When it comes to residential real estate investors, there are clearly two points of view today within the real estate industry and in Washington. Some applaud investors for plunking down their own dollars to save decaying homes in moribund neighborhoods and reviving local real estate markets. But investors come under fire by others for out-competing owner occupants (especially first time buyers and minorities) for distress sales and for switching properties—and neighborhoods—from ownership to rental.
This debate is more than academic. Many of those who make policy decisions that could help or cripple investors—federal officials, trade associations, large lenders and brokers—take their lead from what they read in the media and hear from industry leaders. A good example of how this schizophrenia towards investors can play out in Washington was last year’s FHA anti-flipping rule, a blatant slap at investors that was stopped only temporarily by a waiver once people came to their senses.
Dr. Alex Villacorta of Clear Capital recently described for me how, in the most foreclosure-ravaged Florida markets, investors have been incredible marketplace saviors who bought in at the lowest ebb when no one else would. They single handedly stopped the slide in prices and turned them around enough to encourage chary owner-occupants to gain more confidence in the market and jump in. In market after market across the state, he has chronicled how investors have been the dry tinder that has ignited recovery. (See Can Home Values and Foreclosures Live Happily Ever After?)
On the other hand, Brian Hurley, president and chief operating officer of a mortgage servicing company called New Vista, recently put into words what many have whispered. His study of California REO sales found that over the past three years the percentage of REO homes sold to owner occupant buyers has decreased by about 5 percent or more in 18 of the nation’s counties hit hardest by foreclosures.
Now that homeownership is more affordable, instead of making homeownership for minorities and moderate income Americans more attainable, barriers to financing and competition with investors are locking out of homeownership and changing the residential fabric of their communities from ownership to rental, he told me in an interview.
“We timed the first release of our study to raise awareness of the community impacts that current REO disposition practices are already having. Bulk sales, drop-bid foreclosure auctions and the proposals under review by FHFA promise to move more REOs out of local real estate markets — out of the hands of owner occupants, out of the reach of local real estate professionals, and out of the capital base of these communities themselves. Before the market adopts new strategies to address an expected surge in foreclosure volumes, we wanted the owner-occupancy impact of current approaches to be well understood,” said Hurley, explaining his policy agenda.
A flash point for the concern over investors today is cash sales. Cash sales are the hallmark of investors, the big stick that investors wield to get the best deals and beat out the family homebuyer. The term is a very unfortunate one, conjuring up a legion of Daddy Warbucks, their pockets stuffed with greenbacks. It’s also untrue. Just because the investor shows up at closing with a check, not a letter from a lender, doesn’t mean he didn’t borrow through a HELOC or second trust on another property, or get funding from friends or silent investors. Last spring In a survey of investors by Move, Inc., which I helped design, some 59.5 percent of investors said they planned to put less than half down on their next property purchase and finance the rest. Those planning to use more than 50 percent cash accounted for only 16 percent of investors in the survey. Investors told us that the second most difficult challenge they face has been in finding financing.
Alarms over “cash sales” are ringing loudly this week. Monday my friend John Campbell and his partner Guy Cecala, publisher of Inside Mortgage Finance, released the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey which suggested that In December so many sellers preferred to sell to investors offering cash and shorter closing timelines that they had the effect of depressing prices. This was particularly true for bids on distressed properties, because mortgage servicers selling foreclosed properties or real estate owned generally prefer transactions that can settle within 30 days.
In December the overall proportion of cash buyers in the housing market surged to a record 33.2 percent, up from 29.6 percent a year earlier. Some 74 percent of investors used all cash to buy homes last month. Investors accounted for 22.8 percent of home purchases in December 2011, up from 22.2 percent a month earlier.
Hundreds of thousands of owner-occupant buyers have lost out to investors in recent years and these lost deals reverberate. Tens of thousands of agents and brokers have seen commissions evaporate, not to mention the many disappointed buyers who may blame an investor more than a pokey bank. The Campbell/Inside Mortgage Finance Survey gathers comments as well as data from the approximately 2,500 real estate agents nationwide it reaches each month. Here are some from December survey.
“Investors are very aggressive and expect to see 15 percent-20 percent off list, they will close in 30 days or less and most are cash buyers,” a California agent said. “In competitive offer situations, cash offers prevail for the most part because of the common knowledge of lender closing issues. Cash sales close in 21-30 days. FHA sales close in 45 to 60 days,” reported an agent in New Jersey. “Investors usually offer 10 percent-20 percent below list up to a price of $250K. First time homebuyers are (offering) close to list (price) as are current homeowners. Investors want 2-4 weeks to close …Financing buyers end up with 6- 8 weeks plus to close,” reported an agent in Arizona.
These complaints, as well as views like Brian Hurley’s, are heard within the network of powerful organizations that has been called the housing lobby. It’s quite likely that someone in Washington this election year probably will do or say something that indicates they have a less than enlightened understanding of real estate investing. The fallout for investors could be painful and expensive.
Perhaps it’s time to enlarge and update our timeworn definition of the American Dream. Owning your own home is still a worthy goal but the world has changed and not everyone can achieve homeownership today. Is the Dream big enough to include the notion that it is also admirable to risk your own finances and sweat equity to provide someone else a home and to improve the neighborhood where they live? And if your risk pays off, to receive a fair return as well?