With the housing sector on the brink of recovery, some investors are reluctant to participate in the market. Bank REOs and discounted properties are, in the eyes of some, becoming increasingly hard to find. Turning a profit in today’s economy is not as easy as it was in the previous two years. Warmer states, in particular, are considered to be void of anything resembling a foreclosure discount. However, there are several indicators that should retain a sense of optimism within the investment community. The continued participation of institutional investors suggests that the housing sector still has plenty of deals to go around.
Institutional investors, just one week into January, are already positioning themselves to make large profits in the New Year. Despite the freezing temperature, representatives from large investment firms lined up in front of the Gwennett County Courthouse outside of Atlanta to partake in Tuesday’s auction. Yesterday, nearly 3,000 properties were set for auction across the greater Atlanta area, each of which has the potential to produce positive yields for a prospective investor.
“Only the real die-hards are out here in 7 degree weather,” said Rick Sharga, executive vice president at Auction.com, which conducts the bidding for the bulk of the properties. “It just shows you that there is still a lot of active interest in this trade. It is far from over.”
While the results of the auction have not yet been released, the local housing market is predicted to benefit immensely. Of the approximately 3,000 properties up for sale, an estimated 1,800 are predicted to attract a serious buyer. With the average property fetching around $100,000, the greater Atlanta area is predicted to receive an influx of funds in excess of $180 million. It is important to note that continued interest in the housing market would make this trade relevant for the foreseeable future. The participation of large investment firms all but confirms the direction of the housing sector.
“I don’t think there is any chance that this is going to be over for at least another two years,” said Simon Frost, CFO of Key Property Services, which wanted to buy about 100 properties at multiple auctions yesterday.
Similar to that of small investors, Key buys homes at a discounted price to rehabilitate and sell at a later date. However, with current market conditions being that which they are, Key intends to sell her properties to other investors as turn-key rentals. This trend may benefit investors of a smaller nature.
Last November, home prices nationwide rose 11.8 percent. The increase marked the 21st consecutive month in which prices appreciated. Those gains have been driven by investors on the low end of the distressed market, but they have priced themselves out of some markets, so they are now on the move.
“As the foreclosure discount has gone away in some of the warmer states, investors are looking for markets where they have properties that fit their sweet spot of somewhere between $85 and $150,000,” said Sharga. “That’s the range where they can afford to buy a property and rent it out and get the kind of returns they need to deliver to their investors.”
With the direction the market is currently heading, it is no surprise that Phoenix, Las Vegas and much of California no longer offer the best returns. In fact, these regions have failed to make it into the top 10. According to CoreLogic, these metros have been supplanted by the likes of Chicago, Tampa, Orlando, Atlanta and Indianapolis. Taking into consideration the cost of acquisition, rehabilitation, rental rates and maintenance, these cities are now producing the best returns for investors.
“Atlanta is still one of the very early movers in home price appreciation and in distressed asset acquisition, so we think there are a lot of states, especially judicial states that will start releasing stock over the next few years and we want to be there when they do,” said Frost.
As for the investors who started early, some are finding incentive to sell to smaller investors. However, they are staying in the trade themselves by lending to said investors. Blackstone has even announced a new program to finance small investors buying multiple rental properties. This, in and of itself, is encouraging to smaller scale investors.
While this practice may not be familiar to many, it may be the next step in the investing industry. Rental demand should continue to increase for the foreseeable future and household formations will continue to struggle as a result. Moreover, the nation’s home ownership rate may continue to decline in the face of tight mortgage restrictions.