Profile of investors: The who, where, and how
It is not unusual for investors to buy inexpensive properties after a housing downturn. In fact, investors are often the first buyers to return to the housing market. This time around, however, we see a heavy volume of investment and a broader range of investors seizing on low home prices.
In addition to the so-called mom-and-pop investor—an individual who may own a handful or even dozens of properties—institutional investors such as hedge funds; private equity firms; real-estate investment trusts, or REITs; and other corporate entities are flocking to the market. These groups are funded primarily by private investors and are also increasingly accessing cheap capital from banks to fund their purchases.
Institutional investors may buy distressed properties at any point along the foreclosure pipeline. They buy real-estate-owned or bank-owned properties that have completed the foreclosure process, and they also purchase homes at foreclosure auctions and trustee sales. They buy properties through short-sales—which take place when a lender allows a homeowner to sell his or her home for less than the amount of the mortgage owed—and by purchasing portfolios of distressed notes from servicers. Now, investors appear to be broadening their footprint by also buying nondistressed homes, according to new research from CoreLogic.
Institutional investors such as the Blackstone Group L.P. are also working with financial institutions to create new securities based on rental payments from investor-owned homes. If the market for these securities grows, institutional investors will be able to access more capital and buy more properties to convert to rental homes, which would fuel demand for investor-owned homes and may make it more lucrative for a mortgage holder to sell or foreclose on homeowners rather than keep them in their homes. These transactions would occur outside the reach of a regulatory structure that oversees mortgages, not cash purchases.
While relatively small compared to the $18.5 trillion housing market, institutional investors have spent more than $17 billion in recent years. Even as rising home prices are apparently cooling interest among some leading institutional investors, policymakers should continue to pay attention. Their purchases, which have been targeted in specific metropolitan areas, could make a significant impact on local markets and neighborhoods.
Depending on the type of investor and the market conditions within the city and region of the purchase, investor purchases of distressed homes look wildly different.
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