Why People Don’t Want to Become Real Estate Investors


Change is all around us.  Foreclosure inventories and discounts are fluctuating in ways that are virtually impossible to predict at a local level. A massive wave of new multifamily construction could change the rental equation in hundreds of markets. Government and lender bulk REO-to-rental experiments could take off, drying up inventories and introducing new competition for SFR tenants. Well-heeled investment consortia promise to change the face of residential investing by driving out small investors.

Another almost invisible change is underway yet its impact may be greater and last longer than any other.

Realtor.com today released a new survey on attitudes towards foreclosures that it had commissioned by the pre-eminent research firm Gfk. (GfK conducts research for Associated Press and other blue chip organizations).  As a consultant involved in the project, I had the opportunity to review and analyze the results before they were made public.

I was very surprised by the survey’s major takeaway: Interest in buying foreclosures has almost tripled among potential home buyers in the past two and half years.  Some 92.1 percent of potential foreclosure buyers plan to live in them rather than use them as investments.  Homebuyer interest in foreclosures jumped 159 percent since October 2009, the last time Realtor.com asked that question.  In fact, more than two-thirds (64.9 percent) of today’s homebuyers said they’re likely to buy a foreclosure compared to 25.3 percent two and a half years ago.

Where have all these people been?

I think we’re seeing several attitudinal changes at work.  First, despite the current sales data that shows foreclosures and short sales occupying as big a slice of the home sales market as ever, owner occupants may realize that on a national level we are already on the downside of the Foreclosure Time (See Twilight of the Foreclosure Time).  The day is approaching when the tougher lending standards imposed between 2007 and 2010 will greatly lower defaults and foreclosures; in fact, defaults already are down significantly.  The 30 to 40 percent distress sale market share will become a thing of the past.  There is clearly a pent-up demand among folks handy with a hammer who are willing and able to turn a foreclosure into a home that they probably couldn’t afford any other way.  For them, the clock is ticking.

“Foreclosures can present a new opportunity for buyers to become homeowners, especially considering the discounted purchase prices and lower down payment requirements. This is especially true for owner-occupants interested in improving the property, and holding to it long enough to realize appreciation that can be carried over to future home purchases,” said Realtor.com President Errol Samuelson in the news release.

The number that surprised me most was the very small percentage of buyers who consider themselves to be investors.  Only 6.9 percent of today’s potential home buyers are interested in buying a foreclosure as an investment, down from 13.2 percent in October 2009.  That’s a decline of more than 50 percent.

Is the bloom off the investor boom? 
That’s a question that can’t be answered by one survey.  Unfortunately there is a real scarcity of information about residential real estate investors and the investing phenomenon that coincided with the boom in foreclosures.  Thus, it’s hard to put these numbers into context; they are more or less unique.

At Realtor.com, we’ve been polling real estate investors for three years and establishing trend data.  A year ago, Realtor.com’s survey on investors helped put the investor boom on the map by establishing the market potential for investor-generated demand.  We found that real estate investors, by three to one, would be more active in their local markets compared to typical homebuyers in 2011 and 2012. Two-thirds of investors said they expected the problems first-time buyers have in getting mortgages will make it easier for them to compete for properties.

That survey certainly proved to be true.  Will this latest one as well?  Will we see a decline in the “amateur” investor or the one or two property investor?  Despite the hard-sell TV advertorials, webinars and get-rich-yesterday books, are potential investors growing cautions?  Have they heard about the challenges of financing, cash flow and property management?  Is the pay-off timeline still too long as the nation takes baby steps towards recovery?  Are discounts shrinking beyond the point where profits are less attractive than other investment vehicles?

If nothing else, this latest survey found that potential foreclosure buyers have a good idea of the some of the realities involved, which is probably why they have decided not to invest, but to do a foreclosure as a place to live.  Most expect to receive a discount of anywhere from 10 to up to 30 percent on their property purchase, which is in line with today’s average discount of approximately 29 percent.

Expectations on return on investment have changed dramatically in a year.  In last year’s survey, nearly half (48 percent) expected a profit of 20 percent or more from their property investments over five years, or 4 percent a year. Another 40 percent expected a profit of 10 percent.  In this year’s survey, 56.4 percent expect their purchases to appreciate 10 percent or less over five years, or 2 percent a year.  Younger buyers (age 18-34) are most realistic. More than half those in the first time buyer age group, 25-34 (57.1 percent), expect their purchases to appreciate less than 5 percent, or 1 percent a year.  Most middle income buyers ($30-40K) are more conservative and anticipate an appreciation of less than 5 percent in five years.

In short, we are witnessing a maturation of the investor phenomenon.  People are realizing that buying and rehabbing a foreclosure as a place to live is one thing.  Making money off it is another.  It’s not as easy as some investor gurus make it sound.  Risk is real and rewards can be elusive.  The message is getting through.  Fewer and fewer people are entering investing lightly.  Reality, we can all agree, is a good thing.

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Ziv Magen

    Great, thoughtful post (much like the new breed of educated-semi-traumatized investors are turning out to be :))
    It still eludes me, however, why the throngs are still even thinking about capital gain, when there are so many spectacular cashflow opportunities in the current global environment.

    Any thoughts?

    • All depends upon the strategy and current (as well as long-term) goals of each investor. don’t get me wrong – having so many deals available that cash flow is a beautiful thing, but some folks need an influx of larger sums of cash as well.
      Here in fly-over country, there are endless deals that will monthly cash flow amounts that are almost too good to be true. On the other hand, the fix & flip guys are having to cherry-pick their projects due to the current market conditions and the availability of their end-buyers’ financing.
      And of course, there are those who are are keeping some, and selling some. : )

  2. I see what you see, Steve. I also see an uptick in those with capital opting for expert advice. The ‘BBQ Grapevine’ must’ve finally hit the tipping point as it relates to the relatively poor results of amateur investors. That’s my side door way of sayin’ that a huge portion of those high cash flow deals require close friendship with both Smith AND Wesson. 🙂

    Also, I’m with Ziv. Buying for capital gain makes no sense.

  3. Ziv and Jeff:

    Regarding your thoughts on capital gains…I didn’t mean to give the impression that these potential foreclosure buyers are more focused on capital gains than cash flow. In designing the survey, we asked a question identical to one asked last year (“If you were or are considering purchasing a foreclosure, how much do you expect it to appreciate in five years?”)

    What we found was that potential buyers today have a much more realistic view of potential capital gains than those just a year ago, especially younger buyers. Which shows that they are paying attention to reality, at least more so than in the past.

    Personally I was surprised at the huge increase in owner-occupant interest and the decline in investor interest. My theory is that more realistic expectations on capital gains as well as a better understanding of the dedication required to manage property profitably perhaps has deterred many people who were not ready to become investors but have decided they still would like to do a foreclosure for themselves. That would make a an interesting follow up survey.


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