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There Goes the Neighborhood?

By Wisconsin School of Business

September 18, 2015

New Study from Wisconsin School of Business Examines How Large Investors Buying Single-Family Homes are Impacting Local Markets

Since 2007, families or individuals looking to buy a single-family home may have found themselves competing with some heavy hitters in the market, as large private equity firms, institutional investors and real estate investment trusts have spent billions to purchase as many as 200,000 single-family homes throughout the United States.

A new study from the Wisconsin School of Business at the University of Wisconsin-Madison finds that investors are buying properties at a discount compared to individual buyers, and their presence in the market actually leads to a rise in home values. Overall, investor buyers purchase at a discount of 9.5 percent compared to individuals buying one house during the same time period in the market. The study also revealed that a 10 percent increase in the number of houses purchased by investors in a census block is associated with a 0.20 percent increase in house prices in that market.

Abdullah Yavas, professor and department chair of Real Estate & Urban Land Economics at the University of Wisconsin-Madison’s Wisconsin School of Business, Jessica Rutherford and Ronald Rutherford of the University of South Florida, and Marcus T. Allen of Florida Gulf Coast University examined more than 72,000 real estate transactions involving single-family dwellings in Miami-Dade County, Florida, between January 2009 and September 2013.

“While individual buyers may have a better sense of the local market and a more realistic idea of a home’s value, they don’t have some of the advantages that large investors bring to the game, such as the ability to offer sellers cash up front and avoid the mortgage approval process,” says Yavas at the Wisconsin School of Business. “Large investors are taking distressed properties off the market, possibly signaling to other buyers that these properties are undervalued, and leading more players to enter the market and drive up prices.”

The study identified the price discounts enjoyed by different investor groups as follows:

  • Institutional investors (those averaging approximately 40 purchases during the sample period) purchased at an average discount of 7.7 percent, compared to single-purchase buyers.
  • Large investors (those making six to 28 purchases during the sample period) purchased at an average discount of 13.6 percent, compared to single-purchase buyers.
  • Medium investors (those making three to five purchase during the sample period) purchased at an average discount of 11.1 percent, compared to single-purchase buyers.
  • Small investors (those making two purchases or one purchase as a LLC, LP, or other corporate entity) purchased at an average discount of eight percent, compared to single-purchase buyers.

The discount for large investors is attributed to several factors, including the ability of those buyers to pay with cash. A cash sale may present less risk to the seller of a deal falling apart because of a mortgage contingency clause, while reducing the time required to complete the transaction because cash buyers don’t need loan approval. In both circumstances, a seller is more likely to be willing to accept a lower price. Large investors may also have advantages such as better tools for targeting potential acquisition properties, superior negotiating skills, and experience with the closing process.

“The entry of large investors into local housing markets appears to have some positive, short-term outcomes, such as improving property values by reducing the inventory of foreclosed homes,” says Yavas. “But there needs to be more research to consider how these purchases are affecting housing affordability and the quality of housing stock in local rental markets.”