ultimately the market (supply/demand) will have the greatest influence in what landlords can charge for rent and the rental price swings from other factors will be small in comparison.

Maybe I am over thinking this a bit, but you have to stop and think for a second that we've never in the history of real estate had this rate of single family homes being bought for rental purposes like we are seeing today. There obviously will be implications.

Any thoughts?

Comments 1-26 of 26     Last »

The Professor   Sat, 1 Dec 2012, 2:04am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 1

BayArea says

Any thoughts?

Yeah, one question. How can rental prices go up, and wages remain stagnant?

The Professor   Sat, 1 Dec 2012, 2:08am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 2

BayArea says

Most importantly, what will be the short and long term implications of entire neighborhoods in Pittsburg, Vallejo, Bay Point, Antioch, and Concord for example being owned by none owner occupied investment firms and/or private investors?

Short term: neighborhoods get full of people that don't care about the property they live in. Long term: rents go down, maintenance deferred, another slumlord is created.

BayArea   Sat, 1 Dec 2012, 2:35am PST   Share   Quote   Permalink   Like   Dislike     Comment 3

The Professor says

BayArea says

Any thoughts?

Yeah, one question. How can rental prices go up, and wages remain stagnant?

What you describe sir is also known as a "bubble"

bmwman91   Sat, 1 Dec 2012, 2:51am PST   Share   Quote   Permalink   Like (3)   Dislike     Comment 4

BayArea says

What you describe sir is also known as a "bubble"

In past history, sure. I hope that history repeats itself, at least compared to the alternative.

The alternative:
As you said, we are in historically unprecedented territory. America, depending on who you ask anyway, is in decline. We might see rents go up anyway as the financial sector owns housing and our government, and they can really do as they please. America might just end up like much of the rest of the world with 3+ generations of a family packed into every 3BR to make the rent payments. The wealth disparity is growing, and half of the lower-earners in this country are too stupid to vote for things that would protect them because of partisan bullshit.

David Losh   Sat, 1 Dec 2012, 2:54am PST   Share   Quote   Permalink   Like   Dislike     Comment 5

BayArea says

we've never in the history of real estate had this rate of single family homes being bought for rental purposes

We actually did see this Real Estate wholesaling after the Savings, and Loan scandal.

It's been tried a couple of other times, and it always ends the same.

These investment groups will package the properties into Real Estate Investment Trusts then sell the cash flow minus maintaining the property, and management fees.

This will go on until no one can stand it any more, or the holding period expires. Slowly but surely these properties will be sold back to the public with "special" financing until all the Investment dollars are returned with a profit.

So don't worry, I personally think these properties will be coming back sooner than later, because no one wants to deal with a string of properties far flung with a constant set of whiners as renters.

David Losh   Sat, 1 Dec 2012, 6:28am PST   Share   Quote   Permalink   Like   Dislike     Comment 6

John Bailo says

A world in which the casino has all angles covered and you can't make a move

Well, the casino is rigged in your favor, and you just outlined how.

You've been saving, using tax free investments, buying some stocks, and making a little money on the side. Well, that's your working capital, now what?

That's the question, now what?

What can you do, what can you make, what can you buy, and double your money?

Some people go to garage sales every week end, then sell the stuff on E-Bay. Some people buy, and sell cars. Others go to auctions for furniture, or antiques, then sell stuff by private showing.

If you take the same mind set, and apply it to a Real Estate purchase you can do well.

While you are at garage sales ask what the people are doing, are they moving, are they selling. Look around your neighborhood, look for a place that has some distress, and ask the owner if they had thought of selling. Look for land lords who have owned forever, send them a letter and see if they might do a seller financed transaction.

No one is ever stuck. Real Estate is a transaction between two individuals. Most people just need to find the right fit, rather than force a hysterical purchase.

The Professor   Sat, 1 Dec 2012, 7:07am PST   Share   Quote   Permalink   Like   Dislike     Comment 7

David Losh says

No one is ever stuck.

Amen.

zzyzzx   Sat, 1 Dec 2012, 8:11am PST   Share   Quote   Permalink   Like   Dislike     Comment 8

BayArea says

- Most importantly, what will be the short and long term implications of entire neighborhoods in Pittsburg, Vallejo, Bay Point, Antioch, and Concord for example being owned by none owner occupied investment firms and/or private investors?

You just described most of Baltimore City! It's been like that for years and large portions if it are slums where only blacks and mexicans will live.

