Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

Hooray for the Hedge Funds!? Our Experience Dealing with the Hedge Funds

by Karen Rittenhouse on June 13, 2013 · 27 comments

  
Hedge Funds

Much has been written here about the growing presence of real estate Hedge Funds. We are all interested, curious, confused, and cautious about who they are, what they plan to do in our markets, and what this will mean to our businesses now and in the future.

Here’s Our Story

Our area has finally hit the Hedge Fund radar. We have avoided all sorts of attention in the past — we never had a real estate bubble so we never had the bust; we never had major bank packages available because our state didn’t suffer that many foreclosures. We read and study about these activities in other areas of the country, and have been reading about Hedge Fund activity creeping through the states. We wondered if we’d escape yet another real estate phenomena.

Apparently not. Recently, a Hedge Fund came to town and landed in our backyard. They bought 131 properties here on a single day last month. That got them noticed by both investors and real estate agents alike. This month, they purchased several of our properties and we are THRILLED to sell to them. Turns out, they are paying 92-96% of MARKET VALUE. Unbelievable!

What we’ve found locally is that they will pay 92-96% and are willing to put in another $10,000 in repair costs. Our local median price point is $147,000 which is where they seem to be buying.

To date, they haven’t hurt our buying power at all. We currently buy totally distressed to rehab and sell. They are buying fixed up properties and paying retail. They may well be the answer to our prayers.

Are Hedge Funds Destined for Failure?

Like so many of the lender activities over the past 6-8 years, we don’t understand these Hedge Fund strategies. I doubt that any of us here on BiggerPockets pays 92-96% for our properties (not for long, anyway). And then add another $10,000 in renovations? Wow, the gurus’ heads must be spinning.

The latest hedge fund phenomena we’ve been watching is their property management strategy. Since their plan, apparently, is long term holds with tenants, they need to read a book on landlording. We personally know a local woman they have hired to handle some of their property management and she’s never done it before. Wow. They’ve never contacted us and we’re a fairly large local property management company. You’d think they’d at least want some information from us. Nope. Not so far, anyway.

As far as we can tell, they’re buying wrong by majorly overspending. The only “logical” explanation is that they’re counting on significant short term appreciation. I certainly hope they’re right as we’ll be retiring much sooner if they are. Looking at historical housing numbers, however, I fear this is their final and potentially fatal mistake.

Future significant appreciation or no, our strategy is to win. If house values skyrocket, great for us and we’re Happy, Happy, Happy. If appreciation is slight and/or slow, we plan to buy back these Hedge Fund properties in the very near future at significant discount.

These people, who appear to have very little real estate experience or knowledge, really need to start reading BiggerPockets.

HOORAY FOR HEDGE FUNDS!!!

Photo: bestarns [www.spiritofdecay.com]

Email *
  



{ 27 comments… read them below or add one }

Joshua Dorkin Joshua Dorkin June 13, 2013 at 11:12 am

I LOVE IT! Awesome post, Karen. While they “NEED” to read BiggerPockets, they don’t care . . . it is a massive land grab. I’ve talked to a few guys working at these funds and the goal is to buy — period. Fundamentals are irrelevant.

It is a MASSIVE speculation play, IMO

I’ll stick to the fundamentals.

Reply

Karen Rittenhouse June 13, 2013 at 3:08 pm

Very interesting to watch, Josh, as much has been in the past 5 years….

Yup, buy buy buy. Maybe because Warren Buffet said it was a good place to invest? (he should have added, “with training”)

Reply

Shaun June 17, 2013 at 12:41 pm

What everyone always forgets about that statement by Buffet was he said if he could do it he would buy that 100,000 SFH or whatever it was and leverage the low interest.
He isn’t doing this because he knows that managing that would be a nightmare.

So the “smart” money is now buying these things at retail, all cash, and have no idea how to manage them. This will be an impressively massive explosion when they fail!

Reply

Karen Rittenhouse June 17, 2013 at 1:28 pm

I have proof in my area that they know nothing about management. It doesn’t really matter what the spread, if you don’t know how to manage after you own them, you’re in trouble. And, buying with no equity means there’s no opportunity to sell.

If you’re investing in hedge funds, beware!

