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December 8, 2016

Field Opens for Buyers

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Field Opens for Buyers

With investors pulling back, conventional home buyers are finding their way back into the market. But challenges remain.

There were four offers on the house, one all cash, and Mona Gergen, a 15-year real estate veteran, had that sinking feeling. She was prepared to tell her first-time buyer clients that they wouldn’t get the three-bedroom, two-bath ranch-style house they wanted.

Never mind that the buyers followed up with a beautiful handwritten note to the sellers or that they were preapproved for a loan with 20 percent down. Having seen buyer after buyer lose a deal—or five—to deep-pocketed investors over the last few years, Gergen was sure her clients were headed for the same fate.

“Once in a blue moon, a home buyer is going to win over a cash offer,” says Gergen, a sales associate with Dunnigan, REALTORS®, in Sacramento, Calif.

In the eleventh hour, her clients upped their offer, topping the highest bid by $1,000. Gergen waited for the all-cash buyer, presumably an investor, to come back with a higher bid. But it didn’t happen. Her clients were in. And while they did everything right, maybe the moon had a role, too, because Gergen and other practitioners around the country say they’re seeing a turning of the tide.

Conventional home buyers—who were routinely shunted aside by investors wielding large sums of cash and snapping up 30 and 40 properties at a time—are finding a foothold in the housing market again. As prices continue to rise and discounted properties are harder to come by, investors are drastically pulling back on their buying activity, opening the field for more everyday buyers.

Smaller investors are pulling back, too. The number of home flips, which are done more by investors who aren’t looking to amass large portfolios of properties, fell between the second quarters of 2013 and 2014 from 6.2 percent of all U.S. single-family sales to 4.2 percent, according to RealtyTrac.

Not Buying, But Not Selling Either

The pullback is most evident in markets with the highest levels of cash purchases in recent years. For example, last year was the first in seven years that California saw a drop in all-cash deals, according to the California Association of REALTORS®. Cash purchases—an indicator of investor activity—steadily rose in the state from 11 percent in 2006 to 30 percent in 2012, but then dropped to 27 percent in 2013. In Florida, too, cash sales have been dropping quarterly since the fourth quarter of 2013. They were down 6.1 percent year-over-year in May to about 42 percent of all sales statewide, according to Florida REALTORS® data. (However, certain Florida metro markets still maintain some of the highest percentages of cash sales in the country.) Meanwhile, investor hotspots such as Las Vegas and Phoenix had seen cash purchases above 50 percent of all sales at one time, but that has come way down. In July, less than 25 percent of all Phoenix home sales were cash purchases, according to the Arizona Regional Multiple Listing Service, while that figure stood at 35.6 percent for Las Vegas, according to the 
Greater Las Vegas Association of REALTORS®.

With investor sales slowing, traditional home buyers are picking up the slack. Pending home sales jumped 6.1 percent month over month in May, the largest gain since April 2010. And despite a slip in June, NAR’s pending home sales index remained over 100, considered an average level of contract activity.

But for many would-be buyers, tight inventory remains an issue. New construction is still lagging behind demand. And the big investors who came into residential real estate starting in 2011 did so with a buy-and-hold strategy. Blackstone Group, the nation’s largest investor in single-family rentals, owns more than 45,000 properties throughout the country and has no plans to put them back on the market. “We’re looking to build a [single-family rental] business for the long term,” says company spokes-woman Christine Anderson. “We see strong consumer demand for single-family rentals.”

Institutional investors “realize that if they flood the market with homes, they move prices in a negative direction,” says Howard Flaschen, broker of Round Table Realty in Jacksonville, Fla., who helped investors acquire $50 million in real estate assets last year. “You may see sales of underperforming properties here or there, but any sell-off is likely to be sporadic. There’s a lot more rental demand now than what was in the market a few years ago. It doesn’t make sense for investors to let these assets go.”

As evidence of the long-term trend, in October 2013, Blackstone announced creation of a new type of mortgage-backed security: bonds backed by single-family rental homes. Bloomberg, citing a forecast by boutique investment bank Keefe Bruyette & Woods Inc., reported that the market for rental MBS could reach $900 billion, assuming 15 percent of home sales each year are to investors and 35 percent of investment buyers seek financing.

