Podcast host Nikki Hynes lost out on her dream home last summer. Despite offering $15,000 above listing price, the sellers instead chose an investor — one offering all-cash and a lightning-fast, 14-day closing timeline.
“We were devastated,” Hynes says. “We also began to worry that we wouldn’t be able to find a home if we were going in $15K over and getting beat out by cash offers. It’s very tough to compete with those.”
Hynes’ story is becoming a common one in today’s competitive market. For-sale inventory is down 40% compared to pre-pandemic days, and over three-quarters of buyers found themselves in a bidding war at one point last year. Increasingly often, cash-flush investors were on the winning side of those battles, upping the ante in an already high-stakes market.
According to data firm CoreLogic, investors made 27% of all single-family home purchases in the first three quarters of 2021 — up from just 17% at the end of 2019. What’s more: These investors largely focus on the lower- and mid-priced end of the market, meaning first-time homebuyers feel the brunt of their activity.
“Even before the boom of investors, the American homebuyer had already been facing an uphill battle,” says Christian Wallace, head of real estate services at Better. “When you add in the deep pockets of Wall Street firms, homebuyers won’t stand a chance.”
Rising prices, low rates and inflation
Today’s real estate investors come in many forms. There are home flippers, small- and large-scale landlords, Wall Street-backed institutions, and, more recently, iBuyers — a kind of online home buying company that purchases, fixes up and then resells properties in short order. (Opendoor and Offerpad are examples of these. Zillow used to be.)
Though each has its own motivation for increasing investment volume this year, experts say it all boils down to seizing an opportunity.
“Investors have been chasing higher yields in a low-interest environment,” says Eric Maribojoc, a professor and director of the Center for Real Estate Entrepreneurship at George Mason University. “With single-family rents and home values increasing strongly in recent years, the returns on rental single-family homes have been attractive.”
It’s a succinct way to sum up the many drivers behind this trend.
As Maribojoc mentioned, home values are on the rise. According to the National Association of Realtors, the median price on U.S. homes clocked a 17% increase across 2021. The quick price growth offers major upside to home flippers and iBuyers who want to buy low, make a few improvements and sell high a few months down the road.
Mortgage rates, which until recently, have hovered near historic lows, also factor in, and there’s inflation — which just notched its highest jump in 40 years, to think about too.
Real estate is generally considered a good hedge against inflation (its value and rent potential increases as prices rise), so during inflationary times, many investors see it as a safer bet than other options. As Thomas Malone, economist at CoreLogic, explains, “Both prices and rents have been surging, making housing a relatively more attractive investment than alternative assets.”
Demand for single-family rentals is growing
Malone nods to this briefly, but rising home prices also play another role: They keep people renting longer, pushing up rents (and demand for rental properties) in the process.
According to Realtor.com, rents grew 19% between December 2020 and December 2021. This kind of growth is tempting for institutional investors, who made up 26% of all investor purchases last year — up from 14% a year prior.
These deep-pocketed competitors — often representing a hedge fund, pension fund or real estate investment trust (REIT) — typically turn the owner-occupied homes they purchase into rentals, aiming to generate consistent returns for shareholders. The largest example of this type of company is Invitation Homes, which owns more than 80,000 rental homes.
“Institutional investors, as a result of Covid, had to abandon investing in offices, retail, strip centers and hotels, as they were no longer safe harbors,” says Grant Cardone, CEO of Cardone Enterprises, an institutional investor based in Florida.
Rentals, especially when combined with strong demand from millennials, have offered an increasingly lucrative alternative.
“The largest cohort of millennials is reaching the prime age for household formation,” says Rick Sharga, executive vice president at foreclosure listing platform RealtyTrac. “This creates demand for both owner-occupied housing and single-family rental properties, and investors are actively purchasing homes to meet demand in both.”
Make no mistake, though: It’s not just big Wall Street firms taking advantage of surging rental demand. According to CoreLogic, small investors — those with nine properties or less — made up 43% of all investor purchases last year.
Some of these were existing mom-and-pop operations. Others were first-time investors, using their pandemic-spurred savings or newfound remote work capabilities to branch into real estate (and snag a vacation property in the process).
“Households generally increased their level of savings during the pandemic through a combination of less-spending-while-homebound and receiving government stimulus funds,” Maribojoc says. “Some households spent more on home renovations, some purchased a bigger home, and some invested in rental property. Individual investors owning one or two rental houses still account for most of the single-family investment market.”
Why are sellers choosing investor offers?
At any rate, the investor is only one side of the equation. The other? That’d be the seller — who plays a major role in why investors have been able to consume such a large share of today’s limited inventory.
Oftentimes, investors come to the table with cash offers — as in Hynes’ case. These can be very tempting for sellers: They close fast, and there are also no potential financing issues to contend with as there are with mortgaged buyers.
The old selling-while-buying challenge also makes these offers tempting. Sellers in this boat are looking to align their sale and purchase as closely as possible to avoid overlaps in payments or needing a temporary place to stay. Traditional buyers, who are tied down to mortgage financing that could fall through or get delayed, are just riskier.
“Since investors purchase properties in cash, sellers don’t need to worry about bank approvals, inspections or appraisals, thus eliminating the three greatest caveats that can terminate a transaction,” says Ryan David, owner of cash home buying company We Buy Houses In Pennsylvania. “The seller will get paid very quickly, with closing taking mere days up to a couple weeks. This benefits the seller if they need quick cash or if they need to sell in a hurry, such as relocating for a job or if they’re facing foreclosure.”
iBuyers in particular — offer a compelling alternative for sellers who want to perfectly time their sales. Many iBuyers even offer “trade-in” programs, which allow homeowners to both sell their home and buy a new one in a single transaction.
How regular homebuyers can compete
Whatever a seller’s reasoning is for choosing an investor, one thing’s for certain: It makes an already challenging homebuying climate even more so. According to experts, though, there are still ways traditional buyers can remain competitive.
Making a cash offer is often the best option, as it offers the speed and ease that most investors come with. It also increases your chance of winning by a jaw-dropping 290%, according to an analysis of past real estate transactions.
For buyers without that much money in the bank, cash offer programs like Ribbon or Orchard can be an alternative way to go toe-to-toe with investors. In these arrangements, the company makes a cash bid on your behalf, purchases the house, and lets you rent it back while you work to obtain financing. (With Ribbon, for example, you have up to 180 days to get a loan).
Choosing a lower-cost housing market can also help (you could even become a small-time investor yourself there) and having a mortgage preapproval — ideally a fully underwritten one, can be a smart way to compete too. Because these types of preapprovals require full documentation and underwriting, they can often speed up the closing process and remove much of the risk to the seller.
Finally, experts say, buyers should make their offers as similar to an investor’s as possible: Offer a lease-back, choose a lender with fast closing times, and consider removing appraisal and inspection contingencies. (Make sure you talk to your agent in-depth before doing the latter; waiving contingencies comes with real risk — especially the inspection contingency.)
“Make creative offers that stand out from the rest,” David says. “This might include waiving the inspection or taking possession as-is without the seller having to do anything. Anything that entices a seller by making it more convenient for them is always more appealing.”
Every Saturday, Money real estate editor Sam Sharf dives deep into the world of real estate, offering a fresh take on the latest housing news for homeowners, buyers and daydreamers alike.
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