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In another sign of institutional investors' appetites for foreclosures, inventories of presale foreclosures have declined nearly twenty percent since last year as lenders have made volumes of foreclosures available via REO tapes to well-funded hedge funds eager to buy in bulk.

Institutional Investors Gobble up Presale Foreclosures

In another sign of institutional investors’ appetites for foreclosures, inventories of presale foreclosures have declined nearly twenty percent since last year as lenders have made volumes of foreclosures available via REO tapes to well-funded hedge funds eager to buy in bulk.

Nationally some 1,689,000 properties are in the presale foreclosure inventories. Presale foreclosures Last month presale inventories fell 0.41 percent on a monthly basis and 19.61 percent on a year-over-year basis, according to Lender Processing Services’ “first look” mortgage report.

Presale foreclosures, also called preforeclosures, are properties that have yet go to auction where they are either sold to a third party or go back to the lender to become REOs. They are still owned by their original owners. By selling properties at a huge discount at the pre-sale stage, lenders can reduce their inventories, and avoid carrying costs and rehabilitation expenses exceeding $10,000 per property.

Bulk sales of hundreds of homes at a time can quickly build up the inventories of rental properties that large hedge funds like Blackstone and Waypoint, especially since they pay far below the comparable costs of REOs or even auction sales.

Individual investors and owner-occupants, on the other hand, have a difficult time finding presale foreclosures in their markets. Zillow is one of the few large sites to list presale foreclosures.

However, the large investor purchases of pre-sale foreclosures are speeding up the rehabilitation of defaulted homes and turning them into rentals more quickly than the foreclosure process in many states.

“One of the catalysts in the current upswing has been the large investment funds purchasing REO and other distressed single family homes to rent out. As we also mentioned at that time, the economics of doing this was very compelling, particularly with very low investment returns available in the more traditional financial markets. This is still the case today, even though there have been significant price increases in many of the previously distressed markets of interest,” notes Home Value Forecasts.

“These funds have been renovating the homes, which has helped improve the overall conditions of the surrounding neighborhoods. This injection of capital can only be positive since it is unlikely that homeowner buyers would have had the means to do the same. In addition, having observed a number of real estate cycles, we have noticed that while each one may appear to be different on the surface, they all have the common thread that some type of catalyst gets them going in the first place. Once the cycle starts, a virtuous process of higher sales leads to higher prices which leads to more buyers coming into the market out of fear that they will miss out. At the same time, higher sales typically leads to a shortage of inventory available for sale except in those markets where new homes can easily be built. A unique aspect of the current real estate market environment is that it has the strong fundamental support of very low mortgage rates and historically high levels of home affordability,” said HVF.

3 comments

  1. hi, Steve — yes, these institutional buyers are gobbling up thousands of properties in markets all over the country. Especially in the coastal markets it seems… I just wonder if the hedge funds aren’t creating a whole new bubble all by themselves.

    Also (side note) I tried to reach out to you directly through the contact form here on the site, but I can’t get it to work for me for some reason. If you could reach back my way when you have time, I’d like to discuss having you as a contributing writer to one or more of our real estate investing properties online. Please reach back to me via email and let’s discuss.

    Thanks for the consistently great content. Love it!

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