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One year ago, private money lender Mike Grandjean knew things were good for his investor clients near Jacksonville, Florida.
At the time, he said investors in the area planned to “make hay when the sun is shining.”
Financing was cheap, rent was rising and Jacksonville was seeing activity by investors spike. As many as one out of every three homes sold in his market at the time was going to an investor.
Mike Grandjean | Jacksonville, Florida
Then the bottom appeared to drop out and investors struggled to find homes that they could sell or rent at a profit.
“It stopped a lot of demand in a lot of ways,” Grandjean said. “It didn’t affect just people buying their primary residence, it affected investors as well.”
Investor activity fell toward the end of 2022, according to reports from online real estate company Redfin and analysts at John Burns Real Estate Consulting.
According to John Burns, investors picked up 38 percent fewer homes in the fourth quarter of 2022 than a year before. But that doesn’t tell the full story.
Investors are still buying homes. Lots of them. The share of homes being sold to investors, primarily so-called mom-and-pop landlords who own fewer than 10 homes, remains more than twice as high as it was when John Burns started tracking investor purchases. Investors accounted for about one out of every four homes sold in the final three months of 2022.
Some economists are now waiting to see whether the industry-wide slowdown is the beginning of a slowdown in purchase activity by investors or if their market share will remain higher than historical averages.
“It could be a couple of things like if they think rents are going to stay high,” said Sheharyar Bokhari, a senior economist at Redfin. “Or if they are just seeing…this year is going to be slow but then housing is going to come raging back, prices are going to be raging back again.”
Sheharyar Bokhari | Redfin
“They think there’s plenty of demand just the pent up demand and then it will be fine once rates come down,” he continued. “Or like they’re already jumping on thinking this is the opportunity they’re finding. It could be that in reality we might see another long period of decline.”
Investors get ‘creative’
In the final three months of 2022, investor activity appeared to tank.
Investors in Jacksonville, Redfin reported, bought 57 percent fewer homes than they did a year before. In Charlotte, the pullback was even steeper. Investors in North Carolina’s biggest market bought 62 percent fewer homes.
Still, roughly one in four homes sold in Jacksonville in the fourth quarter went to investors. In Charlotte, it was just under one in four, as industry professionals see signs of continued activity by real estate investors.
Linda Dana | Charlotte REIA
“What I’m seeing some investors do that don’t have the liquidity, now you have multiple people going in on one deal and getting a double digit return for their money,” said Linda Dana, head of the Charlotte Real Estate Investors Association.
Some investors anticipate that people who bought as home prices were peaking last year will be underwater and over-leveraged, freeing up a new source of homes at a time of low inventory.
“Creative financing is the hot sexy word right now,” Dana said. “In this particular case it would be subject-to mortgages because people will be over-leveraged.”
Subject-to deals involve a buyer assuming responsibility to pay an existing mortgage for a homeowner in exchange for the deed. The original financing agreement remains in place.
Others may sit back and wait for home prices to bottom out, Grandjean said.
“It’s not a buyer’s market, it’s not a seller’s market,” he said. “It’s kind of nobody’s market.”
Institutional investors, those that own more than 1,000 properties, cut their pace in half during the fourth quarter, according to the John Burns data. IBuyers, the companies that buy homes quickly with cash and resell them, sometimes at a profit, continued their ongoing slowdown.
Investor market share has grown from around 11 percent in 2001 to just over 26 percent in 2022, according to John Burns Real Estate Consulting. Chart courtesy of John Burns.
Who’s still buying?
Redfin looked at homes in the 40 most populous markets to see whether homes were purchased by a trust, limited liability corporation or other company.
John Burns’ analysis is a bit more granular. The company’s analysts track the names and mailing addresses associated with property transactions. If the address of the property is different than where tax statements are sent, the firm assumes the home is an investment property. John Burns notes investor activity is likely even higher than its projections.
Both datasets show investor activity has climbed significantly in the past two decades.
In 2001, 11 percent of home sales went to investors. That rose to just over 26 percent in 2022, according to John Burns’ data.
Some markets became darlings of institutional firms that were backed by Wall Street investors who picked up communities of rental homes by the thousand.
The era included the creation of a new type of investor: The iBuyer. Companies like Opendoor, Offerpad and, until recently, Zillow and Redfin began scooping up and reselling homes by the thousands.
iBuyer activity peaked at 24,339 in the third quarter of 2021, according to John Burns. The remaining iBuyers ground their activity to a near halt since then, picking up 4,179 homes in the fourth quarter of 2022 or 83 percent fewer.
While mom-and-pop investors also pulled back their activity, they still accounted for 437,856 purchases in the final three months of last year. They account for 19 percent of the total real estate market share, an amount that has remained more or less constant for the past 15 years.
The vast majority of investor purchases are by mom-and-pop investors who account for nearly one in five sales that were made to investors.
Elena Fleck | Redfin Premier Agent
Rent remains elevated after a steep climb during COVID-19, despite recent signs that it has started cooling.
That’s especially true in markets across Florida that saw some of the biggest sustained increases in rent over the past few years.
Redfin Premier Agent Elena Fleck said she has seen out-of-state investors looking for properties that will cash-flow or provide returns that are above the cost of financing the purchase and expenses.
It’s “mostly people from up north that are either moving to Florida at some point or are just looking for income-producing properties,” Fleck said. “Duplexes, triplexes, fourplexes — you name it. [They’re] just looking for rental income more than anything else.”
Like Dana in Charlotte, Fleck sees more investors pooling resources to buy income-producing properties.
“Typically we think of investors as cash buyers but that’s not the case,” Fleck said.
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