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Big money investors buying foreclosures in bulk - a caution flag?

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Rockville Townsquare, MDThe housing market continues to display signs of slowly shedding its recent bad reputation and is actually gaining real recovery traction. Prices in many areas are firming up and even rising, listing inventories are shrinking, permits for new homes show improvement and mortgage money is still quite affordable, so long as the applicant manages to qualify under today’s rigorous underwriting guidelines.


Life seems to be good in the real estate business. And predictably getting better.


At least that’s what large investors like equity shops and hedge funds, among them Blackstone Group, Apollo Global Management and Colony Capital, firmly believe. They are now moving in aggressively to purchase REO – real estate owned - single-family houses in bulk in states such as Arizona, California, Florida and Nevada, the original four who were mauled rather severely when the infamous housing bubble let out all its hyped-up air. The recipe is simple. Acquire homes – hundreds and often thousands of them - on the cheap, turn them around, rent them out and according to their secret formula sell them later for a handsome gain. Billions have been and will be spent on this particular scenario. The pace is actually accelerating as the market metrics keep perking up.


It certainly will help banks and the likes of Fannie Mae and Freddie Mac to move foreclosed inventory from their books and refresh their balance sheets. Vacant and frequently tarnished REOs will be renovated and eventually occupied with tenants to stop potential further deterioration of the housing stock and also give affected neighborhoods a welcome lift, likely beginning to stabilize any value imbalances.


On the other hand, existing homeowners may have mixed feelings about a house four doors down being sold for, say, $200K less than what they paid for theirs. True, it has been fixed inside and out and will get occupants, but it still hurts. How long does it take for the real estate market to relieve them from their chilling underwater status? Are they reasonable candidates for a mortgage walkout? Possibly so. Besides, tenants generally spend less time and money in property upkeep than owner-occupants, so the price stability prediction may be longer than expected in coming.


It appears there is an actual investor rush on now to get in on the gravy train to acquire attractive housing assets with rosy future returns. It could well lead into another bubble as more and more institutional funds chase an apparently shrinking inventory. In fact, buying today may already be too late in several regions where values have gone up at least partly due to the demand generated by these bulk purchasers and the rent won’t be able to cover their mortgage and other costs.


Then what? The acquisitions come to a halt. The nascent housing upturn could well face a new no-growth period. Deep down this process somehow looks like an artificial remedy with little long-term foresight. A strong and sustainable real estate market is built on owner-occupied homes, some might argue. There certainly is some truth to that. 



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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

My cell: 702-499-1006

Marc McMaster
RE/MAX Centre Realty - State College, PA
Putting my clients before myself

The neighbors weren't complaining when their values went up 25% per year though either.  Thye have to take the good with the bad. 

Feb 28, 2013 08:46 PM
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

I know of groups who made their move just a few short years ago and now are bathing in their returns...Buy low and sell high is at work

Feb 28, 2013 09:15 PM
Frank Iglesias
Working With Houses, LLC - Atlanta Real Estate Investments - Lawrenceville, GA
Atlanta, GA Real Estate Investor

I don't think we will see a true recovery that can sustain until jobs are better.  Between banks holding inventory back and Fannie/Freddie pushing up values with the appraisal issues that are becoming well documented, there is no doubt in most people's minds I know, investor or agent that this recovery is artificial.  It is hard to think it will sustain.  Who knows?  Time will tell!

Mar 01, 2013 05:27 AM
Esko Kiuru
Bethesda, MD


Sarasota seems to be right in the middle of this bulk buying.

Mar 22, 2013 11:08 AM
Esko Kiuru
Bethesda, MD


This is not a typical recession and neither will be the eventual recovery.

Mar 22, 2013 11:10 AM
Esko Kiuru
Bethesda, MD


Slow recovery for sure, despite bulk buying.

Mar 22, 2013 11:12 AM
Esko Kiuru
Bethesda, MD


Just trying to stir up a discussion which appears to have worked.

Mar 22, 2013 11:13 AM
Esko Kiuru
Bethesda, MD


Investors being involved in the recovery process does seem to stretch it out.

Mar 22, 2013 11:15 AM
Esko Kiuru
Bethesda, MD


You are right about that, leaving buyers frustrated.

Mar 22, 2013 11:17 AM
Esko Kiuru
Bethesda, MD


Free market sometimes works things out the long way.

Mar 22, 2013 11:19 AM
Esko Kiuru
Bethesda, MD


Thanks for stopping by.

Mar 22, 2013 11:20 AM
Esko Kiuru
Bethesda, MD


Let's hope for the best.

Mar 22, 2013 11:22 AM
Esko Kiuru
Bethesda, MD


For now at least, it seems so.

Mar 22, 2013 11:23 AM
Esko Kiuru
Bethesda, MD


Appreciate your visit.

Mar 22, 2013 11:24 AM
Esko Kiuru
Bethesda, MD


Some markets have different dynamics.

Mar 22, 2013 11:27 AM
Esko Kiuru
Bethesda, MD


When they acquire hard-to-move inventory, that's really helpful for that particular market.

Mar 22, 2013 11:29 AM
Esko Kiuru
Bethesda, MD


I guess. What about those who just bought one before the crash?

Mar 22, 2013 11:33 AM
Esko Kiuru
Bethesda, MD


Can't disagree with that formula.

Mar 22, 2013 11:34 AM
Esko Kiuru
Bethesda, MD


So many homes being investor-owned is largely untested territory and lots of things, good and bad, can happen.

Mar 22, 2013 11:36 AM
Charles Stallions Real Estate Services
Charles Stallions Real Estate Services Inc - Gulf Breeze, FL
Buyers Agent 800-309-3414 Pace and Gulf Breeze,Fl.

At least that are getting the inventory down and that will lead to increases in the market. This should have been done from the start to reduce all this inventory.

May 26, 2013 09:00 AM