There’s been an interesting trend in starter homes in the last few years all across America. In some parts of the country, for instance, investors are snatching up more than 20 percent of starter homes. In Memphis, 20 percent of the starter homes were purchased by investors last year. In Philadelphia, it was 23 percent. In Detroit, investors picked up a whopping 27 percent of the starter homes. Long Island, Oklahoma City, and Atlanta weren’t far behind with 19 percent, 19 percent, and 18 percent, respectively. These figures are based on CoreLogic data.
Many of these investors are institutional. In fact, since the Great Recession, institutional investors have flocked to real estate markets in droves and purchased homes at severely depressed prices. More than two million homes have been purchased by investors since 2008.
This trend was brought about by the real estate crisis that resulted in the housing collapse. Large-scale investors saw the opportunity and seized upon it. Once the best buys were out of the market, they were expected to move to business as usual. But they didn’t. They continued to buy homes and are now competing with first-time homebuyers in markets all across the country. This investor activity is driving up prices and leading to some would-be homeowners pricing out.
Three Kinds of Real Estate Investors
Generally speaking, there are three kinds of real estate investors.
- Fix-and-flip investors buy cheap real estate, fix it up, and resell it for short-term profit. It’s quite popular, but how successful one can be at this endeavor depends on the market.
- Buy-and-hold investors who rent out properties for the passive income. These investors are generally institutional investors, but not always.
- Property traders buy properties and wait until values appreciate before they sell. This can be anywhere from a few weeks to a few years depending on the market.
There are pros and cons to each of these investment strategies. Those who use these strategies usually understand their exit before they get in. They know when they want to sell and for how much they want to sell, and they have a plan in case the investment goes south. But with so much investment activity in the starter home market, potential owner-occupants are having a hard time competing. In some cases, sellers specify in their advertising that they want cash, and when a buyer walks in their door with cash in hand (an investor, usually), they take it. Who wants to wait for the long, drawn-out process of titling, value assessments, and credit checks?
How Marketplace Lending Fits Into the Picture
It’s clearly an investor’s market. When you have the money, you can wait for the right deal. If you’re a seller, you’re going to sell your property to the highest bidder who is ready to close a deal right now. If you’re a buyer, the best way to compete is to be liquid and able to close a deal quickly. These three factors mean institutional investors have a leg up.
An entire industry has grown up around investing in single-family homes. Investors with a system in place are able to buy dozens of homes at a time, and often are able to sell them before they even hold the deed. Lenders put up the capital. And brokers work their lists, bringing the two together. Add a layer of technology to the equation and it’s easy to see that sellers can find buyers even more quickly, and buyers can find homes. Marketplace lending just fuels the fire.
This is a good thing for investors. If you’re looking for a good deal on a property and know the market you want to invest in, you can find it easily. If you’re on the other end of the equation, you can find a buyer. The only question is: How long will it be before a good investment climate comes to an end?