Question for people familiar with reo to rent and hedge fund strategy..

[Thomas Dionne]

Im just trying to figure out if one thing is true about what the hedge funds are doing, I read this 2 weeks ago and cant not think about it...

Everyone has seen how hedge funds in a lot of cases are paying retail rates and accepting lower cap rates. I have heard its because of the following, which if true, I dont see how this isnt a potential problem. I will use even numbers to demonstrate, i dont think they will make margins this good but it illustrates the point easier...

They buy a house for 100k.
They rent the house for 1000.00/mth
They claim that after vacancy and management fees they net 10k a year or 10%
They find a pension fund that wants to buy a security that yields 5% (again, using easy numbers)
Since the house is generating a 10% return, but its getting sold at a price that would generate a 5% return, they just sold the 100k house for 200k.... (10k/year on 200k investment)

I dont think the numbers are that sweet, but as long as the security they create is quoted at returning a rate thats more than the end "pension fund" investor is buying for, they have sold the house for more than they paid for it. If this is done without any regard to the value of the house... this seems bad.

Even if the end pension fund buyer thinks the homes are worth that much, are they confident that we haven't seen a temporary spike in home prices?

Can anybody confirm this or point me to where I can learn more?