Investors Find Shortage of REO Bargains

June 18, 2012

Foreclosure bulk sales are slow to take off as investors report a shrinking pool of bargain-priced distressed homes, Bloomberg reports.

Prices are recovering in once-hard hit markets, such as Phoenix and Miami, and as such, private-equity firms, hedge funds, and pension systems are not buying up homes as quickly as they had planned. Investors had intentions of buying up foreclosed homes in bulk at rock-bottom-prices and then turning the properties into money-making rentals. 

“The folks that raised capital are worried about under- accumulating properties and how to get capital out in an efficient way,” Richard Ford, a managing director in the real estate investment banking group at Jefferies Group Inc., told Bloomberg. 

The Federal Housing Administration announced that it plans to sell loans on about 5,000 distressed properties starting in September for possible rentals. But reports of possible delays have surfaced with Fannie Mae and Freddie Mac bulk sales because of “political pressure to monitor the properties in the pilot project,” Bloomberg reports. 

“This could be a disappointment to many investors who expected Fannie and Freddie to unload thousands of properties through the REO-to-rental program,” notes Jaret Seiberg, a policy analyst with Guggenheim Securities LLC in Washington. 

Also, more banks are agreeing to short sales to prevent foreclosures or opting to sell foreclosures through real estate brokers, contributing to the supply problem. 

The real estate industry has spoken out against bulk sales to large funds, saying there’s enough demand among home buyers and small investors to soak up the distressed home inventory. They’ve argued that selling these properties in bulk could pull down overall home prices too. 

Tom Shapiro, chairman of New York-based GTIS Partners, says he plans to invest $1 billion by 2016 in single-family home rentals but he’s opting to take a more conservative approach of buying properties up one at a time. 

“If you buy by the pound, I think you’ll underperform,” Shapiro told Bloomberg. “If a firm that wants to put in $500 million today at $100,000 a house, that’s 5,000 houses, and they’re not doing the level of work they need to. They’re not going to every house and looking at the Google street map.”

Source: “Private Equity has too Much Money to Spend on Homes,” Bloomberg (June 13, 2012)