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‘We-buy-houses’ companies thriving, but eating up inventory

 

If you’re noticing more ads on TV and the Internet from the companies that buy houses fast for cash, there’s a good reason. These days business is booming in the “we-buy-houses” business.

One company promises to make a cash offer within an hour of inspecting your home. Another provides an "instant" offer online. Others target homeowners who are facing foreclosure or who owe more on their mortgages than their homes are worth. One Florida company even specializes in buying, rehabbing and reselling houses damaged by sinkholes.

The one thing all these companies have in common is that they're selling the homes they buy to real estate investors more than ever before. Behind the boomlet in fast-cash homebuying is a sea change in the business of real estate investing. Investors who were once only flipping bargain-priced foreclosures are now also turning their purchases into single-family rentals.

According to Freddie Mac, since 2006, the fastest growing form of rental housing has been single-family homes, and now accounts for 37 percent of the rental market, up from 33 percent in 2006. Some 2.8 million single-family rentals were added in the last year alone, according to John Burns, CEO of John Burns Real Estate Consulting in Irvine, California.

All-cash sales reached an all-time high during the first quarter of 2014, encompassing 43 percent of all home sales during that period, according to RealtyTrac. Cash buyers and large investors are purchasing a sizable portion of the available inventory, making things even more difficult for consumers who can’t take advantage of record-low mortgage rates because they rely on financing.

Investors scrambling for more properties

Now that foreclosures have dwindled to the lowest level since the second quarter of 2006, according to the Mortgage Bankers Association, the we-buy-houses businesses are becoming an increasingly important source of supply for investors.

Dallas-based HomeVestors, best known for its caveman logo and "We Buy Ugly Houses" slogan, has been supplying investors with significant numbers of properties for years. With more than 400 franchises in 36 states, it recently added 38 more, according to David Hicks, co-president of HomeVestors. About 35 percent of the houses the company buys this year will be sold to investors after going through a process called "hoteling," where only major repairs are made and investors can finish the homes as they wish. The company plans to buy and fix up 3,000 to 3,500 houses in 2014, says Hicks.

"Our average house is 30 years old. Every year a new crop of houses fits our criteria, so there is a never ending supply. We buy houses where someone has lived in them a long time, an elderly couple that can't keep up with the repairs, or a divorced couple," says Hicks.

Smaller companies also thriving

Investor demand is even having a greater impact on smaller we-buy-houses companies. Several have set up "networks" of investors and they act as a middleman, matching investors with owners who want to sell.

Others, like Express Homebuyers in the Washington D.C. market, have completely changed its focus to match the market.

"A year ago we were selling exclusively to first-time homebuyers. Most of our houses were within the first-time homebuyer price range. Within the past 12 months we changed our business model and we are selling 70 percent to investors," say Brad Chandler, CEO of  Express Homebuyers, who is ramping up his television advertising to find more homes to sell to investors. 

"In 2009 and 2010 we bought a lot of REOs, but our supply went away and we had to crank back up our marketing machine," he says.

Investor demand limiting inventory for borrowers

Despite the rise in home prices, Ingo Winzer, founder of Local Market Monitor, a real estate analyst firm in Cary, North Carolina, maintains investor demand is still strong because of the opportunities that exist. "In a lot of smaller markets there are still lots of great opportunities. Home prices are still below 2007 prices and rental demand is strong."

Cash buyers and investors are certainly putting a strain on the available inventory, explains Keith Gumbinger, vice president of HSH.com. While higher home prices will prompt more homeowners to sell, cash buyers tend to get first dibs, and many former single-family homes are being turned into single-family rentals, limiting the options for the average homebuyer who depends on a mortgage to own a home.  

About the author:

Steve CookSteve Cook is managing editor of Real Estate Economy Watch, which was recognized as one of the two best real estate news sites of 2011 by the National Association of Real Estate Editors. Before he co-founded REEW in 2007, he was vice president of public affairs for the National Association of Realtors. In 2006 and 2007, he was named one of the 100 most influential people in real estate.

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