A Change Is Afoot On The StepsPosted on November 5, 2012 by
Something new and bizarre is happening at the foreclosure auction in Bartow County. It seems to be a seismic event that marks an increase in the price properties are selling for on the steps.
A few months ago, a different kind of investor showed up at the Bartow County auction. Their mission is to buy around 200 properties a month in the Atlanta area. One company buying two hundred properties a month is unheard of in Georgia!
The buyer is some sort of investment company that controls a conglomerate of money. Here’s how it seems to work: The investment company has a good number of folks pool their money into one pot. I understand – but have not confirmed – that these money-partners are promised a return of around 8%. This is a much higher yield than they can get at a bank. The investment company uses these funds to purchase property at foreclosure auctions. Once a property is bought, the exit strategy is to find a tenant for the property and manage it as a rental. One day, when property values return, I’m guessing the company will sell these rentals for a nice profit. It’s an interesting business model.
I understand these types of investment companies have been buying in counties like Fulton, Cobb and Cherokee for the past year. Now Bartow has been added as a target.
Because these investment companies have a lot of money to spend and are willing to pay top-dollar for a property, they are driving many mom-and-pop investors – who only know how to buy on the steps – out of the areas where they normally invest. For example: Last month there was a new face on the steps. When we talked, I learned this bidder represented an investor out of Cobb County. Because the Cobb investor was being regularly outbid at the Cobb auction, he decided to migrate north to Bartow in hopes of finding less competition on the steps. (Good luck with that!)
This takes us to last month’s auction. Attending were the folks who regularly bid at the auction in Bartow. Also, there was the guy representing the Cobb investor. Finally, in all their glory, were representatives from the conglomerate investment company. Needless to say, it made for some crowded steps.
Each month, there are usually between four and eight really good deals that get cried. The rest are either marginal deals or outright stinkers. Two years ago, there were two or three of us bidding on these properties. Last year, the number of bidders grew to around five. This year, it’s increased to about ten bidders at each auction. Problem is, the number of really good deals has remained constant.
So what happens to prices when the number of bidders increases but the number of deals remains unchanged? Prices go up, right? To compound the issue, the big investment company is planning to hold, not sell, their properties – this means they’re willing to pay a higher purchase price than flippers.
So does this mean it’s the end of the line for mom-and-pop investors? Hardly. It just means we need to become masters of creative deal structuring and financing. Kim and I have being buying foreclosures since 1995. They represent less than 10% of our business. Buying properties pre-foreclosure has always been the better way to do solid, win-win deals!