There are lots of reasons we aren’t getting the great deals in Austin. I came across an article in my favorite local newspaper, the Community Impact.* this month that explained a lot of what’s going on, and why it’s becoming hard to find affordable homes for both families and small-scale renovators. Here’s the gist, according to Emma Freer, who wrote the report:
In the six Central Austin ZIP codes for which data is available, 11.55%—on average—of homes were purchased by investors in 2018, nearly double the rate of the Austin-Round Rock metro.
The class of buyers that is competing with smaller investors like us is called “institutional investors,” and that means companies that own portfolios of more than 2,000 houses. Who are they? Well, we know of some of them, such as Memphis Invests and other companies FortuneBuilders work with.
How does it work?
The “Institutional investors move in on Austin housing market” article says:
“Anytime there’s a recession, big institutional investors come in and buy portfolios … and rent them,” said Dan Castro, a real estate attorney, broker and founder of the local group Investors Underground, which counts more than 15,000 members.
The logic, […] is that investors purchase foreclosed homes for pennies on the dollar and rent them until their values stabilize, bringing in profit until they can be sold for more money.
It’s similar to what we do, just on a larger scale. And they have the marketing budget and paid staff to do research, so that they can do a great job finding owners of sad houses to reach out to, even without the door knocking and personal contact we offer.
Since so many people are renting houses these days, there’s a market for people to occupy the homes the institutional buyers flip. They can then wait for the market to change and give them a profit from selling, at least in theory.
And the corporations have a system to try to cut down on costs, which involves using the same materials and fixtures in their houses, to take advantage of bulk pricing, and careful scheduling of contractors to maximize their productivity and lower those expenses (at least that’s what they taught us in “flipping school.” Still, they have to hire project managers and others to be onsite, since we real estate redevelopers all know that renovating without putting your eyes on the process leads to imperfect results.
The good news is that, because of the high prices in the Austin area, experts interviewed for the article predict Austin won’t remain a big market for corporate investors, simply because the numbers won’t work out. That’s good news for individual home buyers, if they can afford it, or for folks like us who rent to people who aren’t in the market to buy. As Dan Castro put it, the smaller investors will still be here long after the institutional ones leave because of their cost of doing business:
Unlike individual investors, Castro said, institutional investors accumulate large expenses, which lead to large fees for sellers in distress, and take a formulaic approach—with mass-marketing materials—that pales in comparison to a home visit from a local flipper.
“You can’t duplicate that human compassion, that human touch, that hand-written letter, over a thousand doors,” Castro said. “You can’t scale it the way institutional buyers want to do it.”
That makes us feel better, if we have the patience to wait it out. Thanks to Emma Freer for such an interesting article. The data is fascinating, and there’s a lot more in the original!
*The Community Impact newspaper series was started a few years ago to provide local news in the Austin area. There are many different editions, with news focused on the area where you live, though you can read others online (and I often do). At first it was just some restaurant reviews and lots of articles on schools, but the company has grown and now has excellent reporting on issues of local interest, as well as really useful content on new restaurants and businesses, ones that close, and ones that move. Each month they do a special feature on a local business, too.
I’m happy that the model has been successful and they are branching out to other Texas metro locations, and even Nashville and Phoenix.Hermann says please like and share!