Market expansions

RealtyTrac has been following large institutional purchases of distressed single-family homes that become rentals and it’s expected that these rentals will increase.

This will require successful expansion into new markets by these investors. Rising home prices and competition for these properties are causing gross yields to decrease in some markets. For example, markets in Arizona and California were in demand last year but are less attractive to these investors this year, and in some of the improving markets, institutional investors are starting to sell off their inventory.

Reportedly, the current “hot” markets for investors are Atlanta, Ga., and Charlotte, N.C., and, to some extent, many of the Florida markets referred to as second-tier markets. RealtyTrac finds that even some investors are targeting third-tier markets. The challenge with the third-tier markets is the lack of significant home-price appreciation, which may or may not be of primary interest to large investors. These investors are primarily looking for markets with a fairly high concentration of distressed properties, because their former owners will have to rent.

Changes in REO saturation rates are an indicator of where institutional investors are headed. Understandably, this indicator can be skewed by institutional investors purchasing many properties. Typically, improvements in REO saturation rates is an important precursor to a real estate market’s recovery. The strength of the local real estate market can also be gauged, in part, by the increase in first-time homebuyers as well. This trend can take time, because it is dependent on these buyers being able to get mortgages.

Investors have comprised an average of approximately 19% of home sales since 2010, according to the National Association of Realtors. Deutsche Bank reported that institutional investors have bought more than 80,000 home in less than 24 months. There will be fewer investments opportunities as foreclosures decrease in markets and home prices increase.

Smaller investors typically know a market (i.e., streets) better than larger investors, who use a formula to make purchase decisions. Small investors also have more of an invested interest in making a good purchase decision than institutionalized investors. The smaller investors, however, are at a disadvantage in that they cannot get conforming mortgages on more than 10 investor properties through government-sponsored enterprises; and more often than not, this limit is reduced to five properties being financed at one time.

If small investors purchase properties in excess of these limits using equity, it lowers their return on investment. On the other hand, leveraging assets can increase returns.

Speaking of returns, a parcel of land in the Mead Point Association in Greenwich was reported sold for $25 million. It sold in July 2007 for $18 million having a 1938 home on it with perc tests (a percolation test determines the absorption rate of the soil for a septic drain field or leach field). This prior sale was subject to a lot-line revision which was reportedly done. The total parcel was 7.5 acres in a two-acre zone.


Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

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