Move Over Foreclosure Investor, Here Comes The Hedge Funds

By
Real Estate Appraiser with PahRoo Appraisal & Consultancy

                 As the recent U.S housing crisis that was part of the biggest recession since the great depression shows signs abating, the market has begun to show signs of a recovery. Some will point to the reduced housing inventory, others will point to the positive news of widespread modest increases in home prices on a monthly basis, still others will point to a reduction in the shadow inventory, but a few will point to the entrance of hedge funds and REITS which are buying up single family homes, generally in bulk and turning them to rentals, otherwise known as REO to Rental programs.

                In contrast to the typical investors who were ordinary people investing in single family homes for rental properties and appreciation, new competitors have arrived with big names, an army of staff, huge aspirations, and lots of capital.  Big name private equity firms and hedge funds are flooding real estate auctions around the country.  These entities are lured by inexpensive foreclosures and backed by capital that many small investors cannot compete with. In a recent article on the Wall Street Journal, it was reported that one private-equity firm, Colony Capital LLC, based in Santa Monica, California had 52 employees on one day bidding on homes at seven different county courthouses in Georgia. By the end of the day fishing for foreclosures, they firm hauled in 133 properties to the tune of $9,000,000.  These properties were added to the existing portfolio of 3,600 foreclosed homes it has already acquired. Officials hope to increase the firm's inventory to 10,000 by next spring.   

                Why are firms like Colony, Blackstone, Waypoint, Och-Ziff and Oaktree and others diving deeply into this space, despite extremely high operating costs and a myriad of challenges that come with purchasing individual distressed assets, because they are achieving yields on rents of 7% to 8% in a market where savings rates are less than 1%.  "We, like others, believe in the housing recovery and we believe there's a great role for folks like us to come in, buy these homes," said Anthony Myers, senior managing director with Blackstone real-estate group.  Investors who were once chasing $100 million dollar real estate deals are now chasing these foreclosures.  As Paul Furman, a Colony Capital executive, aptly put it, “We went from hunting elephants to whacking ants with mallets”.

                There are many firms like Colony and the scene above is playing out every day in cities and towns across the country. It comes without saying that many small investors are worried that the days of making huge profits flipping homes, or making modest but stable incomes from rental cash flows are already numbered.  If there is good news in this scene being played out, it comes in the results of the auctions.  Based on Gwinnet County auction sales, the number of properties sold at auction has increased from approximately 15% to nearly 33% due to the arrival of private equity and hedge funds focused on foreclosure sales.  This increase in foreclosure purchase activity benefits the banking sector by decreasing their shadow inventory while increasing their cash on hand that came from the sale of the property. 

Michael Hobbs, SRA, LEED GA, PahRoo Appraisal & Consultancy

 Twitter @Pahroo

 Job Opening We're Hiring: 2 residential real estate appraisers (Chicago or suburbs)

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Posts to Localism
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Foreclosure Talk
Tags:
foreclosure investor
investment property
yield on rent
hedge fund
private equity
blackstone
reo to rental

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Michael Hobbs

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