Real estate has seen a lot of volatility over the past few years. House prices have skyrocketed; mortgage rates have fluctuated wildly. And while the severe inventory squeeze is beginning to ease, the supply of homes for sale is still well below what a balanced market requires.

Of course, many factors influenced this unusual market. But the one that particularly affects the housing shortage is institutional real estate investment. Institutional investors bought 13.2% of all properties sold in 2021, according to a 2022 report from the National Association of Realtors (NAR). Perhaps more concerning is the fact that they purchased these homes for 26% less than state median prices during this period.

These large investment companies are exacerbating the housing shortage by buying the most affordable properties and renting them out, making it even harder for individuals and families, especially first-time buyers, to climb the ladder. housing.

What are institutional investors in real estate?

Institutional investors are usually large companies (i.e. institutions) looking to make an investment that ultimately generates a profit. They can invest millions, even billions, at a time.

When it comes to real estate, these companies typically purchase large amounts of properties. An institutional investor can buy 100 or more homes in a single city, creating a portfolio of properties that they can then rent out to tenants at a profit. This removes these homes from the sales market for residential buyers, further reducing the already weak supply drop.

How Investors Affect Housing Stock

Due to their size and deep pockets, institutional investors can have a massive impact on home inventory locally and nationally. This is especially true in growth areas, where companies can rush in and get what practically amounts to a “wholesale” sale on cheap homes. While this may be good for business, it’s bad for up-and-coming owners: the number of homes these companies are able to buy can dramatically reduce the available supply in a given area, especially for affordable starting points, which makes it even more difficult for regular buyers to compete. .

To make matters worse, many investment companies make cash offers to buy homes and are willing to accept them as is. This makes them more attractive to sellers than to individual buyers, as there is no financing risk and no need to worry about appraisals, repairs or updates.

Because of their financial resources, institutional investors “are often able to lose money on properties for a few years, eventually raising the rent enough to make it worth it,” says Dennis Shirshikov, chief content officer at Awning. , a San Francisco-based real estate tech. company and brokerage.

Even people who aren’t looking to buy a home can feel the squeeze on housing inventory caused by these investors. For example, with fewer people able to buy homes, more people end up renting, which in turn can drive up rental prices.

Which markets are most affected?

As institutional investors strain housing supply across the country, the hardest hit areas are usually in the south. According to the NAR report, the top five states with the highest share of institutional investor purchases are:

State Share of home sales that went to institutional investors
Texas 28%
Georgia 19%
Oklahoma 18%
Alabama 18%
Mississippi 17%

The next five states, Florida, Missouri, North Carolina, Ohio and Utah, all tied for sixth place at 16%. Some areas are particularly affected. For example, in Lincoln County, Mississippi, more than 60% of homes sold went to institutional investors. In Charlotte, North Carolina, a vibrant and growing real estate market, corporate investors were responsible for 32% of home purchases in the fourth quarter of 2021.

Some worry that institutional investors are creating a long-term shortage of stocks in these markets. “When a hedge fund comes in and buys a bunch of single-family properties, those homes are gone,” says Doug Greene, owner of Philadelphia-based Signature Properties. “And if they ever decide to sell, it will be to another big institution, which means they may never come back into the market for the regular buyer.”

What Homebuyers Can Do

However, there is still hope for house hunters. Even if you live in a market where institutional investors have taken up much of the inventory, here are some steps you can take to improve your chances of buying a home.

  • Sweeten the offer: Cash transactions are part of what makes homebuyers so attractive to sellers. While cash offers are out of reach for most people, companies like Ribbon and Knock will fund what amounts to a cash offer for you, which can help your offer stand out in a crowd. You can also reduce the financing risk that sellers face by offering a larger down payment – there are many down payment assistance programs to help you increase the amount you have set aside.
  • Be light on the unexpected: Make it easier for a seller to say yes by reducing the number of conditions you impose on the purchase. Foregoing some contingencies, like a home inspection, can be risky, but it can be done without getting burned if it helps you compete. Being flexible in other ways, like letting the seller dictate the closing schedule, can also help.
  • Expand your horizons: If you’re looking in a really tough city, you might want to consider options in a cheaper housing market. The success of a purchase outside of your initial search area will give you the opportunity to start building capital – and you can eventually trade in a home in your chosen area.
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