Peter P   Sat, 1 Dec 2012, 11:08am PST   Share   Quote   Permalink   Like   Dislike     Comment 9

I think the solution is to allow more homes to be built. Simple supply and demand problem. Slightly complicated by NIMBYs and other rent-seeking bodies.

REpro   Sat, 1 Dec 2012, 3:27pm PST   Share   Quote   Permalink   Like   Dislike     Comment 10

robertoaribas says

50% of germans rent, and neither their society nor their neighborhoods have collapsed as a result.

It just is what it is...

Have you been in Germany?
Wish yourself to have all German tenants.

bmwman91   Sat, 1 Dec 2012, 6:00pm PST   Share   Quote   Permalink   Like   Dislike     Comment 11

How could you?! Don't you know about the nesting season of the spotted owls?! The live in other states, but they COULD fly to Woodside and take up residence. Why would you want to build a big ugly house and rob them of a home? What did the spotted owl ever do to you?! God, I bet you are one of "those" people that also thinks vaccinating their children is a good idea. Here, let me get you a copy of the pamphlet I picked up at Whole Foods, it will show you how to prevent Polio and Smallpox with an Acai-Hemp seed blend. Steve Jobs was a BIG believer in the curative properties of this holistic remedy!

taxee   Sat, 1 Dec 2012, 6:55pm PST   Share   Quote   Permalink   Like   Dislike     Comment 12

David Losh says

Some people go to garage sales every week end, then sell the stuff on E-Bay. Some people buy, and sell cars. Others go to auctions for furniture, or antiques, then sell stuff by private showing.

A friend of mine traveled through Zimbabwe. He brought back some of these. Holding them in my hand gave me a creepy feeling. I asked him how the economy functioned. He said "they make it work".

taxee   Sat, 1 Dec 2012, 6:59pm PST   Share   Quote   Permalink   Like   Dislike     Comment 13

There are those who are part of government, those who are vested and part of 'the franchise'. The rest trade whatever they can among themselves.

taxee   Sat, 1 Dec 2012, 7:06pm PST   Share   Quote   Permalink   Like   Dislike     Comment 14

It will be interesting to see what happens to currency and property taxes after most of the property is in the hands of our 'nobility'.

APOCALYPSEFUCKisShostikovitch   Sat, 1 Dec 2012, 8:48pm PST   Share   Quote   Permalink   Like (3)   Dislike (1)     Comment 15

Rents will be subject to cartel pricing and will 10x over night.

People will move into squats and abandoned cars.

Hookers and drug addicts will occupy the units.

Rental cartel snipers will fail to secure the units as hookers and drug addicts form better armed squatters militia.

Cops, disdainful of cartels, ignore calls for help and, in some neighborhoods, join in fire fights on the side of the hookers and drug addicts, claiming some samples as commission on their services.

Cartels will be bailed out.

taxee   Sat, 1 Dec 2012, 10:12pm PST   Share   Quote   Permalink   Like   Dislike     Comment 16

Sounds like the grower economy in northern cali.

lostand confused   Sat, 1 Dec 2012, 10:32pm PST   Share   Quote   Permalink   Like   Dislike     Comment 17

bmwman91 says

How could you?! Don't you know about the nesting season of the spotted owls?! The live in other states, but they COULD fly to Woodside and take up residence. Why would you want to build a big ugly house and rob them of a home? What did the spotted owl ever do to you?!

This may seem tounge-in-cheek, but it is true. One of friends, when I lived in the bay area had horses and boarded at a public stable. The stable had acess to a state park through another state owned property that was not part of the park. Then some endagered eagles came and nested on the state owned proeprty and they said the riders could not ride their horses through the porperty to get to the park. I was like what-eagles in the trees means no horses on the ground?

I never could understand the logic and thought she was pulling my leg-but no, she wasn't. If they are so sensistive-perhaps there is a reason why they are in danger? I mean pigeons don't need no protection??

moonup   Sun, 2 Dec 2012, 12:30pm PST   Share   Quote   Permalink   Like   Dislike     Comment 18

I don't think big investment firms have any intention of keeping the houses for long - mass renting is going to come with difficulties. Also, they know that interest rates will be going up in a few years, and house prices will have nowhere to go but down at that time (wages stagnant and/or falling means fixed monthly payment, either to landlord or bank). So they sell at that time and leave mom and pop holding the bag (again). If you own, just be sure to keep your eyes open and get out when you see them eyeing the exits.

