Sarah Edelman, a policy analyst for CAP, points out in Cash for Homes:  Policy Implications of an Investor-LedrnHousing Recovery, published on CAP’s website that it is not unusual forrninvestors to buy inexpensive properties in a housing downturn.  This time, however, the nation is seeing arnheavy volume of such purchases from a broader range of investors.  This time it is not just individual investors who might own a handful ofrnproperties but also hedge funds, private equity firms, real-estate investmentrntrusts, and other financial entities.    </p

Institutional investors may buyrndistressed properties at any point in the foreclosure pipeline – through shortrnsales, at auctions or trustee sales, from bank inventories or by buyingrnportfolios of distressed loans from servicers. rnEdelman said some investors are working with financial institutions torncreate new rental income-based securities and if they are successful will havernaccess to even more cash to buy properties. rn</p

Investors can play an important rolernin the recovery, absorbing excess inventory, establishing a price floor, andrnjumpstarting appreciation.  They can alsornoffer quality, affordable rental opportunities to those shut out of homernownership.  But Edelman says they canrnalso destroy communities by allowing properties to sit empty, failing to bringrnrental properties up to code, and neglecting tenants’ needs.  When investors buy large quantities ofrnproperties in a single area it can cause prices to overheat and increase marketrnvolatility and if they sell numerous properties at once it can spin neighborhoodsrnagain into decline. She says investors can and should play a role in the recoveryrnbut there are serious risks to leaving neighborhood recovery solely in theirrnhands. Policymakers must monitor and manage the activity to make sure investorsrnare acting responsibly and playing a stabilizing role in the communities. </p

Investors pursue different strategiesrnfor their investments and each may employ different ones depending on economicrnconditions, location, and existing opportunities.  Some buy and sell homes (flipping them)rnwithout ever renting them.  This is lessrncommon today than before the crash but may be rebounded; the number of homesrnflipped in 2011 increased by 12 percent and has returned to pre-crash levels inrnCalifornia.  Edelman quotes one study inrnwhich homes flipped in 2011 brought investors an average profit of $37,375.  Where flippers actually improve the propertyrnbefore selling it they can jump start revitalization of an area. But ifrnimprovements are cheap and merely cosmetic then flipping can accelerate an area’srndecline.</p

Many investors today buy and hold,rngenerally for three to five years. rnMorgan Stanley expects this market to grow from $17 billion to $100rnbillion in the next five years.  Again,rnif the investor is not making enough from rentals to justify maintaining thernproperty, this can further hurt the community. rnSome investors, once realizing that a property is going to underperform,rnmay even abandon the property, delaying neighborhood recovery.   </p

Edelman says that while we canrnspeculate, we do not know how well institutional investors will fare asrnlandlords and neighbors.  She quotes ThernWall Street Journal that “investors and analysts have raised concerns aboutrnhow quickly firms have purchased thousands of homes, and whether they have thernmanagement track record and expertise to oversee the maintenance of propertiesrnacross the country.”</p

Managing scattered-site rentals isrnlikely to be more costly and more challenging than managing a typicalrnmultifamily apartment building because of larger staffs needed to cover arngeographic area.  There may also bernmultiple layers of property-management subcontractors between the investorsrnthat own the property and the tenant who lives in the property.  Investor may also leave the propertyrnmanagement to the tenants who may lack the motivation to comply withrnmaintenance requirements or with demands of homeowner’s associations, some ofrnwhich are putting new limits on renting within their areas.  </p

There is also the concern thatrninvestor purchases (especially with cash) could crowd out too many potentialrnhomeowners who will live and take root in a neighborhood.  This can hinder neighborhoods struggling tornrecover from the foreclosure crisis by preventing these communities fromrnreclaiming lost wealth.  If owners arernnot located in the communities where they invest, when they resell most likely theyrnwill take their profit with them.</p

What’s more, it is not clear thatrnthose who invest in houses will show an equal commitment to the surroundingrnneighborhoods. While investors may recognize that amenities such as parks andrngood schools will improve their property’s value, they may not be as engaged inrnthe future of the neighborhood.</p

Edelman lays out four strategies forrninsuring a lasting housing recovery that strengthens the national economy whilerncreating affordable homeownership opportunities for qualified buyers: </p

1.     rnHelprnhomeowners stay in their homes.   Preventing as many asrnpossible of the more than 2 million foreclosures still looming is the firstrnstep toward a strong housing recovery.</p

2.     rnLevel thernplaying field for owner-occupants and mission-driven organizations. Households and community groups that are unable to accessrncredit are struggling to compete with cash investors to buy homes. With betterrnaccess to financing, buyers who are more rooted in the community than thernaverage investor would be better positioned to own properties in theirrnneighborhoods</p

3.     rnMonitorrnand manage investors. Ensuring that investors take carernof their properties is key to leveraging investment for the benefit of therncommunity.  Local officials should payrnparticular attention to how well institutional investors care for theirrnproperties. Federal regulators must pay attention to the activities ofrninstitutional investors, particularly if a new market develops for securitiesrnbacked by these investor-owned properties.</p

4.     rnGet the mortgagernmarket working again.  Thernability to secure a mortgage for a home has become elusive to many Americans.rnThe nation urgently needs housing finance reform to make sure that we have arnwell-functioning secondary market that can serve all communities.

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