Investors are effectively no longer overpaying for assets in the residential housing market, according to Auction.com EVP Rick Sharga in the company’s quarterly housing update on Thursday.
But for those investors paying at or close to market value for their homes and looking to rent them, the strategy has shifted away from what it was as recently as two years ago.
“A couple of years ago, in early 2013, we actually saw some property prices spike,” Sharga said. “When you see an investor paying over 100 percent of the appraised value, it suggests that something in the market is a little bit out of whack. What was happening is that institutional investors were coming into the market in a very big way in states like Nevada and California and buying up properties they decided they were going to rent out. In some cases, they drove prices up so high that not only did the foreclosure discount disappear, but they were paying over market value. For some investors, that’s actually okay as long as the rest of the numbers work out within their business models.”
While Sharga said investors have for the most part stopped overpaying for assets, some are still paying at or close to market value. And for those investors, a change in strategy has become necessary in order to stay profitable.
“If you’re an investor buying a property to rent, we’ve seen a lot of those folks paying at or close to full market value because what they’re looking at right now is to try and make their money from cash flow on renting the property rather than making their money on based on home price appreciation where they would buy low, rent for a couple of years, and then sell high,” Sharga said. “It’s a very different model than when the buy-to-rent strategy became popular a couple of years ago among institutional investors.”
In some cases, they drove prices up so high that not only did the foreclosure discount disappear, but they were paying over market value." Rick Sharga
Investors now are generally paying around 77 to 78 percent of market value for single-family residential homes, Sharga said.
“As an investor, if you find that what you’re doing is buying things significantly lower than that, you’re getting a terrific deal,” Sharga said. “If you’re paying a little bit more than that, it suggests that either you need to sharpen your pencil a little bit or maybe you’re in one of the markets where the price points are a little harder to get to. There is some definite regionality in these numbers.”
Sharga suggested that investors whose portfolios have largely consisted of distressed inventory should consider diversifying, given the substantial declines the country has seen in distressed inventory in the last few years. Foreclosure inventory remains high in some areas of the country, such as in the Eastern Seaboard, the Midwest, and in some pockets of Arizona and Nevada, but Sharga said he believes foreclosure levels will normalize within the next two years—and might fall even lower.
“I suspect that by the end of 2016, most of the backlogs of bad loans in the states will have been processed through the system,” he said. “By 2017 at the overall national level, we should be back to regular historical levels of foreclosure activity. If lending standards don’t loosen up at all in the next year or so, by 2018 we might actually be at the low normal levels of foreclosure activity. That sounds good and isn’t necessarily a bad thing in and of itself, but the flipside is that more and more people who should be able to get loans won’t because the lenders simply aren’t taking on any risk at all.”