The modus operandi of the mass buyer - a case study

[Chris Martin]

We've seen posts here on BP about "bigger players" getting into some markets. Some are reported to be hedge fund buyers that are renting the properties out, some seem to be specific to bank REO property. According to this BP topic, one hedge fund manager was bold enough to proclaim his vision of putting the small guys all out of business! From today's J Scott post (which prompted me to post this topic), a big buyer in his area terminated a contract "because they got their funding pulled" and the unanswered question remains is it a sign of things to come?

Well, I'm not sure anyone knows for sure. But I can tell you the facts about recent transactions in my area. As I posted in J Scott's thread, we have one known 'institutional' buyer in my area, Wake county NC. This one player has bought 138 houses in 2013 (96 on 2-7-2013) per county records. I don't have to-the-day records but the data is current as of a week or so. My sample set is the complete record of all property cards in the county. They only bought 14 in 2012 (0 in prior years) so are a new entrant in this market. There is no sign they are stopping.

So here's a Myth or Reality summary based on factual data from this buyer. From a methodology perspective, I'm using the relevant fields of 362,386 county property card records in a series of queries to obtain the results. Historically I find the county record data to be very accurate, and since I can search on a property card basis, I can conclude that my findings should be a very good representation of this institutional buyer. What I don't have at my disposal are any MLS or market dynamics (e.g. are these listed properties?... I can't tell.)

Myth or Reality?

1) This whole institutional buyer thing is hogwash... I used to believe this. From some (not J Scott) BP member responses, like in this topic about REIT buyers, I couldn't conclude that the sales were really happening. The posters provided no details, etc., and that looked like posers rather than posters. But I have proof that 'institutional' buying is real where I am.

2) These "players" came out of no where and started buying... Again, I'd say this is reality. The buyer in my area had 0 (zero) properties 4 months ago. Now they have more property then HUD and VA combined.

3) They are only buying new or almost new houses... This is very simply myth. Less than 25% of their purchases are 2012 or newer properties. The oldest? 1992. About 23% were properties built before 2000, 69% built before 2010.

4) they must be buying in one area and not spreading themselves all over the county... Surprisingly, myth. Although 54% of their buys are in Raleigh, they have property in 12 different towns, all but 3 (Raleigh, Fuquay, Zebulon) where they have less than 10.

5) these buyers must be buying cheap property.... The short answer is myth. The average price, based on tax stamps, was $168,140. Not one property was bought for under $100K.

6) These guys are 'Flash in the pan'... these guys are not in for the long haul... You decide. Announcement of Proposed Initial Public Offering, dated 2-27-2013

[J Scott]

Good analysis of that buyer, Chris!

I'd say that from what I've seen (both from some data mining and from pure empirical evidence), your myth vs reality points are right on.

I certainly have data to support the fact that several institutional buyers (and I use that term lightly -- many are just large private equity funds that most people probably wouldn't call "institutions") are buying up to 200+ properties per month in my metro area (which is a large area, btw).

We've found about 100 cash buyers who have purchased 20+ properties in our metro area in the past 12 months, and I'm guessing (I don't have the data in front of me) about 10% of them have purchased at least 100 properties in the past 12 months.

To you second point, yes, many of them are new buyers in the area, and the larger ones are brand new to the area in the past 12 months. We know many of the agents representing these buyers and they have confirmed that they are private equity funds that have recently raised significant capital for the purpose of buying rentals in a few specific markets.

That said, Atlanta has a lot of investors, and I'm sure there are hundreds of local cash buyers who are buying 5-10 properties per year; the big players comprise a small percentage of the total buyers, but probably comprise more than 50% of the total cash purchases the past year.

Also agree that they aren't (just) buying new houses. They do seem to want move-in-ready houses, but it appears (in my county, at least), they're buying stuff 20-30 years old in many cases. And while I don't know about the rest of the metro area, I'm guessing they're buying older stuff than that, just based on the fact that many parts of ATL have older housing stock.

The ones in this area are buying all over the metro, including about a dozen counties. I don't know the breakdown of purchases in various areas, but it's pretty disparate. I imagine they have more than one property management team based on the large geographic area they're buying (and the horrendous traffic around here).

