How is the Small Investor to Compete?

Our government seems to be placing its bet on large-scale investment groups to help get the country out of the foreclosure mess.  In May the Federal Housing Finance Agency will announce who from among 3- or 400 investor groups will be allowed to compete for a stock of 2500 Fannie Mae/Freddie Mac properties in several major foreclosure markets.  A group of these properties are in the Atlanta area and will be sold in bulk to qualified investors.

The bigger investment groups will be able to put up millions of dollars in cash and will, more than likely, be able to drive the prices down below 70% LTV for these properties to be used as rentals.  Analysts speculate that these larger investors purchasing bulk REO deals from the GSEs or banks will be able to command 10-12% return on investment for holding these properties as rentals, well above the market return rates.

In major markets across the country large investment syndicates and hedge funds have entered into a feeding frenzy for bank-owned property sometimes driving the bidding up at auctions or in negotiations with lenders past a point where a small investor can compete.

Where does that leave the little guy?

It is obvious that in order for the mom and pop investor to survive in the current market climate the smaller investor will have to work faster and with more guerilla stealth than in the past.  Here are some strategies for competing in this changing market environment:

1.  Pick markets that are generally not the target of the larger investors.  Right now larger investment groups are going after residential and commercial REOs, bulk REOs and notes, and A-grade apartment complexes and other top-of-the-line commercial property in larger markets.  Instead, the small investor can go after:

• Bank-owned property in secondary and tertiary markets that do not have enough properties to buy in bulk;

• C and B grade apartment complexes and smaller residential multi-family in any market that is beginning to emerge from the recession that with some rehab and proper management can bring in improved cashflow. Large investment groups are mostly passing by these older and smaller properties for the newer, larger and glitzier projects.

2.  Pick investment strategies that do not lend themselves to bulk buying such as:

• “Quiet title actions” and Short Sales.  These activities take working with distressed sellers one at a time.  The banks have been pulling a con job on us for well over a decade using, and we finally have the method to fight back.  The Agents and Investors who work with these pre-foreclosure clients are doing a real service in helping the owners avoid foreclosure altogether.  Helping one homeowner at a time is not the market of choice for investment groups with millions in cash;

• Locating and helping other motivated sellers such as probate sellers, families moving out of town, those with little to no equity who might be candidates for a “subject to” deal, landlords who are out of town owners, or landlords who want to retire. These are the traditional wholesale sellers that will always be present in any market.  They need your help!

3.  Join a larger group as a passive investor.  Sometimes the best way to fight them is to join them.  Investors with the financial strength to afford investing personally or through a retirement account might consider joining an investment syndicate as a limited partner in a large bulk buy or a major commercial property acquisition. 

It is estimated that we are little more than half way through the present foreclosure crisis.  Bulk buying and rental programs will only be one piece of the puzzle to bring the housing market back to stability. It will take the efforts of large and small investors alike working with others involved in real estate and finance to turn things around. There is room for all types of investors to make money and help distressed owners for many years to come.