REO Phenomena From Another Perspective

The Washington Post has an interesting article about the REO market there.  I thought the story sounded oddly familiar Cash-Rich Real Estate Investors Trigger Bidding Wars, Frustrate Other Buyers.


Here are some excerpts:

Investors have reemerged with brute force in the Washington region's real estate market over the past few months, triggering bidding wars in some neighborhoods teeming with foreclosed properties and hindering traditional home buyers...

Does this sound familiar?

With interest rates low and home prices way down from their peaks, all-cash investors are snapping up the cheapest properties and helping clear out the excess supply of homes on the market. They're betting that the market has hit bottom or will soon.

"What's happening in this area reflects what's happening in other parts of the country," said Sam Khater, senior economist at First American CoreLogic, which plans to release a report soon on all-cash deals. "In markets where price declines have been steep, we've seen quite a bit of competition between the low-end, first-time home buyers and investors."

It seems like this very phenomena is happening in the starter neighborhoods across Utah.  The below anecdote is very insightful and I believe explains one strategy being used in purchasing distressed property right now:

To successfully compete with this investor class, real estate agent Jennifer Bridges recently advised one of her clients to offer $275,000 on a Woodbridge townhouse listed for $219,000. After reviewing the prices of similar homes in the area, Bridges concluded that the home (a foreclosure) was listed well below its value to induce a bidding war.

"When the agent called the following day to say they'd accepted our offer, I was screaming a the top of my lungs," said Bridges, who is with ERA Blue Diamond Realty. "They had 14 offers, including some cash offers, but the agent said he felt ours was better. He didn't specify why."

Robert Bauman, the buyer, was downright ecstatic when he ended up paying $13,000 less than he'd offered because the appraisal came in that much lower. "It was so rewarding after having lost so many bidding wars," Bauman said. (emphasis added)

I think we saw this strategy on the bidding war for 2176 Jefferson Ave. a couple weeks ago.  And to sum up...

"There's a big difference between [the all-cash] investor and the flipper of the housing bubble, who put no money down," said Mark Zandi, chief economist at Moody's Economy.com. "This person has all the skin in the game, and that's encouraging. It suggests that housing in the area is now appropriately valued or maybe even undervalued."

I think Mark Zandi hits the nail on the head.  The market is telling us that prices are at or below "appropriate" value.  I still believe that while prices may have bottomed, they arn't going to be shooting sky high in the near future.  Investing for cash flow or a rehab flip are still viable options.  However, cash flow investors will beat out rehab flippers most of the time due to the lack of capital improvements they make to property. Rehab flippers will always need more room to compensate for resale risk and capital improvement risk.