Institutional Real Estate Investors Face Tough Choices

As real estate prices continue to bounce off Great Recession lows, institutional investors in some markets, who bought properties at the bottom, now stand to make more than 50 percent from their investments after about five years. With some poised for such high returns – especially at the higher end of that range – brokers are being called on to execute exit strategies. There are a few wrinkles, though.

For one, there aren’t many obvious places for these investors to deposit their gains once a sale is completed. Between all the recent stock market volatility and the crashing international markets and commodities such as oil and gold, it doesn’t make sense to sell an investment property now – especially since this class of owners doesn’t need the money.

“The rich are getting richer in this market. People who have money and invested it wisely are seeing returns on their investment,” says Amanda DiVito, a broker with RE/MAX Alliance in Denver, Colo. “They have a decision to make. The challenge is: ‘what do I do with it?’”

The market recently “corrected” downward to the tune of 10 percent following larger crashes and currency devaluation policies in China. Without an obvious catalyst on the horizon and an interest rate hike likely in the next few months, real estate seems to be becoming a more and more attractive asset class every single day.

“They sure as hell don’t want to go into the stock market. They say, ‘I guess I’ll keep being a landlord,’ which technically is what they’re doing right now,” DiVito says. “To be honest, these institutional investors, if they’re smart, they would (sell) 5-10 percent of their inventory in the spring and then (sell) 10-15 percent the next March, April or May.”

She is referring to some of the professional homebuyers she knows who have bought blocks of houses in the distressed areas of Arizona and South Florida, where the markets have been the strongest in the spring. The housing markets that are considered the strongest, such as New York City, Southern California and DiVito’s home base of Denver, are proving even trickier for investors because that high-return opportunity never really presented itself in the first place.

Denver’s prices only dipped 15 percent during 2007-09. DiVito estimates that single family homes dropped from $317,000 to $270,000 during that period and have since surged to $401,000 – mainly due to lack of inventory and the state’s anti-construction policies, which have also forced real estate investors into other markets.

Meanwhile in red hot Southern California, many prospecting landlords and hedge fund managers have already gone in and out of their trade, booked a nice profit and have moved on to the next opportunity – not necessarily in real estate.

“Currently in Southern California, we are not seeing a significant increase in the number of institutional sellers of residential real estate,” says Melissa Zavala, a broker with Broadpoint Properties, an independent brokerage with two offices in north San Diego County. “Most of the institutional buyers who purchased at the height of the Recession participated in flips and resold those properties already.”

Still, Zavala maintains that brokers can still get in on this lucrative industry – even in tighter regions such as San Diego.

“As far as seeking the opportunity to represent an institutional seller, the best method would be to start by obtaining local data and identifying those sellers. For example, you could ask the title company to search a specific area and provide you with a list of owners that own more than five properties in the county. Then, you could create a marketing campaign and target those clients,” she says. “Once you make a few good contacts, your pipeline will be chock full of transactions.”

In parts of Michigan, where many neighborhoods were hit hard by the Great Recession, the plunge was deeper and the recovery has been slower; however, after five or six years, prices are starting to hit attractive levels and exit strategies are starting to be executed. As this trend unfolds across the Midwest, brokers are seizing these long-awaited opportunities.

Prices are coming back up and a lot of institutions, I believe, are looking at the economy and home prices to see if this is the right time to sell,” says Mitch Fannon, a broker with ListTrue, Inc., a brokerage firm in Michigan with offices in Grand Rapids and Lansing, which projects sales of around $60 million by year's end. “Specifically for institutions, we are marketing to them and have put together special plans and incentives for them to work with us. We make it simple for them and our agents to get properties online and for sale quickly.”

Nick Segal, founding partner of Partners Trust in Beverly Hills, Calif., agrees that a tailored sales plan is crucial for courting institutions, and brokers should pay particular attention to principles of supply and demand, which in these cases, dictate that institutions get good deals by buying up many homes at once and then selling them gradually one at a time so they don’t flood the market with inventory and hurt their sales prices.

“The precursor to obtaining the listings for sale is found by building trust. Trust is developed by providing comprehensive market analysis and a strategic marketing game plan, in association with some prudent tax planning, to define the stages of introducing the inventory to each micro-market in a manner that serves the ultimate objective of the institutional investor,” Segal says. “The broker that can best honor the objectives of their client and deliver an effective strategy will ultimately earn the client's business.”

Andrew King is an award-winning journalist with 15 years of experience with the Gannett newspaper company, appearing in The Journal News (Westchester, NY), Asbury Park Press and USA Today. He also contributes to The Real Deal, and

Reprinted with permission from RISMedia. ©2015. All rights reserved.



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