All Forum Posts by: Brian Burke

@Rob K is correct, they are selling occupied homes with a quit claim deed and no title insurance. In that case, buying from them carries the same risk as buying at a Trustee's sale (courthouse steps). That is NOT a venue for beginners unless you have so much money that you dont care if you lose it.

A couple of weeks ago, I saw them selling a house that was obtained via foreclosure of a wiped out second deed of trust. In that case, they are selling NOTHING! The property had already sold to a market buyer several months ago after the first foreclosed. Of course, I only discovered this by doing my own title search. I'd bet that they weren't even aware of this, they just sell what their clients ask them to sell.

That being said, not all of their auctions are sold in this manner, some are sold with title insurance. You have to read the terms and conditions of each auction.

1. Celebrate my 23rd wedding anniversary
2. Raise at least $10 million for my third (and probably final) buy/hold SFR fund
3. Make smarter purchases with better yield than the hedge funds are doing in their buy/hold funds (which isn't really that hard)
4. Double last year's apartment complex purchases (to four)
5. Flip at least 50 houses (down from typical 100 but that's getting harder to do)
6. Take at least two one-week vacations and at least two "mini-trips"
7. Finish up my helicopter add-on rating to my pilot certificate
8. NOT write a book (no time!)
9. Maybe write an article, but for sure have an article written about my business by a major news publication (happened already this year so I have to keep the momentum going)
10. Help my fellow investors on BP by posting replies, giving feedback, and posting success stories to keep up the motivation

@Brandon Turner, "they" say that you achieve your goals by writing them down and then publicly declaring them. Thanks for starting this thread so we can all hold our feet to the fire. I hope I don't live to regret this...

Welcome to BP, Henri!

They very well might...you never know! They are buying about a third of my flips for higher prices than end-user buyers.

Bryan Hancock, I don't have the specifics of the deal structure (and they are all different), but what I have seen, and heard from the fund managers, is a structure where the capital source is paid a preferred return and a split of the profits after the allocation of the pref. It seems that they are in the 5-7% range on the pref. When this opportunity first became apparent, they were assuming this to be a 30's IRR model, but after seeing reality, many of them are now underwriting to a high-teens model. I'd be surprised if they get that, given that they are paying full market value (or more) and the first 10% of market move just barely covers their exit costs.

Tiger M., they aren't levering on the buy. They are amassing a portfolio then many of them will do (or have done) a take-out. They will then use the debt funds to either buy more property, or return capital to their capital source. Returning capital that costs them a 5 or 6% pref with debt at 4 or 5% does make sense.

I was talking with a large bank not long ago seeking such a take out for my portfolio. They were looking to place a minimum of $25 million but would really prefer higher, in the neighborhood of $100 million. It didn't work for me, my portfolio was too small, but it is a clear indicator of the direction that large banks and life insurance companies are headed. They like the model, and availability of debt elevates the enthusiasm in the investment world. That explains some of the crazy buying.

Mike V., you get in touch with these groups by finding the local real estate agents that are representing them. They have gone out to each market and identified a few agents to be their "buyers agents" and scout for property. For me, it was pretty easy to find them because they found me. It started by noticing who was writing offers for them on my flips, then it progressed to getting phone calls from them asking to buy anything and everything I have.

Call a couple of REO agents in your area and ask them who is writing offers on their listings. Chances are they will be well aware of who the players are. I wouldn't bother trying to call the hedge funds directly, unless you own a large portfolio of homes you want to sell, they won't want to talk to you...they'll direct you to talk to their agent if you can get them on the phone at all.

Steve,

The funds won't fold if securitization falls off the table. They have multiple exit strategies, including rolling up into a REIT, taking the venture public via an IPO, bulk sales to other groups, and one-off sales to end users. They evaluated all of their options before they got into this. Different groups have different preferences from that list of options, but they are all on the table.

Yes, it is true that Och-Ziff decided to exit, and reports were that they weren't hitting their targets. That is likely true. Och-Ziff was one of the first groups in this space, and back when they got in, everyone was underwriting to mid 20s to low 30s IRR. Of course they weren't going to hit that. They had one more motivating factor to exit however: their assets had appreciated in value! If they exit early, they could get close to their target IRR because of the capital appreciation. If they hung out for a few years, as originally planned, their IRR would start to dilute. They HAD to get out. Groups are now underwriting to IRRs in the teens and have lowered their cost of capital.

It is also true that these groups are starting to obtain large allocations of debt financing. It's not because they are trying to stay in the game, it was the plan all along to employ leverage once it became available. There are a few banks coming online with product to accommodate this model.

THR is Blackstone. They'll be backing off soon, they have to digest all of this inventory they have been buying. They haven't even touched a lot of it.

@David A., look back to August 2005, yes the market can lose a lot of value very quickly, but you are right that it takes some catalyst to initiate the drop.

@Will Barnard, I agree with you. 2012 will be my best year in over 20, and I enthusiastically look forward to 2013. There is as much deal flow out there as I can handle, despite the competition.

If you really dig into all of the announcements, plans, and hype, three seems to be about $8 billion going into play. Some estimates of remaining shadow inventory by respected analysts are as high as $840 billion. That means that capital is coming into play to capture ONE percent of the potential opportunity.

The bulk of the larger groups in this space operate the same way. They buy in the same areas, they buy the same types of properties, they underwrite the same way, and run their operations in a similar manner.

They are much less concerned with rental yield than buying as many houses as possible, as fast as possible. They underwrite to 5-7% net yield, which in many markets calculates to prices that actually exceed market value. The whole game is a macro play on housing prices, and it carries very high pricing risk.

In order for these groups to simply break even, housing prices must rise at least 20% to cover their exit and renovation cost. Simply, it's just not a good model.

It's not all bad news. Despite having to compete against more than one of these groups in my areas, I'm still able to get robust deal flow. Increasing my price bracket for flips allows me to operate outside of their influence. In lower price brackets, I'm still able to get a lot of houses that have enough margin to flip, but don't meet my metrics to hold as a rental because the yield is too low for me (even at wholesale price). The funny thing is, the large funds buy most of them from me after flipping them, at retail price. Go figure. They have also raised the value of my rental portfolio. I knew these guys were coming, and I told all of my investors that would be exactly what would happen...

Finally, Steve commented about the REO-to-rental pilots. I was a qualified bidder on the 2,500-house FNMA pool sale earlier this year. Ultimately, I chose not to bid because as I was underwriting the assets of one of three sub-pools that I was interested in, I could see a lot of issues with the assets that I found less than thrilling, and I could see the handwriting on the wall as to where the bidding was headed. All I can say is that all of the talk about this program and its effect on the RE market and individual investors was coming from sources that were forming their opinions without knowing the facts. It is not a threat to those of us that typically operate in a one-off strategy, whether homeowner or investor.

The bottom line: the landscape is changing, but it always does. Being a real estate investor is like sailing a boat in a stream that winds through a meadow. If you try to sail in a straight line, you will run aground. You have to shift course to stay afloat. Change up your strategy to react to the changing landscape. Use some creativity, and you will be just fine.