Cash and carry: Institutional investors aren’t the only ones paying cash for homes

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CHARLOTTE – While some would-be homebuyers struggle to obtain mortgages and find properties in their price range, others – more than half of all buyers in October – paid in cash.

A recent report from RealtyTrac, the online real estate data provider, found that more than 50 percent of sales in the metro area for October were cash.

These purchases are being made by several groups, according to those in the industry: institutional investors; older sellers with enough equity in their previous homes to pay cash for the next one; people looking for a better return on investments than traditional instruments are providing; workers relocating from more expensive housing markets, both nationally and abroad; and foreigners looking to invest in U.S. real estate.

Over the past two years, institutional investors have played a large role in the local real estate market, and pay in cash. But there are signs that their influence may have peaked, at least for the time being. According to the RealtyTrac data, the percentage of homes sold to institutional investors fell by 11 percent between September and October in the Charlotte area, from 16.3 percent of all home sales to 14.5 percent; and by 15 percent from October 2012, when 17.1 percent of all sales were to institutional investors.

John Bradford, owner of Park Avenue Properties, said institutional investors are not retreating from the Charlotte market, they’re “digesting inventory.” Bradford’s firm has helped institutional investors manage their properties.

“They’ll buy more properties, but maybe not as many as in the past,” said Bradford, who is also a member of the Cornelius Board of Commissioners.

‘Good for the market’

Phil Henderson, president of Henderson Property Management, agrees, saying of institutional investors’ appetite for single-family homes: “They are not quite as aggressive as they were before, in that they are now closely scrutinizing market values to make sure they are buying below market. Previously, they were paying above-market rates just to meet their acquisition quotas.”

Henderson said that based on his experience, American Residential Properties is one institutional investor that is still very active in the Charlotte market.

Bradford’s bullish on institutional investors: “There’s no doubt that institutional investors created a frenzy, but they’ve been good for the market.”  The investors have pushed up house prices by creating greater demand for the limited available inventory, thereby increasing homeowners’ equity – especially those with little or negative equity; and they have snapped up foreclosure inventory, taking the properties off banks’ hands.

Paul Jamison at Jamison Realty handles both sales and property management for investors.

“We do see the hedge funds pulling back from the feeding frenzy, but I know that inventory does have an impact on that ‘lack of strong buying,’” he said. “I also think, like most, they are taking stock in the existing inventories and making sure they flush out some of the good/bad buys and (are) buttoning them up as such.”

Jamison has also seen increased demand and cash sales from people close to or in retirement, as they seek income and higher yields. “I see more folks willing to buy one or two homes, or convert their current homes (into rentals) versus just selling and downsizing or moving into assisted living.”

Similarly, Bradford has seen cash-only investors leveraging their 401k funds through self-directed IRAs and buying property rather than betting on mutual funds for their retirement nest egg. He admits he’s seeing only small numbers of these investors, but he thinks more people will participate in these types of plans once they become aware of the opportunity.

At T.R. Lawing, Tommy Lawing says his property management company regularly hears from clients wanting to buy a rental for income: “That’s our stock in trade.”

Investors look for higher returns

Lawing said he has worked with people who have savings and are looking for a safe place to put their money. “They can’t put it in a CD (because of the low returns), so real estate becomes an inviting vehicle,” said Lawing.

Lawing believes that appreciation will continue in the rental market because there’s a shortage of new construction.

J.C. Underwood is not surprised by the high level of individual investor activity in Charlotte’s real estate market, a practice he’s been involved with for 50 years. As the executive director of the nonprofit Metrolina Real Estate Investor Association, he helps educate people interested in real estate investment, whether they are in the market for single-family homes or apartment properties.

With 400 members, the association also connects retirees with investors looking for capital. Underwood thinks retirees are looking for a better return on their savings than the 1 percent they’ll get from a bank, for instance. “Investors will pay 7 or 8 percent, usually for a loan that lasts 60 to 90 days,” said Underwood.

Investing in Charlotte’s blue-collar neighborhoods is the backbone of Metrolina’s investment activity.  Underwood boasts that his investment group is the area’s “largest supplier of affordable housing, and we do it with private money.”

Henderson said the “mom and pop” investors he’s worked with usually fall into one of two categories: reluctant landlords who could not sell their primary residence after buying a new home, so they’re looking to lease property; or the new investor that is looking to take advantage of low prices and low interest rates, and enter the real estate market rather than dealing with stocks.

Keith Thompson with Berkshire Hathaway HomeServices has seen cash-only buyers of all stripes in the local market: institutional investors, foreign buyers, retirees and “plain old regular buyers.”

Unlike markets such as Florida or Phoenix, the foreign buyers in our area, in his experience, are relocating to Charlotte through their employers. Some of these buyers pay cash, but some do get loans. “They tend to be very well qualified for loans and have solid cash balance sheets as well,” noted Thompson.

Henderson said his company has helped foreign investors from Australia, the United Kingdom and China purchase properties and manage them as well. “All of these have paid cash for their properties and some are looking for more investments.”

Some buyers coming to the local market with cash in hand are not necessarily looking for an investment opportunity. “It’s always been the case in Charlotte that buyers from more expensive markets around the country have the ability to come in and either put down a very large down-payment or pay cash,” said Thompson. “These buyers dried up during the nationwide market downturn, but are now coming back out of the woodwork as the real estate market around the nation has rebounded.”