Ryan Lundquist June 13, 2013 at 11:22 am

It’s been amazing to watch cash sales in the Sacramento area. Right now 53% of all single family sales under $200K have been cash so far in 2013. 37% of all sales have been cash in the entire county (for 2013). Last year one fund began to buy very aggressively and it made a big impact on the market. This fund has purchased over 1200 properties since last August too. It’s been interesting to watch their prices that have been on point with other sales in the neighborhood or even 10-15K higher at times. Top dollar now and betting on future appreciation and a profitable REIT.

Reply

Karen Rittenhouse June 13, 2013 at 3:09 pm

Right, Ryan.

Some of the funds that started all this excitement have already stopped buying. Will be interesting to see how all of this lands in the next few years.

Reply

Jake Kucheck June 13, 2013 at 12:48 pm

Karen,

I’ve made this point a number of times, but comparing large PE buyers to individual landlords is apples and oranges. You, and me, and most of the people on BP buy houses to achieve a desired result from the outcome of the house, whether it be a lump sum of cash from a flip, or a desired yield from rent. Private equity buys houses so that they can create a projectable yield, create a synthetic product based on the projected yield, and then sell that product or IPO out their initial capital and make substantial gains. What the houses do is mostly irrelevant as long as there is a buyer for their product.

So, you may not understand their model, but it is massively more profitable than ours. Think of the companies that made a killing during subprime- same thing, just with rent instead of mortgages.

The risk is what happens if you do the IPO too early and still have poor performance, like Silver Bay has done (and shown on their first earnings report). Once you’ve already done an IPO and are still only hitting a 4-cap before fees, I don’t know what your exit strategy is.

Reply

Karen Rittenhouse June 13, 2013 at 3:30 pm

Interesting perspective, Jake.

“You, and me, and most of the people on BP buy houses to achieve a desired result from the outcome of the house.” Yes, when you buy a house, there should be a desired outcome.

“Private equity buys houses so that they can create a projectable yield”, which is exactly the same thing, buying for a desired outcome.

“What the houses do is mostly irrelevant as long as there is a buyer for their product.” Which is a terrifying statement. The houses are the only relevant thing in the package as they are the only thing in the package. Making them irrelevant is like the banks saying someones income was irrelevant when giving loans. How did that work out? (apples to oranges?)

“Once you’ve already done an IPO and are still only hitting a 4-cap before fees, I don’t know what your exit strategy is.” Which is my point – I don’t understand how they’re going to hit the numbers their investors and/or buyers are going to need to see if they continue with their business model as it currently exists.

Long may they wave. I hope everyone is profitable; there’s certainly more than enough out there for everyone (especially the way we print money). I just don’t see their business model as a sustainable one but (“So, you may not understand their model”) I’m not as myopic as you may think.

Thanks for taking the time to contribute and spell all that out. I would certainly love to understand more of the details here on their model. One thing’s for sure, it won’t be many years down the road before we’ll be able to come together again to evaluate!

To your investing success.

Reply

Jake Kucheck June 14, 2013 at 10:05 am

I think there is an underlying distinction that is subtle but important.

When I said that individual landlords buy for a desired result, I probably should have also made the point that in order to succeed, individual landlords need to achieve that result over the life of the investment. PE buyers don’t need the houses to achieve that result, they just need the houses to meet specific criteria at the outset.

And yes, this does seem reminiscent of subprime, and I made that point too. But again, there’s another distinction that needs to be made. While subprime understandably did not end well for borrowers and whomever bought the MBS or CDOs that were sitting there expecting to be paid a yield that did not come to fruition, the companies that created and packaged the product made enough of a fortune to last several lifetimes. There’s no need to create a sustainable business model when you can retire before the bubble bursts.

Reply

Karen Rittenhouse June 14, 2013 at 10:20 am

Yeah, that’s a little bit tragic, benefiting on the loss of others – what investors are constantly accused of doing but not, actually…

I wasn’t really doing the apples to oranges thing. I was sharing our experience – they buy fixed properties, we fix up properties to sell. For us, they are an answer to prayer, especially at 95% of value.

Thanks for continuing to clarify.

Sharon Vornholt June 13, 2013 at 3:57 pm

Karen – You just have to sit back and scratch your head don’t you? Maybe they will need to sell quickly in the future and you can buy them back at a big discount. Great information!

