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Homeownership has always been the pinnacle of the American dream. But for many first-time homebuyers, that dream is exceedingly out of reach. Hedge funds, corporate buyers, and other investors are buying up affordable homes, squeezing out those trying to capture the American dream. What is the future for home buying in America?
Hedge Funds and Residential Real Estate
In most real estate markets, summer 2021 saw runaway home prices, record home sales, and inventory shortages, the likes of which we haven’t seen in decades. These trends were great news for home sellers and real estate agents. But homebuyers – particularly first-time homebuyers – often found themselves on the outside looking in.
In the past, real estate investors were individuals or families. They would invest in one or two additional properties, either to use as long-term rentals or as a “fix-and-flip” investment. However, the 2008 housing crash brought new players to the investment game: entire investment enterprises and investment groups that made billions by snatching up foreclosed properties during the recession.
There are several ways for savvy investors to passively invest in real estate. One such option is through a hedge fund. With this investment, multiple investors pool funds and then purchase and manage real estate properties. Hedge funds are becoming increasingly popular because they allow nearly anyone to invest in real estate. And because larger corporations manage these funds, investors aren’t actively involved in the purchase, renovation, and management of the properties. It’s an easy (and affordable) way to expand a real estate portfolio without the headaches that come with property management.
Unfortunately, these hedge funds are driving up home prices and pushing out the first-time homebuyer.
Outbidding First Time Homebuyers
Hedge funds represent a relatively low-risk and hands-off approach to real estate investment. The hedge fund managers can use the capital raised by investors to identify real estate properties with the most significant potential for growth and income generation. Then, the hedge fund makes a cash offer on those properties, closes within weeks, does some minor renovations, and then either rents the property or re-sells for a profit.
Meanwhile, the investors simply sit back and collect their earnings. It’s a win-win, right?
Well, not exactly.
In many cases, these hedge funds purchase properties in lower-income areas, where homes are typically more affordable. Many first-time homebuyers are often looking at the same properties, in the same places.
When a home hits the market, first-time homebuyers make the best possible offer they can. They are often using homebuying assistance programs to meet the necessary down payment. Remember: these homebuyers are young or from marginalized communities, many of whom have barely scraped together the minimum down payment needed to secure a loan. These first-time homebuyers find a home they love, make an offer, and cross their fingers.
Meanwhile, a real estate hedge fund comes in and sees the same property. It will make an excellent investment, probably netting several hundred a month in rental income for the fund. The hedge fund writes up an offer, in all cash, offering to take the home as-is, without inspection or repairs. Additionally, the hedge fund can afford to write an offer above the asking price, driving up prices throughout the market.
In most cases, the seller will look at both offers and see an easy decision. On the one hand, there’s a first-time homebuyer with a mortgage, whose offer could potentially face problems before closing. There will be inspections, possible repairs, and closing costs. On the other hand, the hedge fund offers an all-cash offer, with no contingencies and flexible closing dates. The sellers take the hedge fund’s offer.
No one can blame the sellers. Most of us would do the same. But in a real estate market where inventory is scarce, and affordable homes are increasingly difficult to find, hedge funds are pushing first-time homebuyers out of the market.
Low Inventory Woes
Investment groups aren’t the only ones to blame for rising home costs. For years, available inventory hasn’t kept up with demand, especially when it comes to affordable housing. During the pandemic, the supply-demand gap only widened, thanks to worker shortages, supply chain issues, and ever-changing health restrictions.
However, millennials and other first-time homebuyers are flooding into the market, finally ready to purchase their first house. With so few homes available, though, the market is extremely competitive, especially in the lower price ranges. New construction simply isn’t keeping pace with the increasing demand, and homeowners are staying in their properties longer than expected. Consequently, there just aren’t enough homes to go around.
First-time homebuyers face an uphill battle. They aren’t just competing against other first-time buyers. They’re also competing against all-cash offers from corporate buyers and real estate hedge funds. With so few houses on the market, many first-time homebuyers are increasingly disheartened, often writing offer after offer, receiving one rejection after another.
For many potential homebuyers, disappointment has now become commonplace. More and more, first-time homebuyers abandon their dreams and choose to rent instead. And it’s no wonder: 2021 saw the highest rate of investor-purchased properties than ever before. In other words, hedge funds and other investment groups saw success – but only because first-time homebuyers experienced failure.
The Corporate Buyer
Hedge funds weren’t the only factor creating a nearly impossible market for first-time homebuyers in 2021. Corporate buyers – businesses that purchase properties as part of their corporate portfolios – also took advantage of a soaring 2021 real estate market. Companies like Zillow went on a buying spree, often offering tens of thousands above the asking price, consequently driving up an already competitive housing market.
However, in Zillow’s case, the plan backfired. The summer 2021 housing market created a perfect storm. Low inventory and overbidding led to increasingly inflated prices. Zillow ended up purchasing homes in some of the nation’s hottest markets, all for well above listing price.
Then, as the market began to cool in the second half of 2021, Zillow was left upside down in thousands of homes. The mistake ultimately cost Zillow an estimated $500-$500 million. Zillow ultimately disbanded their homebuying program and laid off about 25% of their total workforce.
But for first-time buyers who were outbid by Zillow – and unable to afford other homes because of soaring prices – the failure came too late.
The Future of Real Estate: Do First Time Homebuyers Stand a Chance?
With all of these corporate investors, hedge funds, and other high-capital investors, do first-time homebuyers really stand a chance?
It’s not as easy as it once was to win that bid, but there is still hope. First-time buyers can increase their chances of success by following these tips:
Save up as much as possible. A larger down payment, money to cover closing costs, and potential appraisal gap coverage will make your offer more appealing to a seller.
Don’t make an offer before you’re ready. If you haven’t yet secured a loan and a pre-approval letter, that should be your top priority. Many sellers won’t even consider your offer if you aren’t pre-approved.
Sweeten your deal. There are many ways to make your offer stand out from the rest. Consider offering to help pay for closing costs, close in a shorter timeframe, or waiving any recommended repairs unless required by your mortgage broker.
Find an experienced real estate agent. A great real estate agent is worth their weight in gold. Find an agent who knows how to work with first-time homebuyers. Your agent should have a comprehensive plan to make your offer stand out – and how to get it accepted. Hiring an experienced and knowledgeable agent could mean the difference between acceptance and rejection.
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