Institutional real estate investors — often mammoth operators with Wall Street ties — gobbled up record amounts of inventory in almost every corner of the pandemic-induced fever dream that was the 2021 real estate market, with one notable exception: distressed properties being sold at foreclosures.
That these homebuyers are now reluctant to buy in the niche market that got many of them into the real estate market a decade ago is somewhat ironic. But it also makes sense, since their large-scale acquisition strategies could collapse under the logistical pressures of undertaking major renovations on hundreds or thousands of homes at once.
“The Blackstones and the Vinebrooks are not going to look at these lots,” said Terry Kerr, a Memphis-based real estate investor, referring to the often vacant and severely distressed lots available at foreclosures. “We take a house and gut it. All new components. … The hedge funds are not making great improvements.”
It’s a different story in the non-distressed retail market, where large institutional buyers are crowding out both owner-occupiers and local real estate investors, according to Kerr, who is president of local Mid South Home Buyers.
“Every time we play them, we lose,” he said. “It’s the hedge funds that have driven the market. Private investors just follow them.”
bulk buyer bonanza
More than 2 million home sales in 2021 were to cash buyers, up 67% from 2020’s 1.2 million to a new record high, according to Auction.com analysis of record public data from ATTOM Data Solutions, which is available way back in 2000.
Those 2 million cash sales accounted for 32% of all existing home sales for the year, the highest level since 2014, though it’s still down from the 37% peak in 2012, when home prices finally bottomed out after the Great Recession. The proportion of cash sales continued to rise in the first two months of 2022, hitting an eight-year high of 36% in February.
Some of these cash buyers are owner-occupiers trying to compete with well-funded institutional investors, but institutional investors’ seemingly insatiable appetite becomes clearer when looking at the proportion of purchases to bulk buyers, which ATTOM defines as buyers of at least 10 properties per year.
These big buyers bought more than half a million homes in 2021 (530,025), also a new record high and more than double the number in 2020 (205,934) or in the pre-pandemic 2019 market (258,780). Bulk buyers accounted for 8.4% of all home sales in 2021, the highest proportion since 2013.
In stark contrast, the number of foreclosure purchases by bulk buyers fell to a new record low of 4,179 in 2021. More importantly, these bulk buyer purchases accounted for just 11.5% of all foreclosure sales for the year, up slightly from 11.1%. in 2020, but lower than any year before 2020 and well below the 52.0% peak in 2009. So far in 2022, only 5.4% of foreclosure sales have gone to wholesale buyers, while 5.6% of retail property sales went to wholesale buyers.
Data from Auction.com, which has accounted for more than 40% of all foreclosures nationwide over the past two years, tells a similar story. Less than 1% of Auction.com buyers have collectively purchased more than 10 foreclosure items through the platform in the last two years.
Most foreclosure buyers using the Auction.com platform were small local buyers buying properties within driving distance of their homes. More than 99% of buyers purchased 10 or fewer foreclosure items on the Auction.com platform in 2020 and 2021 combined. The median distance between foreclosure buyers and the homes they bought was 14 miles in 2020 and 16 miles in 2021.
These are buyers like Tony Tritt, who bought a combined seven homes on the Auction.com platform in 2020 and 2021. All seven were located in the Atlanta area where he lives, an average of 35 miles away. A veteran investor, Tritt has been buying through Auction.com since 2013, but he’s never purchased more than seven foreclosure properties from the platform in a single year.
“I feel like we’ve played a small role in adding value to the neighborhoods that we’ve operated in,” Tritt said, noting that he’s willing to take on the major renovations that are often needed when the highly distressed properties available at foreclosures – something that sets it apart from the institutional investors active in Atlanta’s retail market. “Those we pick up on the courthouse steps are the ones that institutional investors are avoiding.”
Tritt sells most of its properties to owner-occupiers, many of whom are first-time buyers. Selling a quality product to these buyers is a responsibility he takes seriously.
“Our job isn’t to get rich, it’s to do the right thing. If I’m renovating a house and I have to lose money on that house, I’m losing money, but I’m renovating it properly because I have to sell it to someone and live with myself,” he said. “My name means everything to me. I see these people at the grocery store and at the ball game. I want them to come and hug me.”