Podcast host Nikki Hynes lost her dream home last summer. Despite bidding $15,000 above the listing price, the sellers chose an investor instead — an all-cash offer and a lightning-fast 14-day closing time.
“We were devastated,” Hynes said. “We also started worrying about not being able to find a house if we spent more than $15,000 and were beaten by cash offers. It is very difficult to compete with them.
The Hynes story is becoming mainstream in today’s competitive marketplace. Inventory for sale is down 40% from pre-pandemic days, and more than three-quarters of buyers found themselves in a bidding war at some point last year. Increasingly, cash-strapped investors were on the winning side of these battles, upping the ante in an already high-stakes market.
According to data company CoreLogicinvestors made 27% of all single-family home purchases in the first three quarters of 2021, up from just 17% at the end of 2019. Plus: these investors are primarily focused on lower and mid-market prices. , which means that first-time buyers feel the weight of their activity.
“Even before the investor boom, the American homebuyer was already facing an uphill battle,” says Christian Wallace, head of real estate services at Better. “When you add in the deep pockets of Wall Street companies, homebuyers won’t stand a chance.”
Rising prices, low rates and inflation
Today’s real estate investors come in many forms. There are home flippers, small and large-scale landlords, Wall Street-backed institutions and, more recently, iBuyers – a sort of online home-buying company that buys, fixes and then resells properties in a flash. of time. (Opendoor and Offerpad are examples. Zillow was.)
While everyone has their own motivation to increase investment volume this year, experts say it all comes down to seizing an opportunity.
“Investors are looking for higher returns in a low interest rate environment,” says Eric Maribojoc, professor and director of the Center for Real Estate Entrepreneurship at George Mason University. “With single-family rents and home values rising sharply in recent years, returns for rental single-family homes have been attractive.”
That’s a succinct way to sum up the many drivers of this trend.
As Maribojoc mentioned, home values are on the rise. According to the National Association of Realtorsthe median price of homes in the United States recorded a 17% increase in 2021. Rapid price growth offers a major advantage to homebuyers and iBuyers who want to buy low, make some improvements and sell high. high in a few months.
Mortgage rateswhich until recently hovered near historic lows, are also factored in, and there’s inflation – which just recorded its highest jump in 40 years, to think about too.
Real estate is generally considered a good hedge against inflation (its value and rent potential increase as prices rise), so in times of inflation many investors see it as a better bet. sure other options. As CoreLogic economist Thomas Malone explains, “prices and rents have risen, making housing a relatively more attractive investment than alternative assets.”
Demand for single-family rentals is increasing
Malone briefly acquiesces in this, but rising house prices play another role as well: It allows people to rent longer, driving up rents (and demand for rental properties) in the process.
According to Realtor.com, rents increased by 19% between December 2020 and December 2021. This kind of growth is tempting for institutional investors, who accounted for 26% of all investor purchases last year, up from 14% the previous year.
These deep-pocketed competitors – often representing a hedge fund, pension fund or real estate investment trust (REIT) – typically turn the owner-occupied homes they buy into rentals, aiming to generate consistent returns for shareholders. The largest example of this type of business is Invitation Homes, which owns over 80,000 rental units.
“Institutional investors, in the wake of Covid, had to abandon investments in offices, retail, shopping malls and hotels as they were no longer safe havens,” says Grant Cardone, CEO of Cardone Enterprises, a Florida-based institutional investor.
Rentals, especially when combined with strong demand from millennials, have offered an increasingly lucrative alternative.
“The largest cohort of millennials are reaching the ideal age for household formation,” says Rick Sharga, executive vice president of foreclosure registration platform RealtyTrac. “This is creating demand for both owner-occupied housing and single-family rental properties, and investors are actively buying homes to meet demand in both.”
But make no mistake: it’s not just the big Wall Street companies that are benefiting from the increase in rental demand. According to CoreLogic, small investors – those with nine or fewer properties – accounted for 43% of all investor purchases last year.
Some of these were existing family operations. Others were first-time investors, using their pandemic-boosted savings or newfound remote working abilities to get into real estate (and land a vacation property In the process).
“Households have generally increased their level of savings during the pandemic through a combination of less spending while staying at home and receiving government stimulus funds,” says Maribojoc. “Some households spent more on home renovations, some bought a bigger house and others invested in rental properties. Individual investors with one or two rental homes still make up the bulk of the single-family investment market.
Why do sellers choose offers from investors?
Either way, the investor is only one side of the equation. The other? That would be the seller – who plays a major role in why investors were able to consume such a large chunk of today’s limited inventory.
Often investors come to the table with cash offers, as in the case of Hynes. These can be very tempting for sellers: they close quickly and there are also no potential financing issues to contend with as there are with mortgage buyers.
The old challenge of selling by buying also makes these offers tempting. The sellers of this boat are looking to align their sale and purchase as closely as possible to avoid overlapping payments or needing a temporary place to stay. Traditional buyers, who are tied to mortgage financing that could fail or be delayed, are simply riskier.
“Because investors buy properties with cash, sellers don’t have to worry about approvals, inspections, or bank appraisals, eliminating the three biggest caveats that can end a deal,” says Ryan David, owner of cash-based home-buying company We Buy Houses In. Pennsylvania. “The seller will be paid very quickly, with closing taking only a few days to a few weeks. facing seizure.
iBuyers in particular offer a compelling alternative to sellers who want to perfectly time their sales. Many iBuyers even offer “trade-in” programs, which allow homeowners to sell their home and buy a new one in one transaction.
How Regular Homebuyers Can Compete
Whatever a seller’s reasoning for choosing an investor, one thing is certain: it makes an already difficult home buying climate even more difficult. According to experts, however, there are still ways for traditional buyers to stay competitive.
Making a cash offer is often the best option, as it offers the speed and ease with which most investors come. It also increases your chances of winning by 290%, according to a To analyse past real estate transactions.
For buyers who don’t have so much money in the bank, cash offer programs like Ribbon or Orchard can be another way to confront investors. In these arrangements, the company makes a cash offer on your behalf, buys the house, and lets you rent it while you work to secure financing. (With Ribbon, for example, you have up to 180 days to get a loan).
Choosing a lower-cost housing market can also help (you might even become a small investor yourself there) and having a mortgage pre-approval – ideally a fully underwritten guarantee, can also be a smart way to compete. Because these types of pre-approvals require full documentation and underwriting, they can often speed up the closing process and remove much of the risk for the seller.
Finally, experts say, buyers should make their offers as similar as possible to those of an investor: offer a sale-leaseback, choose a lender with fast closing times, and consider removing valuation and price contingencies. inspection. (Make sure you talk to your agent thoroughly before you do this; giving up contingencies carries a real risk, especially the possibility of an inspection.)
“Make creative offerings that stand out from the crowd,” David says. “This can include waiving inspection or taking possession as is without the seller having to do anything. Anything that attracts a seller by making it more convenient for them is always more attractive.
Every Saturday, Money’s real estate editor, Sam Sharf, dives deep into the world of real estate, providing a fresh take on the latest housing news for homeowners, buyers and dreamers.
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