Hedge Funds, Cash Buyers Scooping Up Scarce Supply of Residential Real Estate

Instead of reinvesting their money into richly valued U.S. stocks or low-yielding bonds, hedge funds have turned to buying houses in booming locations.

— Steve’s Marketplace —

Editor’s note: Contributing columnist, Steve Nicklas, expresses his views and insight on various topics in Marketplace.

The three cardinal rules in real estate are location, location, location. But the reliable economic equation of supply/demand helps determine the value of the location. 

 In Nassau County, FL the demand is downright overwhelming. More than 400 properties from Fernandina Beach to Yulee to Bryceville are being purchased each month, many by newcomers from far-away states. The new buyers hail from places like Olympia, Washington and Milwaukee, Wisconsin and Honolulu, Hawaii. 

However, there’s an unexpected newcomer on the demand side, with deep pockets and the appetite of an 800-pound gorilla. The newcomer is inflating demand, while supply dwindles. 

This aberration is hedge funds. They are and have been prevalent buyers here, as well as around Northeast Florida. Local real estate agents are encountering hedge-fund buyers more regularly, along with newer competitors like Zillow and Open Door. 

In two instances, hedge funds swooped in and scooped up houses in Jacksonville – with full-price cash offers. “We said ‘who are these guys?’ ” says John Holbrook, the manager of the local Pineywoods Realty office. “We looked them up – these are big hedge funds.” 

The hedge funds are flush with cash, so they sidestep the need for financing. Also, they typically offer full price, which removes the delay of the appraisal process. After a brief inspection, they often make the purchase – and move on. 

In the Lofton Point neighborhood, for instance, a hedge fund from Dallas, Texas has bought multiple houses over the years. The neighborhood off the Amelia Concourse perfectly fits the mold for hedge funds – with houses in the $250,000 to $300,000 price range, with 1,800 square feet and three bedrooms/two baths. 

These houses can rent for $2,000 a month, which produces an 8 percent annual yield on their investment. In addition, the houses will likely appreciate, especially in our area, providing an extra return on their capital. 

Instead of reinvesting their money into richly valued U.S. stocks or low-yielding bonds, hedge funds have turned to buying houses in booming locations. It provides a hedge to their normal business of being long/short of securities. Even industry titan Blackrock is getting into the action. 

One hedge fund that is active in Nassau County owns 13,000 houses across the U.S. Rarely does a hedge fund sell its houses; they are primarily buying and placing them in a portfolio. 

In contrast, online real estate sites like Zillow and Open Door have been buying, but not keeping their properties as long. Sometimes they’ll even flip a house for a quick return, according to Holbrook. 

Hedge funds will also buy houses directly from large homebuilders like Pulte Homes. Inevitably by doing this, they are soaking up the starter-level inventory. “They’re squeezing out the first-time homebuyer,” says Glen Cacciapouti, a real estate agent with Pineywoods.  

Most millennials are first-time homebuyers, but they face steep competition. The millennials have eclipsed the baby boomers as the largest generation in the country, so the demand from so many younger buyers is insatiable and immense. Often, availability and affordability can be insurmountable obstacles for them.

Therefore, young buyers are routinely relegated to renting instead. From a house owned by a hedge fund, for instance. In fact, there has been a shortage of new homes dating back to the financial crisis/real estate meltdown of 2008. 

The appeal of our area is as plentiful as our sea oats. The property prices are low for the eastern seaboard, land is still abundant, and growth seems inevitable. Even as the home prices escalate, “It’s still cheap to many of them,” says Cacciapouti. 

The current inventory reflects the unwavering demand from buyers – lots of buyers. Ironically, the majority of real estate transactions on Amelia Island are done in cash, according to Holbrook. So we have highly accredited buyers. 

Only 210 houses/condominiums are available right now on the Multiple Listing Service commonly used by real estate agents. “Which for a county our size is an incredibly small amount to have on the market,” says Holbrook. 

Overall, even with a gradual slowing over the past three months, the property market is “still red hot,” Holbrook says. The bidding wars have subsided, after peaking in July and August. However, prices are still climbing, as sellers clamor for the highest value. 

“When sellers keep raising their prices, you get less of a bidding war,” says Cacciapouti. 

To which Holbrook adds, “It’s almost like the bidding wars are over, but high prices are here to stay.” 

Even if mortgage rates rise, they will remain low on a historical basis. And that’s only relevant for buyers who need financing. Buyers like hedge funds that make cash offers will usually prevail in a transaction anyhow. This is not a cardinal rule, but it is another reliable equation. 

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Steve Nicklas Financial Advisor
Steve Nicklas

Steve Nicklas is a financial adviser with a regional brokerage firm who lives and works on Amelia Island. He is also an award-winning columnist. His columns also regularly appear in several weekly newspapers in North Florida, and on his website at SteveNicklasMarketplace.com. He has published a book, “All About Money,” of his favorite columns from the past 20 years. The book is available on Amazon. He can be reached at 904-753-0236 or at [email protected]