RealtyTrac devotes the bulk of its most recent edition of HousingNewsReport, its monthly web magazine to detailing some real estate investment strategies. The lead article by Octavio Nuiry, Managing Editor gives advice compiled from interviews with and articles by several successful investors. However, even if the advice did come from Warren Buffet we can hardly get excited about such business models as buying distressed properties or finding undervalued ones.
However one useful theme did emerge from several of the investors featured in Nuiry's article, "Real Estate Investment Strategies for 2015." The message was characterized by Tony Youngs, a Georgia investor as finding the "hidden market," one to which no one else is paying attention.
Youngs' hidden market is property just about to enter the foreclosure pipeline which he identifies and follows through the process until the opportune time come to purchase it. This gives him the time to research the property and a head start on competing investors with more human resources or deeper pockets. Carrying the hidden markets theme one step further, Youngs locates clusters of those properties and rather than buy them himself markets their availability to those same deep-pocketed investors, principally Wall Street hedge funds.
For Greg Markov, a Phoenix real estate broker and investor, the hidden market is unique but abandoned and/or neglected urban properties. Markov buys the properties and completely "re-imagines" them into architecturally interesting housing. He then sells them to a second hidden market, millennials who do not want to live in the suburbs where most builders are building.
The hidden market theme, although he never used those words, was best and most creatively brought home in a second piece in the magazine entitled "Calculated Risk: A Contrarian View of Investing in Real Estate" written by Alexander Philips, Chief Executive and Investment Officer of TwinRock Partners.
Philips' firm started out with one of the same strategies as Buffett, locating the undervalued property, actively pursuing opportunities where it believed rehabilitation or repositioning would improve the property's physical characteristics and/or market value. It looked for distressed properties or those not being employed in a highest and best use and concentrated in more affordable markets with a strong upside potential. The firm followed that plan through California's Inland Empire and then through other undervalued communities in the state until each became saturated with investors so they began looking outside of California. That is when they found their hidden market.
During the savings and loan crisis and subsequent New England bank failures many condominium complexes were devastated by the failure of first the owners and then the lenders who repossessed units to pay home owner association (HOA) dues. Many states passed what are called priority lien laws which allow HOA to place encumber a property for delinquent HOE dues. These HOA liens are senior even to an earlier first mortgage on the home. Philips' firm picked Las Vegas as its next investment target just as a lawsuit challenging the states priority lien law (SFR Investment Pool v U.S. Bank) was wending its way through the court.
Briefly, SFR, another real estate investor, had purchased a condo at a foreclosure auction brought by an HOA even as U.S. Bank was in process of its own foreclosure. SFR received and recorded a trustee's deed from the HOA and, days before the bank's scheduled foreclosure, filed an action to quiet the title and enjoin the sale. Not to get too deeply in the weeds and issues of judicial and non-judicial foreclosures, thus far the HOA's sale and SFR's deed have been validated although appeals continue.
Taking what Philips thinks was an educated risk, his firm began to purchase properties from HOA's which had foreclosed on their liens or were in the process of doing so. They have spent a few million dollars purchasing these properties with the objective of fixing them up, renting them, and selling them at a profitable juncture.
Phillips tells one story that shows the potential of his firm's hidden market approach. One of the homes they acquired had sold to its owner in 2006 for $300,000. The investors bought it from the HOA in May 2013 for $11,000 and think the property today is worth about $184,000.
While the final opinion in the SFR case could still upend this and other deals, Philips says, "With upsides such as this, we anticipate that our investors could triple their money after accounting for investment fees and expenses."