I don't know what the average property value they're searching for across the metro area, but in my county, most of their purchases are in the $80-120K range. Very little below $80K is move-in-ready these days and anything over $120K is probably returning less than 1% in monthly rent. From the properties we've sold to these groups, they appear to be looking for at least 1.25% monthly rent...last summer is was less than 1%. So, their standard seem to be increasing.

Again, this is from a combination of actual MLS data, talking to the agents representing these guys and just empirical evidence (what I've seen/heard).

[Lynn McGeein]

Chris Martin Thank you very much for this information. What is very strange is that when I searched the sales records, it seems they aren't buying at such a huge discount, most look like the same ratios of price to assessment that individual investors like us were paying, some even seem to be fairly high, definitely not what I would have expected from bulk purchases. Happy to see they are paying as much as they are as I was thinking comps would be ruined for months.

[K. Mitchell]

Institutional buyers really don't impact me or the small landlords I know. I just don't see them as competition and they certainly won't put me out of business. In fact, just the opposite will probably happen.

I own several of my units outright and could reduce rent just to the cost of tax and insurance if needed. If I had to, I could even operate at a loss for a few decades if need be.... My passion/interest in real estate would keep me going. What would keep them going in the face of years of losses?

In fact, many of the landlords I know are not making a profit. They try, but don't make it. Their time horizon is long, so they will eventually. Their passion/interest in real estate carries them through.

If institutions think they will put the small guys out of business, I don't think institutions realize that this is who they would be competing with. Also, I don't think they realize landlording real estate isn't that profitable in many markets and waiting for capital appreciation is iffy at best.

[J Scott]

Originally posted by K. Mitchell:
Institutional buyers really don't impact me or the small landlords I know.

In my opinion, the biggest impact is that they're limiting your ability to pick up additional units at below market prices. If you're not currently looking to add units to your portfolio, they probably pose little competition to anyone who owns their units outright.

Now, for those landlords who are highly leveraged, there may be some additional impact, as the institutional buyers may not to drop rental rates below market get all their units filled -- that means market rents are driven lower, hurting everyone cash flow, especially those who have a monthly mortgage payment.

[Mike McKinzie]

I have already seen this in my Phoenix area rental. I had it rented at $1,150 a month and then it became vacant. To get it rented again, I had to drop it to $900 a month. No big deal as I own the house free and clear. But having paid $120,000 for it 2 years ago, my percentage return did drop. Luckily, other rentals I own in other markets allowed for a rent increase so overall, my annual rents went up. But let's see how these "big boys" do paying $150,000 for a house that rents for $900 a month in the Phoenix area!

While these large purchasers might make it more difficult to find deals, overall, they bring the values up, helping under water homeowners get out of trouble and making for a more healthy market. My fear is if they decide to dump IN MASS when they find out they can't make better than 2-3% returns on their investments. But, maybe that will be an opportunity for us "little guys" to pick up an additional five or ten a year!

[Account Closed]

Thanks for sharing the situation in your market. I'm in CA and knew from the start that institutional buying wasn't a myth. But was I was pretty skeptical about its impact outside of certain metro areas. I didn't even know there was myth about them making discounted offers or paying below market, because for the last six months they have been setting the market in two of my farms. They pay asking price or better, with no appraisal. It's their purchases, and those of other cash buyers, that are making the comps go up. The owner occupant buyer doesn't have a chance unless they are buying in the market over $250K and under $75K, or in really bad areas. I have seen no evidence yet of institutional buying of any kind of units.

I don't know what "institutional buyer" really means. In the beginning I assumed it was Wall Street type funds moving money into RE for a few years. I've become more interested in two foreign LLCs in my areas that just started buying at the beginning of 2013. They both have 100+ houses now and are buying anything that is relatively ready-to-go, not just finished rehabs. They are buying in the $150-225K range. They just started buying at foreclosure sale a few weeks ago too, which is a totally different gig. That being said, there is no shortage in my area of agents who will do everything for investor buyers: bid at sale, vacate your property, supervise your rehab and get it rental or re-sale ready.

Because I buy directly from sellers and buy properties that aren't for sale and often solve problems that an average buyer and escrow doesn't cover, I like to think I'm exempt from Fund Panic. However, it is starting to get to me.

[NA Foster]

Thanks to all for this interesting news. The only way I can track “The Big Boy” buyers in my county is by their name: company, inc, llc, etc. I will track them here if provided names.

