So far in this foreclosure crisis, the banks and government-sponsored enterprises (GSE) like Fannie Mae and Freddie Mac have foreclosed upon and taken ownership of many homes. Then, they've primarily sold them one by one through real estate sales professionals, via the local multiple listing services (MLS). This approach is a slow, arduous process and has led to high inventory of vacant, bank-owned homes. Many sides on the debate would like the GSEs, who own about 180,000 homes, to move it along and start bulk selling properties to investors instead. But many on the other side of the debate feel that is a bad idea.
Those who believe the GSEs should start selling in bulk think that it will help to get homes out of the government’s hands and into the hands of profit-seeking investors. This is because ideally, these investors will renovate the homes and rent them out to provide more affordable housing to people in need. But these investors would also prefer to pay a very low price for these houses, so they can make more of a profit off of them. That scenario would cost the taxpayers more because the government would be getting less money from these investors for the houses, and we the taxpayers lose!
On the other hand, the owners that have been selling the homes one by one have been getting pretty fair prices using this method. And the GSEs still believe that they can recoup more money with this traditional sales process over bulk selling the properties to investors at larger discounts. But the GSEs are not completely against the idea of bulk sales — in fact, they're willing to try other avenues and test out bulk sales, according to The Wall Street Journal.
Professionals, from Goldman Sachs economists, to Warren Buffet, to Stuart Miller from Lennar Homes, have chimed in with their opinions. Buffet and Miller are saying they’ll pass on these opportunities, due to it being tough to manage and earn a fair rate of return on single-unit properties. The Goldman economists say yields can average 6.3%, but can exceed 8.0% in some cities like Las Vegas, Detroit, and Tampa. But as a long-term rental property owner, I can tell you that the Goldman Sachs economists probably don’t own any rental properties if they think they can earn a 8.0% yield on properties in Detroit or Las Vegas.
In fact, profits on rental properties can be quite elusive. What pencils out nicely on a financial projection rarely comes true with real estate overall, and almost never with single unit properties. The rehabilitation costs, tenant issues, potential for rent loss, vacancy, unexpected expenses, and time-consuming nature of managing single rental units, with no economies of scale, make the return yields much lower than anticipated. In some areas like southern California, with land constraints, prices will probably appreciate over a decade to provide an overall fair rate of return. But don’t forget that those increases could be nullified by capital repairs like new roofs, siding, HVAC, etc. that always cost a lot more than one anticipates. In areas like Detroit and their bad economy, it’s a risky gamble to bank that prices will appreciate at all in the next decade to compensate for the low yields.
The reality is that single unit properties are hard work. For small mom and pops, handling the issues are okay and these properties can provide favorable returns. But for a major investor, after adding on all the property management fees, asset management fees, and corporate overhead charges, they shouldn’t expect too high a return on their invested capital. It could work out well, but the odds are against them!
All in all, if history is any guide these big firms will overpay for real estate just to place money into assets. it’s always easier to risk another person’s money than to spend that of their own. Plus, they get management fees after they acquire the properties, so they buy buy buy and that bids up up up the prices! That brings down yields. Then they get years of management fees regardless of how well the investments perform for the people taking the risk with their own money.
Regardless of these issues, I would opine that bulk sales are the best route for everyone, even if they hurt pricing. That’s going to be really tough medicine for individual property owners, including myself, who will have to see prices fall further. But those lower prices will only be on a temporary basis, so we’ve to go hold on for better times a few years down the road.
Move out the excess inventory by clearing out via bulk sales, the market will soon bottom, prices will start to increase, and the economy will finally gain some additional steam. And that’s good for everyone!
