Podcast host Nikki Hynes lost her dream home last summer. Despite offering $15,000 over list price, the sellers instead chose an investor — one that offers cash payments and a lightning-fast 14-day closing period.
“We were devastated,” says Hynes. “We also began to worry that if we made $15,000 and were beaten by cash offers, we wouldn’t find a home. It’s very hard to compete with them.”
The Hynes story becomes commonplace in today’s competitive marketplace. Inventory for sale is down 40% from pre-pandemic days, and more than three-quarters of buyers have been in a bidding war at one point in the past year. Increasingly, cash flush investors have found themselves on the winning side of these battles, upping the ante in an already high stakes market.
According to data company CoreLogic, investors made 27% of all single-family home purchases in the first three quarters of 2021 — up from just 17% at the end of 2019. What’s more, these investors are largely focused on the lower- and mid-priced ends of the market, which means that First-time home buyers are feeling the brunt of their activity.
“Even before the investor boom, the American homebuyer was facing an uphill battle,” says Christian Wallace, head of real estate services at Better. “When you add in the deep pockets of Wall Street firms, homebuyers don’t stand a chance.”
Rising prices, low interest rates and inflation
Today’s real estate investors come in many forms. There’s Home Flipper, landlords large and small, Wall Street-backed institutions, and more recently iBuyers — a type of online homebuying company that buys properties in a short amount of time, repairs them, and then resells them. (Opendoor and Offerpad are examples. Zillow used to be.)
Although everyone has their own motivation to increase investment volume this year, it all boils down to seizing an opportunity, experts say.
“Investors are looking for higher yields in a low interest rate environment,” said Eric Maribojoc, professor and director of the Center for Real Estate Entrepreneurship at George Mason University. “Since single-family rents and house values have risen sharply in recent years, the yields for rented single-family houses have been attractive.”
It’s a succinct way of summarizing the many drivers behind this trend.
As Maribojoc mentioned earlier, home values are rising. According to the National Association of Realtors, the average US home price has increased by 17% in 2021. The rapid price growth offers a major advantage down the road for property flippers and iBuyers who want to buy low, make some improvements, and sell high for a few months.
Mortgage rates, which have hovered near historic lows until recently, also play a role, and there’s also inflation – which just jumped by the highest in 40 years – to also think about.
Real estate is generally considered a good hedge against inflation (its value and rental potential increase as prices rise), leading many investors to see it as a safer investment than other options during inflationary times. As Thomas Malone, economist at CoreLogic, explains, “Both prices and rents have skyrocketed, making housing a relatively more attractive investment than alternative investments.”
The demand for single-family homes is growing
Malone dozes off shortly thereafter, but rising home prices play another role: they keep people renting longer, driving up rents (and rental demand).
Rents increased 19% between December 2020 and December 2021, according to Realtor.com. That kind of growth is enticing for institutional investors, who accounted for 26% of all investor buying last year — up from 14% a year earlier.
These well-financed competitors — often representing a hedge fund, pension fund, or real estate investment trust (REIT) — typically convert the homes they buy into rentals to generate consistent returns for shareholders. The largest example of this type of company is Invitation Homes, which owns more than 80,000 rental homes.
“Institutional investors have had to abandon investments in offices, retail, strip centers and hotels as a result of Covid because they were no longer safe havens,” said Grant Cardone, CEO of Cardone Enterprises, a Florida-based institutional investor.
Renting, especially when combined with strong demand from millennials, offers an increasingly lucrative alternative.
“The largest cohort of Millennials is reaching the prime age to start a household,” said Rick Sharga, executive vice president at RealtyTrac, a foreclosure platform. “This is creating demand for both condominiums and single family rentals, and investors are actively buying homes to meet demand in both.”
But make no mistake: It’s not just big Wall Street firms that are benefiting from rising rental demand. According to CoreLogic, retail investors — those with nine properties or fewer — accounted for 43% of all investor purchases last year.
Some of these were existing mom and pop operations. Others were first-time investors who used their pandemic-related savings or newfound remote work skills to get into real estate (and snag a vacation home in the process).
“Households have generally increased their savings during the pandemic through a combination of spending less while traveling home and receiving government stimulus funds,” says Maribojoc. “Some households spent more on renovations, some bought a bigger home, and still others invested in rental properties. Individual investors who own a rental home or two still make up most of the single family investment market.”
Why do sellers choose investor offers?
In any case, the investor is only one side of the equation. The other? That would be the seller — who plays a major role in why investors have been able to consume such a large chunk of today’s limited inventory.
Investors often 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 like there are with mortgage buyers.
The old sell-while-buy challenge also makes these offers enticing. Sellers in this boat try to match their sale and purchase as closely as possible to avoid overlapping payments or the need for a temporary home. Traditional buyers tied to mortgage financing that could fail or delay are just riskier.
“Because investors buy real estate for cash, sellers don’t have to worry about bank approvals, inspections, or appraisals, eliminating the top three caveats that can shut down a transaction,” said Ryan David, owner of home buying firm We Buy Houses In Pennsylvania. “The seller gets paid very quickly, taking just a few days to a few weeks to close. This benefits the seller when they need quick cash or need to sell in a hurry, e.g. B. because of a job change or if he is threatened with foreclosure.”
iBuyers in particular offer a compelling alternative for sellers who want to time their sales perfectly. Many iBuyers even offer “trade-in” programs, allowing homeowners to sell their home and buy a new one in a single transaction.
How regular homebuyers can compete
Whatever a seller’s argument for choosing an investor, one thing is certain: it makes an already difficult home-buying climate even worse. However, according to experts, there are still ways traditional buyers can stay competitive.
Making a cash offer is often the best option as it offers the speed and ease that most investors come with. It also increases your chance of winning by a staggering 290%, according to an analysis of past real estate transactions.
For buyers without that much cash in the bank, cash offer programs like Ribbon or Orchard can be an alternative way to get on an equal footing with investors. In these arrangements, the company makes a cash offer on your behalf, buys the home, and lets you rent it back while you work to get financing. (Ribbon, for example, gives you up to 180 days to get a loan).
Choosing a lower cost housing market can also be helpful (you could even become a small investor there yourself) and getting a mortgage pre-approval – ideally a fully signed one – can also be a smart way to stay competitive. Because these types of pre-approvals require full documentation and endorsement, they can often speed up the closing process and remove much of the risk for the seller.
Finally, experts say, buyers should make their offerings as similar to an investor’s as possible: Offer a leaseback, choose a lender with short closing times, and consider eliminating valuation and inspection risks. (Be sure to speak at length with your agent before doing the latter; forgoing contingencies comes with real risk — particularly the inspection contingency.)
“Make creative offers that stand out from the rest,” says David. “This can include waiving the inspection or accepting it as is without any action on the part of the seller. Anything that attracts a seller by making it more convenient for them is always more attractive.”
More of money:
Buying a home with cash can save you thousands, and you don’t have to be rich to pull it off
For these millennial homeowners, the vacation home is the new starter home
How to buy your first home