Professional investors will be good for everyday homebuyers.
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Investors are buying single family homes at record percentages according to a an analysis by CoreLogic®, a property data and analytics company. These all-cash buyers may be crowding out traditional homebuyers, who usually make offers subject to financing and sometimes subject to sale of their current home. Despite worries about the trend, it’s likely to be better for everyday buyers and sellers.
Investors have one of two aims: buy for rental, or buy to resell (flip). And sometimes buy for rental becomes a resell a few years later when conditions change.
Buying for rental became a big business in the last recession, when many houses were put on the market, either by homeowners or by banks that had repossessed them. Investors swooped in. Not only were purchase prices relatively low, but plenty of people who no longer qualified as buyers were trying to rent.
The increased availability of single family homes for rental is good for consumers in general. In past eras, the purchase or rent decision was almost identical to the house or apartment decision. Condominiums and co-ops allow a family to live in a multi-family building as an owner, not just a renter. And now the rise of investor-owned rental houses allows living in a single-family home without being an owner. Although the traditional options seem to suit most people, some would prefer alternatives, so this is a good shift.
Investors who own rentals may decide to sell their properties. This will happen, most often, when house prices are high and rental rates are low. That is, when more people want to be homeowners, more homes will be offered for sale. That will tend to stabilize housing prices over the economic cycle. And it works in the other direction when home prices are relatively soft and rents are high: investors buy more houses, taking houses off the market before prices get too depressed. Milton Friedman observed long ago that when speculators make profits, they are stabilizing prices by buying low and selling high.
The other investor aim is to resell the property. Small investors, defined as those who have purchased one to ten properties, have more impact than the few large investors. The big guys, though, are putting data analytics to use to cut down on the cost of decisions. Sometimes called iBuyers, companies such as OpenDoor, Zillow Offers and RedFinNow use sophisticated value appraisal systems to make offers. They make the market more liquid but also compete with traditional homebuyers.
Here’s what is great about investors buying to flip. Sometimes a buyer is desperate to close a deal, but the seller is waiting for top dollar. The buyer may be facing a deadline to start a job or for the kids to start school. The seller may have a great deal of flexibility, such as a retired couple moving to their vacation home. The buyer may pay a higher-than-normal price.
At the other end of the spectrum, a buyer may be choosy but a seller may be desperate. The seller might be ready to buy another house, or moving to another city on a schedule driven by job or school. The deal may close at a below-normal price.
The average buyer and seller are going into the process not sure whether their transaction will be above or below what would be normal for that type of house, in that condition, in that neighborhood.
Investors reduce the range between potential high prices and potential low prices, by snapping up anything desperate sellers need to unload, while serving buyers in a hurry. They reduce the risk that the individuals in the market face of being unlucky in the final price.
What about the all-in cost to the average home buyer or seller? After all, the investors who are flipping expect to make a profit. One possibility is that the total cost to buyers will be a little higher and the net gain to sellers a little lower. That would compensate the investors for providing liquidity to the market and reducing the risk of a price far away from normal.
The other possibility is that the investor profits will come at the expense of real estate brokers. Professional buyers and professional sellers could use real estate agents but negotiate lower fees because of the reduced effort needed by the agent. The investors might use salaried staff members instead of real estate agents for buying and selling. It may take some time for the common business practices in real estate to change, but greater efficiency will eventually find its way into transaction fees.
Everyday home buyers and sellers should welcome the participation in the housing market of professional investors.