APOCALYPSEFUCKisShostikovitch   Sun, 2 Dec 2012, 12:47pm PST   Share   Quote   Permalink   Like (1)   Dislike (1)     Comment 19

robertoaribas says

moonup says

I don't think big investment firms have any intention of keeping the houses for long - mass renting is going to come with difficulties.

I'm not so sure; I have two acquaintances managing several hundred properties each for these firms... They have some pretty slick automated procedures in place for tenants, managers, repairmen etc. Hell, i'd love to have their software!

What's the protocol for putting down free fire fights between rival starving neonazi cannibal tribes?

Bellingham Bill   Sun, 2 Dec 2012, 1:24pm PST   Share   Quote   Permalink   Like   Dislike     Comment 20

The "implication" is that this curve goes up:

http://research.stlouisfed.org/fred2/series/GINIALLRH

luckily, nobody in this country is actually exposed to the real data detailing the decline of what we once had here.

David Losh   Mon, 3 Dec 2012, 12:06am PST   Share   Quote   Permalink   Like   Dislike     Comment 21

robertoaribas says

managing several hundred properties

They have great software that keeps things chugging along. In time they will consolidate into apartment buildings or mixed use. The individual houses will be sold off with special financing to make the whole thing happen.

moonup   Mon, 3 Dec 2012, 1:13am PST   Share   Quote   Permalink   Like   Dislike     Comment 22

Also, I couldn't think of a worse place to be a landlord than in San Francisco. These investment firms are going to take it on the chin when they go to sell in a few years and realize that their protected, rooted tenants knock $100k off their sales price.

everything   Mon, 3 Dec 2012, 3:17am PST   Share   Quote   Permalink   Like   Dislike     Comment 23

Agreed, they might be buying location 10-20 years before location is known. Simply wait until the tenants trash the homes out then tear them down and put up way more rentals
instead.
David Losh says

robertoaribas says

managing several hundred properties

They have great software that keeps things chugging along. In time they will consolidate into apartment buildings or mixed use. The individual houses will be sold off with special financing to make the whole thing happen.

SkyPirate   Tue, 4 Dec 2012, 1:18am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 24

moonup says

I don't think big investment firms have any intention of keeping the houses for long - mass renting is going to come with difficulties. Also, they know that interest rates will be going up in a few years, and house prices will have nowhere to go but down at that time (wages stagnant and/or falling means fixed monthly payment, either to landlord or bank). So they sell at that time and leave mom and pop holding the bag (again). If you own, just be sure to keep your eyes open and get out when you see them eyeing the exits.

I remember in 2005/2006 when apartment communities were converting into townhomes/condos for sale. Guys, it's all about rent vs. price ratios. If prices climb significantly above the ratio's historical average, investors sell the property. If prices are at or below the ratio's historical average, they keep renting out the properties that they do own and even go out and buy more properties to put out for rent.

Right now, investors are buying for the purpose of renting. Prices can fall some and that's ok. These investors are only in trouble if rents fall. They'll keep renting out their properties until there comes a point where cashing out is more attractive (if prices climb significantly).

epitaph   Tue, 4 Dec 2012, 6:34am PST   Share   Quote   Permalink   Like   Dislike     Comment 25

Home prices follow the economy. Uncle Sam is going to need to balance his checkbook(fiscal cliff), and when that happens you can bet your ass the economy slows. If I wasn't a renter I would sell right now, I don't see how prices can go up in 2013.

futuresmc   Tue, 4 Dec 2012, 6:57am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 26

moonup says

I don't think big investment firms have any intention of keeping the houses for long - mass renting is going to come with difficulties. Also, they know that interest rates will be going up in a few years, and house prices will have nowhere to go but down at that time (wages stagnant and/or falling means fixed monthly payment, either to landlord or bank). So they sell at that time and leave mom and pop holding the bag (again). If you own, just be sure to keep your eyes open and get out when you see them eyeing the exits.

You're working under the assumption that all the laws that protect renters have to remain intact or be enforced. That's the beauty of a 'free market' and deregulation in an oligarchy. You can chip away at the rights of renters by eliminating the laws that require landlords to have any responsiblity to maintain their property, then put in place laws that obligate tenants to make repairs their own dime. You can defund agencies that help tenants prevent illegal evictions or theft of property by landlords. You can monopolize a significant portion of the market and price set properties irregardless of tenant's ability to adapt. If banks and big investors get a taste for slumlording, make no mistake, deregulation of the rental market will come under the banner of freedom.

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