Sharon

Reply

Karen Rittenhouse June 13, 2013 at 4:08 pm

Thanks, Sharon.
Yup, another puzzle we’re all working to piece together!

Reply

Glenn Schworm June 13, 2013 at 10:44 pm

We have not been hit yet, so I have felt safe. From all of the chatter on BP it seems as though they will not effect many of our buying strategies as we target the “off market” distressed properties. Agree? I guess time will tell for us. Thanks for the article Karen, maybe they will snatch up many of our finished houses at retail also! Their strategy really makes no sense to me, but if they want to buy them finished, we will sell to them.

Reply

Karen Rittenhouse June 14, 2013 at 6:45 am

Hi Glenn:
I hope they come to your area, buy up all your for sale properties, and raise the property values of your rentals.

Hooray for Hedge Funds!

Reply

Sabrina June 14, 2013 at 4:57 am

Great article. There are so many points to watch for with this Hedge Funds, which lead us to think that if their buying parameters are not fitting the norm for real estate investing, we can bet that it is just helping create another bubble perharps. This might be just a new waive of opportunity for “us” real property investors.

Reply

Karen Rittenhouse June 14, 2013 at 9:52 am

Hi Sabrina:
We’ve been doing this business since 2005 and no 2 years have been the same. The best investors always look for trends and upcoming opportunities so they’re ready to jump on board.

Thanks for taking the time to comment!

Reply

Matt June 16, 2013 at 11:28 am

I’ve spoken w/ a few hedgies over the last few years and the majority are in it for the yield. Simply picking off the low hanging fruit that is real estate right now and financing it with 30yr fixed rates < 4.0%.

In the Fed's ZIRP world, hedge funds/Ibanks/corps not doing this in areas such as yours are passing up easy $.

Reply

Karen Rittenhouse June 16, 2013 at 11:34 am

Thanks, Matt.

Isn’t it a little depressing knowing that our neighborhoods are “low hanging fruit.” Life is interesting.

Reply

Matt June 16, 2013 at 11:38 am

As long as we’re still attached to the tree, I won’t complain. :)

Reply

Karen Rittenhouse June 16, 2013 at 12:47 pm

Get what you can while they’re pickin.

:)

Reply

Eve June 16, 2013 at 12:39 pm

Thanks for sharing the story, Karen.

Reply

Karen Rittenhouse June 16, 2013 at 12:47 pm

Thank you for reading it, Eve, and for taking the time to comment.

To your success!

Reply

Eric Cumberlander June 17, 2013 at 12:03 pm

Great post!

My questions is why don’t hedge funds buy REO properties in bulk
from the banks and government agencies as opposed to
buying retail at a premium.

Also investors should look at hedge funds as a blessing in disguise,
especially since they are buying retail at a premium. Who better to
flip rehabbed property to.

The main ones being hurt by hedges funds are consumers looking
to buy after standing on the sidelines for the last 5-7 years. They
are being priced out of the market.

Reply

Karen Rittenhouse June 18, 2013 at 11:22 am

Eric:
If they bought REOs, they’d need a rehab team! As it is, they don’t even have property management set up, apparently.

They do seem to be helping sellers. Will be interesting to see where this leads.

Thanks for the comment!

Reply

Jack June 18, 2013 at 9:02 am

How can I invite them to my town (Lexington, KY)? I’ve got several rentals I’d gladly part with on the terms you’ve described.

Cheers~Jack

Reply

Karen Rittenhouse June 18, 2013 at 11:23 am

Jack:
Lexington is probably on their radar. Keep your eyes out!

We’re so so happy to market to them.

:)

I’ll send them your way!

Reply

Jack June 18, 2013 at 4:00 pm

I and some others here would welcome them. Others here would grumble about the hedge funds snagging the good deals. That because lately around here, everyone and his brother-in-law are now “real estate investors.”

These guys are paying more than list price for properties needing significant work. The other game changers are the home buyers picking up light fixers at bargain prices. These are the smart ones and I don’t begrudge them their good fortune. But the good deals for real investors will occur when the hedge funds and REI wannabees decide to bail on their crackpot scheme to make money by overpaying and flood the markets with bargain basement deals. I give ‘em a few years at best.

Cheers

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: