The Expert Podcast

So have you heard that some hedge funds and investment companies are buying entire subdivisions? We're going to take a look at how this works and what it means for you as a prospective home buyer—how it can even benefit you if you know what to look for.

So here's an article where the home builder D.R. Horton built a new subdivision of 87 detached single-family homes in Palm Bay, Florida, which is in the central eastern part of the state. This is an area where lots of people are wanting to move and buy homes because it's pretty reasonable in terms of the pricing. None of these homes ever made it to the retail market, meaning all the families that wanted to buy a house to live in as their primary residence, all of the people who are currently renting that want to be a homeowner, all of the people who are being displaced by outside migrants coming from New York, New Jersey, moving to Florida, need a place to live—none of these houses could satisfy that market.

Why? Well, because a hedge fund called Fundrise purchased all 87 homes for 45 million dollars, and all these homes are going to be used as rentals from day one. These are brand new homes that will be rentals only. Fundrise is a hedge fund that puts together packages of money from various investors and they use it for different types of growth opportunities—sometimes real estate, sometimes stocks, sometimes commercial property. In this case, they bought the subdivision and they purchase single-family homes for that reason. And the Sunbelt region, including Florida, has experienced extremely high demand for rental units as migration from northern states continues.

So these houses are going to be rentals from day one. If you are in the market for a home and you're shopping around trying to find a house, one of the things you're going to see is there's a lack of inventory. Well, this is one of the reasons why there's limited inventory—because these hedge funds are buying up not just one or two houses here and there but an entire subdivision. Forty-five homes that could be 100 or so people could have lived in that subdivision as primary residents. Now there's still going to be space for 100 people, but only as renters—as tenants, not as owners. So if you're shopping for a home to own, those 45 houses are not in the inventory.

What does that mean for you as a potential buyer? Well, first of all, it shows that there is interest in the real estate market, even at current levels, from smart money. Smart money meaning these are hedge funds—they know all the ins and outs of the real estate business. They have dozens of analysts that all they do all day is spend money researching documents, researching prospective growth, researching market activity, and their determination is that the market is a value at its current level.

Look, they wouldn't have spent 45 million of their own money if they didn't think real estate was a good investment even at current prices. They're not holding back, waiting for the price to go down—they're putting their money where their mouth is. These hedge funds have to answer to their investors. They have to show growth. They can't afford to take losses. And quite frankly, they don't need this for a roof over their head—they need it only for money.

So if the reason that you as a potential buyer are hesitant about purchasing real estate for your primary residence is because you think the market might go down, there's an example of a financial institution—a hedge fund—whose only measure of the market is money. It has nothing to do with the floor plan. Do they like the house? Does it have the right color drapes? Is the backyard good for their kids? They don't care about any of that. They just care about the money.

So from their money measurement—as experts in that area—they're saying, "Market's good. We're in. We're buying. Forty-five million dollars—we're in." So that's an indication that if you want to buy a house and you want something for your kids and your family, but you're concerned about the money, well here's a money answer. Hedge fund is all in. They probably know what they're talking about. Could they be wrong? Sure. But that's just one data point to consider.

Second thing is, how do you approach the market as a buyer if you're having difficulty finding properties to purchase because these hedge funds are buying them? Or somebody else is putting in all-cash offers as an owner? Maybe somebody moved from New York, sold their house in Manhattan—their condo, their co-op—for a few million dollars. They come down to Florida, they can buy something for $800,000 and still have spare change in their pocket.

How do you deal with that? Well, as a buyer, you may have to adapt your purchase strategy. Maybe you look at what's called a "don’t-want-our house"—maybe a house that nobody else wants. The buyers that are all-cash by definition are going to be affluent—even if it's a $400,000 house or $450,000 house. Those buyers who have all-cash by definition are affluent—they have $400,000 cash laying around to put into a house. A person of that means is probably going to be slightly choosier about some aspects of the house—things like design, colors, superficial features, staging, maybe condition of the fixtures, cabinets, appliances, carpet, siding. Is the paint nice? Those people can afford to make those discriminations because they have the cash.

So if you're having trouble finding a house because maybe you're getting a mortgage and you're finding no sellers want to deal with you because everybody else is offering cash, find a house that's been on the market for 30, 40, 50 days. They're out there. You can look at our channel Homescheep.com and there are houses out there that have been on the market for a long time—and the reason why usually is because of some very minor cosmetic defect: carpet's old, the windows are dirty or scratched, the decor is outdated. A buyer coming in with four or five hundred thousand in cash—they just don't want to deal with that. They want a nice house from day one. They want turnkey. They want to walk in, bring the furniture, done.

A strategy you could use is to look at the homes that those cash buyers are avoiding, which could be maybe a house that needs some cosmetic fix-up. You don't want to buy something with structural problems—certainly you want to buy something that is structurally sound—but that might need some elbow grease: clean the floor, power wash the patio, scrape paint off the garage. Things that you could either do or hire a handyman to do, for that matter.

And you may be able to get the house below market, because that same pricing pressure is going to artificially depress the listing price or the transaction price of a house that all the cash buyers are walking right by—or driving by. Sometimes people don't even look at the inside if they see the outside doesn't look good: bushes are scraggly, lawn's dried. Those are good houses, because you can fix those things over time at your own pace, at your own budget.

So if you buy a house cheap and it needs $10,000 worth of cosmetic repairs—paint, landscape, pressure washing—look, you can do that over time. You can spend $400 a month and spend three years updating all those things. At the end of three years, you have just as nice of a house as the people who paid cash down the street and maybe paid $30,000 or $40,000 more. And now you're ahead of the game and you're able to get a house.

There are houses available in all price points in all parts of the country. We've done videos of houses that are $200,000 within an hour's drive of New York City, within a five-minute drive of the beach, with 5,000 square feet, with five acres—every possible scenario. So the houses are out there—you just may have to look through the ugliness. Look through the cosmetic defect. Curtains, paint, flooring is all cheap and easy. And if you don't know how to do it—look, you could be a YouTube contractor. Most of the things you can learn to do by watching YouTube.

We've seen clients—we have a younger college graduate in her 30s who learned how to put in new flooring in a house just because it was an easier way to do it than calling a contractor.

So the reality is—yes, there are hedge funds out there buying up these large tracts, brand new homes to rent out. They think it's a good idea to own. They're putting their money where their mouth is. So it gives you some confidence that your decision to be a homeowner might be a good one—even in this market. In getting out of rent and having a fixed mortgage payment, which even at 5 or 6 percent is still lower than rent—and it's not going to go up. You can't get evicted.

If you have comments, put them below. We’d love to hear what you think and questions that we can answer in future videos.