The current state of real estate hedge fund dumping
The latest news in property investing is that major corporate hedge fund investors are selectively dumping large chunks of their portfolios on the market. These large real estate investing hedge funds, who gobbled up foreclosure properties during the very worst years of the financial crisis, had been biding their time waiting for the real estate market to improve. Concurrently, they were taking advantage of the tight rental market, and had placed most of their portfolios into the rental market – becoming some of the greatest corporate landlords in history. Now, they have been quietly unloading some of their huge array of mostly single family units.
Small property investor as middleman
As reported in The New York Times last week (“Investors Who Bought Foreclosed Homes In Bulk Look To Sell,” by Matthew Goldstein, June 27, 2014), “a year ago, buying foreclosed homes to rent out was the sure-thing trade for investment firms backed by money from private equity companies, hedge funds and pension systems. But with the supply of cheap foreclosed homes dwindling, some early investors are looking to cash out a bit by flipping homes to competitors.”
Due diligence is key
So small, individual investors now need to make sure their due diligence is as accurate as possible. By dumping large amounts of single family homes on the market, primarily marketing them to other investors, any small investor should make very sure any potential positive cash flow is in fatc, going to turn out that way. My guess is that smaller investors will accept lower CAP rates, as well as smaller Returns on Investment (ROI’s) compared with these larger hedge fund investors. As a small investor, you can still come out ahead. But just be confident you’ve gotten all your numbers, and that they are truthful and most importantly, verified. Make sure any seller, especially an institutional one, supplies you with rent roll and expense data that can be checked – and double checked for accuracy.
Quietly unloading properties en masse
The Times article also pointed out that “the Waypoint Real Estate Group, one of the first companies to raise money from private investors to buy foreclosed homes, is quietly shopping as many as 2,000 houses in California that it acquired in the last few years in several private investment funds…The homes, which are largely rented, are being shown to other companies backed by investor money that have also scooped up distressed houses in states including Arizona, California, Florida, Georgia, Illinois and Nevada.” Mr. Goldstein also notes that “Waypoint is considering selling about half of its 4,000 homes. Some of the biggest institutional investors in the market for foreclosed homes — companies like the Blackstone Group, American Homes 4 Rent and American Residential Properties — have slowed their pace of acquisitions in response to an increase in home prices and a dearth of foreclosed homes that do not require significant renovation.”
Setting a new trend
The trend is obvious here. As foreclosures dry up (or, more accurately, have been gobbled up by institutional investor dollars over the last five or six years), it becomes more difficult for large investors to find units that meet their rigorous bottom line standards for profitability. The Times article went on to also point out that “the single-family home market, after a wave of acquisitions by companies backed by Wall Street money, is changing as institutional buyers now focus more on expanding their operations to manage tens of thousands of homes across the United States. Industry participants say that the rapid buying of foreclosed homes has ended and that they expect other early institutional buyers to sell homes to lock in profits. They say they also expect the business to consolidate into the hands of a few large companies.”
What all small property investors know
Interestingly, the bread and butter of operations management that is the backbone of the small, single property investor – namely, managing one’s own investment property – has been a potential downside for institutional investors who are new to the game. Mr. Goldstein goes on to illustrate: “The companies are finding that the most challenging part of the rental business is expanding their property management operations — often from scratch — to deal with leaky toilets, damaged roofs and tenants who do not pay rent on time. Blackstone’s property management business, Invitation Homes, for instance, has grown to more than 1,500 employees from just 14 two years ago. The rapid growth has not always been easy.” He then goes on to quote an industry professional about this downside for hedge funds: ““Most of these companies have 18-month track records as property managers, so they are still working out the operational details,” said Michael Gutierrez, managing director of operational risk assessments at Morningstar Credit Ratings. “There have been growing pains.””
How to profit from this news
The Times article concludes by saying “now, institutional buyers like Blackstone are more focused on fixing the properties they already own, renting them out and using the properties as collateral to back bonds that can be sold to investors.” So how can a small real estate investor profit from this news about the dumping of large numbers of single family homes onto the market? As you locate potential new acquisitions, ascertain if they are currently being sold by an institutional investor group. If so, make doubly sure of the accuracy of the rent and expense data they provide. And as long as you are comfortable the potential property fits your criteria for a proper ROI and throws off an acceptable positive cash flow, then you should certainly consider negotiating for it. Even the property investment world has middlemen sometimes – like the small property investor.
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