[K. Mitchell]

In investment terms, I think many of the players in the real estate market simply are not rational. They are the the 'own one or two property and subsidize the loss with W-2 wages' type of investors. They buy with a 20-30+ year time horizon and look at the SFRs as retirement income once the mortgage is paid off.

I don't know for sure, but my guess is that these investors, just due to the large number of them (or should I say, "us"), hold the vast majority of SFR rentals in the U.S. (excepting some of the larger buyers like Ted Turner, etc.). If this is the case, I still don't see how any large fund can expect to compete in a market space dominated by this type of irrational investor.

Put another way, I don't think the economies of scale for a larger investor can add enough efficiency/savings for the larger investors to displace the irrational investors they are competing with--even over a short term (such as 3-5 years). Especially if they have to continually show profits to shareholders or boards of directors every month, quarter, year.

I also think that the larger investors economy of scale/savings can't even overcome the efficiency added by the local investors who know their local market and invest strategically in their market over a long time horizon (i.e., the guys that can wait a long period of time for bargains and wait out market swings). This competitive efficiency advantage for smaller landlords combined with their irrational investing seems insurmountable.

If I were betting, I would bet on the small landlords....

[James Hiddle]

I want to throw some questions at you guys. Are these institutional buyers/hedge funds/equity firms more speculative players or are some actually REI savvy? Are they creating yet another bubble or is this just a passing storm that will die down soon? And are they doing more harm than good?

[K. Mitchell]

Sell your portfolio to them at a steep premium. Invest the proceeds into shorting their stock. When their stock goes down, buy your same portfolio back from them at a steep discount.

:)

[Chris Martin]

Originally posted by James Hiddle:
I want to throw some questions at you guys. Are these institutional buyers/hedge funds/equity firms more speculative players or are some actually REI savvy? Are they creating yet another bubble or is this just a passing storm that will die down soon? And are they doing more harm than good?

Qood questions. Without an S-11 from the REIT, we can only speculate. Even with an SEC filing, we still may be speculating;)

Here's what I know. In their last Reg-D filing, filed a few weeks ago, they state their Total Offering Amount is $18,260,704. The offering is complete (100%). Under Revenue Range, they Decline to Disclose. Combined with prior Reg-D filings (where they raised $18,980,325) it looks like they have raised roughly $37.2M. By isolating the county property card field "Pkg Price" for each REIT bought property, I can conclude that they have paid roughly (the field "Pkg Price" is based on tax stamps so is a rounded amount) $26.4M for the property in Wake county they acquired. It is possible their buying spree is closer to the end than the beginning.

Regarding "..are they doing more harm than good?" I think it is too early to know. I'd bet there are 152 happy sellers though! With Trianle MLS reported closed sales for the first two months of 2013 at 3,184 units, this REIT represents a small percentage of total transactions. Short term, I think they are doing more good than harm.

[Bill Gulley]

Great post Chris! I understand there are some new players here as well, but nothing like what's hitting the larger metros. No matter what happens, the big guys can't buy them all nor can they find them all. Guessing I'd say only 15 to 20% of my deals came out of banks, 20% were probably walkins, the rest were from other efforts.

And, I suspect as the tax benefits begin to play in 7 to 12 years, you'll see for sale signs.

[Chris Martin]

@Bill Gulley

Well, it's been almost 10 years since American Homes 4 Rent (AH4R), in December 2012, burst onto the scene in Raleigh and started buying dozens (and ultimately hundreds) of properties a month. In their target market, which overlapped mine, AH4R over the course of 18 months or so bought everything available. Within 18-24 months they started bidding at the courthouse and, it turned out, my career was over. I couldn't compete with a multibillion-dollar operation. LOL! We were/are just some locals trying to make a living. 

In the past 10 years, AH4R haven't sold much. Other than a trickle, they stopped buying in volume in 2015Q1. Their last SEC 10-Q filing shows they have 2,165 SFR in Raleigh. I believe them. They have their properties scattered about in various holding companies like AMH 2014-3 BORROWER LLC (296 units.) Lennar is the largest parcel owner at 1,658 parcels in Wake County, followed by City of Raleigh (1,255), Pulte (1,066), and State of NC (664).

10 years ago, I said "Short term, I think they are doing more good than harm." For my local market, I think that was indeed the case. 

[Pat Lulewicz]

@Chris Martin love that you came full circle on a post like this.