Real Estate News & Commentary

“Smart Money” Woke Up – Now What?

72 Articles Written

I don’t know about your market, but I can point to the day the “Smart Money Woke Up” and started changing the real estate fundamentals for the buy-and-hold investor. It was like a starters gun went off and competition tripled, prices went up 20% in the distressed market and bidding wars became not only commonplace but also became the norm.

I believe the trigger was pulled by Warren Buffett and his now famous quote that went something like this:

“I would immediately buy thousands of rental homes if I could do it efficiently.”

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Now remember, to most mom-and-pop investors, Warren Buffett is seen as the best investor on the planet.  So if he would buy thousands of rental homes, the average person should go out and buy 1 or 2 properties immediately to insure they do not lose out on this once in a lifetime opportunity.

However, to the “Smart Money,” Warren Buffett was simply pointing at an opportunity in the market that someone should take advantage of.  In the end, “The Smart Money” believes they can capitalize on the opportunity even if Buffett can‘t or doesn’t want to.

They believe this because unlike Warren Buffett, who is almost anti-technology, these “Smart Money” investors with deep pockets can utilize technology better than anyone else.  They use cloud based applications right on their tablets or smart phones, run instant comps and know more about a house inside of a few minutes than you or I can in 4 hours.

Thus, with deep pockets and the technology advantage, the “Smart Money” can go out and single handedly change a market overnight. Some articles I have read indicate (example) they are buying 6 to 10 houses a day, every day and they have no plans to stop. ****

In addition, if you follow the common belief that “Smart Money” likes to run in packs, a market can quickly get very crowded.  I suspect we will see some significant average price increases shortly in many previously distressed markets, because the “Smart Money” has become the big buyer of REO and Short Sale properties.

So what am I doing with my business given this sudden and meaningful change?

First, I want to see if I can decipher the expected or modeled return the “Smart Money” is chasing.  My early calculation indicates they are happy with an 8% return on a house they own free and clear (remember they have deep pockets).  I think this is a horrible return but then again I don’t have millions of dollars to put to work.

I need this data so I know where to take my maximum offering price on a property if I really want it; or if I think the “Smart Money” is missing something about the asset (such as an existing opportunity to create value not found in spreadsheets and online databases).

Second, I want to understand where they are focusing their attention in my market.  I want to understand where they are doing most of their buying and what segment of the market they are after.

In my market, they seem to dominate the court house steps and they like properties built in the last 10 years.  I want to know this information, so I can figure out if these investors are my competition.  Plus, it tells me where to focus my energy to find good deals that they will miss, because they rely on technology and deep pockets (not relationships).

Finally, I am going to be very happy if they are in my market because they will goose my returns in short order, and potentially allow me the opportunity to 1031 Exchange out of houses into small apartment buildings 3 or 4 years earlier than I expected.  I bought 20+ single family homes over the last 2 years and if they want to double the value for me all the better.  I will just move the equity into a segment of the market they are not playing in.

In the end, it all boils down to supply and demand.  If supply continues to be managed slowly and the demand from “Smart Money” and mom-and-pop investors continues to rise, then prices have to go up, and I believe prices could rise quickly,

I welcome the “Smart Money” (about time if you ask me – where were you 2 years ago;-)

Good Investing!


    Ziv Magen
    Replied over 7 years ago
    Awesome “boots on the ground” practical brainstorming post. Loved every word. I think it truly boils down to seeing if there’s competition, how manageable it is, and what the best strategy to counter/capitalize on/cooperate with it is. I can only testify that I consider myself to be one of those spreadsheet/database person you mention – can’t be bothered with hands-on attention to spruce value, rehabbing, evicting and re-renting etc – want things to run smoothly from day one and report once a month, and can’t really afford to, investing from overseas – but that certainly doesn’t mean I’m happy with 8%. I can get that with creative banking – why would I go realty, unless I’m speculating on capital gain etc (which I don’t), if I’m not getting at least double what the bank would offer me? On the upside, for every failed application that some smart guy with boots on the ground like you takes from me, I have three or four a month (not quite up to those numbers of yours yet :)) that get me in the door in a heartbeat, because they can’t be bothered to wait for the rest of the market to catch up and start offering – they just want to get rid of it. So not quite on the low returns, but definitely for us number crunchers it’s a bulk thing, spot-on there. Would rather have five “average” (in my environment, 14-15%) properties than agonize over the one “gem” that’ll net me 20-25%. From where I’m sitting, nine hours flight and a continent away, it makes perfect sense – so I don’t see us as competitors, really, the “boots on the ground” vs “number cruncher” archetypes – more like complementary forces influencing the market (positively, hopefully :))
    Mike Z
    Replied over 7 years ago
    Hi Ziv I agree with your main point that we are not really competitors except that we happen to be buying the same asset. There is a lot of great things to be said about your model. Speed, Return and Repeatability (especially from over seas). As a simple guy with boots on the ground I enjoy picking off my 5-8 deals a year at 20%+ and keeping my full time job. Good Investing
    Tod R
    Replied over 7 years ago
    Michael, do you see the MF in your market being overpursued yet? In Tx I’m seeing the institutional investors buying up larger complexes based on 5-6 cap rates. I think the trickle down effect to smaller MF properties bodes well for the smaller investors.
    Tod R
    Replied over 7 years ago
    Michael, do you see the MF in your market being overpursued yet? In Tx I’m seeing the institutional investors buying up larger complexes based on 5-6 cap rates. I think the trickle down effect to smaller MF properties bodes well for the smaller investors.
    Mike Z
    Replied over 7 years ago
    Tod R, In my market SFH are being bid up. I think MF’s are currently decent buys Good Investing