Big Investors May Take Over Florida Foreclosures

Marc Jablon Invest Properties , Palm Beach County Real Estate , real estate blog Leave a Comment

Big investors may take over Florida foreclosures

Private equity firms think foreclosed homes in Florida  will make much more money as full rentals. New York based  GTIS Partners expects to purchase more than a $1 billion worth of  single family homes by 2016. Earlier this year, GI Partners in California indicated that it, too, plans to spend close to half a billion on bulk single family homes.

A Federal Reserve study that came out in January suggested that selling foreclosed Florida homes, and those in other states, to investors as rental properties might be a means of reducing or eliminating the excess of bank-owned homes.

The government needs help with housing from big investors.

This is not an idea that has just come to the fore. Back in September of 2011, government agencies contacted large capital management funds known for their astute financial decisions, such as Starwood Capital Group and Cerberus Capital Management.  These funds were asked for suggestions on what to do with the excess housing that the government now owns.

Many large investors are solidly behind this plan to sell homes in bulk, because it would put hundreds of thousands of Florida rental homes into a market that is swelling with demand for affordable rental housing.  However, another group suggests that transient single industry markets, such as Las Vegas, where gaming is the main industry, are not sufficiently stable.

On top of that, individual properties require more intense management. Unlike Florida multi-family buildings that can be managed relatively efficiently because all systems are within one unit, single family houses mean individual electrical systems, hot water heaters, air conditioners, etc. If not carefully orchestrated, this could turn into a logistics nightmare when thousands of homes have to be monitored.

Homeownership continues to drop.

Nonetheless, the rate of U.S.  home ownership has dropped more than 3.5% since 2004, and continues to decline. As more young people with lower wage jobs move into the housing market, the rental market continues to increase and so do landlords’ returns on investment.

While many new families would like to purchase their own single family homes, current economic realities dictate that this is not possible for a very high percentage of them. However, with the glut of single family homes moving into foreclosure, and estimates that more than 7 million homes will be foreclosed upon and resold to investors through 2016, it may be relatively easy for these families to find a home to rent.

Look for lease buyouts in the future

As economic conditions improve, it is likely that these capital funds, because they will already own the houses and will be familiar with the payment capabilities of renting families, will allow these renters to set up rent/option or  lease/buy situations. The result is likely to be a win/win situation for all parties.  Investors will be able to sell the already discounted homes for a profit, while families may be able to transition into mortgage situations that they can comfortably afford.

The institutional investors will see a return on their investments from day one. In fact, since 1990, rental homes have averaged just over an 8% return, according to a Morgan Stanley report last year.

Bulk homes may become a new class of investment

Some savvy analysts indicate that these foreclosed home, when purchased in bulk, will become a new type of institutional asset, and shares will likely be sold to small investors.

It is not surprising that the states most interesting to investors – because of the sheer volume of foreclosed homes currently available and in the pipeline – are California, Arizona, Nevada, and, our home state, Florida. The expectation is that in five years, the prices of these homes will recover sufficiently that they can be sold for a hefty profit. If it takes longer, the 8% average rental returns will more than cover the investment costs. After all, everybody has to live someplace, and a rented house is better than no house at all.

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Marc Jablon