Cash Sales: The National Trend 

Although investor activity has slowed, driving down the rate of cash sales in some markets, such sales have remained fairly consistent on a national level, hovering between 27 percent and 35 percent since January 2012, according to the National Association of REALTORS®. More recently, that has been due to noninvestor buyers, says NAR Chief Economist Lawrence Yun. It’s not just wealthier buyers who are bringing cash to the table. Many first-time buyers are avoiding the conventional loan route and taking private loans from family members to purchase in cash, he says.

If demand is still outpacing supply in your market, be prepared to educate buyers about what it will take to make the winning bid. In the case of Gergen’s clients, that meant having an adequate down payment, making an emotional appeal to the sellers, and figuring out their best possible offer.

Consider bank-owned properties, too. Some banks with REO properties still on their books are actively seeking out residential buyers over investors. Mark Greenwell, broker-associate at Watson Realty Corp., also in Jacksonville, says he has seen a growing number of banks over the last year seek to attract a wider pool of buyers by investing considerable funds to fix up foreclosures. “Banks are going in and replacing HVAC systems, repainting, putting in new carpeting—they’re doing it because they’re getting more money and more buyers in the end,” Greenwell says.

In Detroit, too, banks are making a concerted effort to get REO homes into the hands of residential buyers, according to Michael Shannon, GRI, principal broker at Metropolitan Real Estate in Garden City, Mich. Even though investor interest in the local market remains high, Shannon says, banks are now typically not accepting bids from investors for the first two weeks after a property is listed. Often, buyer demand is so strong—11 to 17 offers are typical for a property, Shannon says—that potential home buyers outbid investors. “Investors were used to getting houses for $20,000; now those same houses are selling for $50,000,” he says.

Easing Buyer Fears

But even as traditional buyers move back into the market, they may feel anxiety about buying in areas where rentals have proliferated.

There’s skepticism about how well-equipped institutional owners are to manage and maintain single-family rentals. In REALTOR® Magazine’s July/August 2014 issue, Chris Herbert, research director for the Joint Center for Housing Studies at Harvard University, called the task of managing individual properties on this scale “unprecedented.” And while most consumers don’t see that big picture, they are sensitive to changes in their neighborhood.

Heidi Kasama, ABR, managing broker at Berkshire Hathaway HomeServices Nevada Properties, recently saw a past client give up on the condo he loved after his neighborhood filled with renters.

“I sold him a very nice condo in a gated condo community—it had a pool, cobblestone street, walking trails—for around $250,000,” Kasama says. “After the market collapse, you could buy a condo for under $100,000. The community became a lot more single professionals, and then suddenly you had investors picking them up and renting them out. My client wanted to move out of the area because it no longer had the feel it used to have.”

That unease extends to buyers, too. “One hundred percent of the time, when I’ve shown a home where there’s a rental sign next door, the buyer decided not to buy,” says Christina Cavins, an agent with Irongate Inc., REALTORS®, in Dayton, Ohio. “The assumption is that the pride of ownership is not there with a rental property.”

Kasama, too, says she’s seen many buyers decide to look elsewhere once they learn that a neighborhood has a lot of rentals. “When your neighbors are moving out every other month, it’s not attractive to those who want to live there permanently,” she says.

An underlying concern, of course, is how nearby rentals will affect home values. A 2013 Penn State University study published in the Journal of Urban Economics bears out the point. It looked at American Housing Survey data, collected by the Census Bureau every two years, and found that a home’s transition from rental to ownership provides more than $1,300 per year in value to nearby homes. In other words, a house is worth more when the landlord next door decides to sell to an owner-occupant.

That presents challenges when listing properties in areas that have seen more rentals in recent years.

“In Orlando, we have a lot of short-term rentals and vacation rentals, and we have areas with a lot of single-family rental housing,” says Steve Merchant, ABR, CIPS, chairman of the Orlando Regional REALTORS® Association. “Often, buyers find out a neighborhood has rentals, and they end up buying in another place that doesn’t have as much rental activity.

“But there aren’t enough homes on the market for everyone to have that luxury,” he adds.

If you’re listing properties in a market with a large number of rentals, aim your marketing at value-oriented buyers.

Merchant says some buyers are willing to make concessions on features in order to be in an area with a greater percentage of owner occupants. But others will put the owner-occupancy issue aside in order to get just the home they want.

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