Homebuyers are increasingly going up against hedge funds and other big institutional buyers in a hot housing market— and they will need to bring their best offers to the table.
Cheri Benjamin, Realtor and CEO of Village Premier Collection, which services Atlanta, Las Vegas and Tampa Bay, said buyers might want to try and put down more than 20% and get their bank to wave an appraisal, as well as see what other contingencies they can do without. That’s because institutional buyers are now paying in cash and often at the listing price or above.
“What’s happening is that they are coming in and they are paying cash and they are paying over and above what the asking price is for the property,” Benjamin said, stressing that before Covid-19, they often would only pay about 70% of the after-repair value on a house because they intended to flip it. “They are entering more into the buy-and-hold market versus the buy-and-flip market. That’s why we are seeing a bit of a shift from that.”
Homebuyers are going up against institutional buyers more and more, according to property database Attom Data Solutions LLC. Institutional investors accounted for 4.6% of all single-family home and condo purchases in the second quarter of 2021, the highest share since the fourth quarter of 2015. That is up from 3.2% during the first quarter of 2021 and more than double from the 2% during the second quarter of 2020.
In many places, that share is even higher, with 11% of all sales in Mississippi made up of institutional buyers, alongside 10.4% of sales in Arizona, 8.8% of sales in Georgia and 7.6% of sales in Nevada. In the Atlanta metro area, where Benjamin operates, institutions purchased about 12.5% of the homes sold in the second quarter of 2021.
She said sellers have to beware of taking an offer from institutional buyers, who may offer asking price or above but will use the inspection contingency to drive the price back down.
“What investors typically do is they beat you up when it comes to the inspection,” Benjamin said. “They want price reductions for those repairs.”
Real estate investors (not just institutional) purchased 67,943 U.S. homes in the second quarter of 2021, the highest quarterly figure on record, according to a recent report by Seattle-based Redfin Corp. That’s up 15.1% from the first quarter.
Canada-based Tricon Residential Inc., for example, earlier this month said it was forming a $5 billion joint venture with the Teacher Retirement System of Texas, Pacific Life Insurance Co. and another, undisclosed global investor. The $5 billion venture will acquire more than 18,000 single-family rental homes across the country.
The metro area with the biggest share of homes sold to institutional buyers was Memphis, which saw 15.8% of homes sold in the second quarter of 2021 go to institutional buyers – up from 13% during the first quarter of 2021 and up from just 5.2% during the second quarter of 2020, more than a 207% increase, according to Attom.
“Home sales to institutional investors have soared over the past year as investment funds, pension systems, large real estate entities and others buy up properties to renovate and resell or, more likely, convert into single-family rentals,” said Attom Chief Product Officer Todd Teta. “Those rentals often go to people who need to live somewhere temporarily or have been shut out of the housing market by soaring prices. The increased interest is likely due to the stronger returns investors can get compared to other places where they can put their money.”
He said the biggest spikes came in the South and the West, where rates of institutional buyers more than doubled. Institutional buyers showed the least interest in the Northeast. And these equity, pension and other funds have an advantage over individual buyers, he stressed.
“They have access to more sources of credit at the best interest rates or have more cash on hand to fund purchases. They also may be willing to bid prices up more than individuals because their priorities are either quick flips on resales or a consistent return over a long period with single-family rentals as opposed to an individual buyer looking for a place to live on a tight budget,” Teta said.
The metro areas with the biggest share of institutional homebuyers includes:
- Memphis, Tennessee: 15.8%
- Atlanta-Sandy Springs-Roswell, Georgia: 12.5%
- Charlotte-Concord-Gastonia, North Carolina: 11.6%
- Phoenix-Mes-Scottsdale, Arizona: 11.5%
- Jacksonville, Florida: 10.9%
- Tucson, Arizona: 10.5%
- Raleigh, North Carolina: 10.3%
- Birmingham-Hoover, Alabama: 10.2%
- Indianapolis-Carmel-Anderson, Indiana: 9.2%
- Las Vegas-Henderson-Paradise, Nevada: 8.8%
The high number of cash purchases comes as what has been a red hot housing market spurred in part by Covid-19 has begun to shift. Prices are beginning to slip, with 4.7% of listings for the four weeks ending Aug. 1 seeing price drops, according to real estate firm Redfin, compared to 3.7% during the same period last year.
There are other signs the market might be turning, with new home listings surpassing prepandemic levels earlier in July, according to reporting by Ashley Fahey, real estate editor at The Business Journals.