Dave Dinkel's Insights: Greatest Fears #11

My Greatest Fear – Hedge Funds and Foreign Buyers Take Every Deal 

In the past year or so, major institutional players have come into the real estate market.  These buyers are generally thought to be hedge funds set up for the sole purpose of predominately buying single family homes (SFH).  Occasionally, they do buy multi-family properties but SFHs are their goal.

These buyers are also in competition with foreign individuals who have tons of cash to spend and are coming to America to buy “low-priced” homes.  They then rent these properties and look to get about 3 – 5 years’ worth of income before they look to retail them to SFH buyers when the real estate market goes higher.

The hedge funds have a different plan.  Their idea is to purchase as many properties as possible in as little time as possible and then sit for a year or two on the rental income and then sell their entire portfolio back to the public through an Initial Public Offering (IPO).   The rental income they are receiving is essentially a CAP or Net Interest Income Rate of 8% or less.  The other “play” they will sell is the capital appreciation potential – most of which will be taken out by the players in the hedge funds as they sell their shares to the public.

Currently the number of hedge funds and foreign buyers accounts for about ½ of one percent (0.5%) of all sales in the country.  In some areas of the country that continue to be distressed, this number can rise to 2% of all sales or about 20 per 1,000 homes sold.  That means that if in your county there are 1,000 SFHs sold each month, Hedge Funds and foreign buyers account for 20 of these sales.  Even if you assume that this figure is only partially (1/2) correct, the institutions are still only buying 40 SFHs a month and only a couple of multi-family properties.

Instead of being afraid of these shadowy buyers and frankly insignificant players, your better bet is to embrace them and get wholesale deals for them.  They can’t hide as the Public Record tells all – they haven’t gone to the lengths of going underground with their purchases by opening a ton of LLCs – one for each purchase but anything is possible.

They may have seemingly endless funds available but there are more SFHs available than they can ever purchase in their wildest dreams!  Get out there and find deals, contract them and show the wholesale deals to the institutional buyers in your area.  Find them in the Public Record as “corporate entities” holding more than two SFHs.  Contact them by postcard or letter and ask if they would give you their email address.  Then list ’em up and send them your deals!

Warning – if you decide to send them other investors’ deals, beware that they very likely get the other investors’ lists already.  If they see you re-sending other wholesalers’ deals and marking them up, you will be out of their loop in no time.  They may not opt-out of your email list but your chances of doing deals with them drops dramatically.

In summary, I can absolutely guarantee that if you are not making offers because of the impact of institutional buyers, you might as well take up another hobby besides real estate investing that is less expensive and more fulfilling.  You are what you believe and you act accordingly – utter failure or absolute success, you have a choice.  Excuses are a bad foundation for a successful life.

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