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Real Estate Investors Profit From Hidden Markets
RealtyTrac devotes the bulk of its most recent edition of HousingNewsReport, its monthly webrnmagazine to detailing some real estate investment strategies. The lead article by Octavio Nuiry, Managing Editor gives advice compiled from interviewsrnwith and articles by several successful investors. However, even if the advice did come fromrnWarren Buffet we can hardly get excited about such business models as buyingrndistressed properties or finding undervalued ones. </p
However one useful theme didrnemerge from several of the investors featured in Nuiry’s article, “Real EstaternInvestment Strategies for 2015.” Thernmessage was characterized by Tony Youngs, a Georgia investor as finding the “hiddenrnmarket,” one to which no one else is paying attention. </p
Youngs’ hidden market is propertyrnjust about to enter the foreclosure pipeline which he identifies and followsrnthrough the process until the opportune time come to purchase it. This gives him the time to research thernproperty and a head start on competing investors with more human resources or deeperrnpockets. Carrying the hidden marketsrntheme one step further, Youngs locates clusters of those properties and ratherrnthan buy them himself markets their availability to those same deep-pocketedrninvestors, principally Wall Street hedge funds.</p
For GregrnMarkov, a Phoenix real estate broker and investor, the hidden market is uniquernbut abandoned and/or neglected urban properties. Markov buys the properties and completely “re-imagines”rnthem into architecturally interesting housing. rnHe then sells them to a second hidden market, millennials who do notrnwant to live in the suburbs where most builders are building. </p
The hidden market theme, although he never used those words,rnwas best and most creatively broughtrnhome in a second piece in the magazine entitled “Calculated Risk: A Contrarian View of Investing in Real Estate”rnwritten by Alexander Philips, Chief Executive and Investment Officer ofrnTwinRock Partners. </p
Philips’ firm started out withrnone of the same strategies as Buffett, locating the undervalued property,rnactively pursuing opportunities where it believed rehabilitation or repositioning</bwould improve the property's physical characteristics and/or market value. It looked for distressed properties or thosernnot being employed in a highest and best use and concentrated in morernaffordable markets with a strong upside potential. The firm followed that plan throughrnCalifornia's Inland Empire and then through other undervalued communities inrnthe state until each became saturated with investors so they began lookingrnoutside of California. That is when theyrnfound their hidden market.</p
During the savings and loanrncrisis and subsequent New England bank failures many condominium complexes wererndevastated by the failure of first the owners and then the lenders whornrepossessed units to pay home owner association (HOA) dues. Many states passed what are called priorityrnlien laws which allow HOA to place encumber a property for delinquent HOE dues. These HOA liens are senior even to an earlierrnfirst mortgage on the home. Philips’rnfirm picked Las Vegas as its next investment target just as a lawsuitrnchallenging the states priority lien law (SFR Investment Pool v U.S. Bank)rnwas wending its way through the court. </p
Briefly, SFR, another real estaterninvestor, had purchased a condo at a foreclosure auction brought by an HOA evenrnas U.S. Bank was in process of its own foreclosure. SFR received and recorded a trustee’s deedrnfrom the HOA and, days before the bank’s scheduled foreclosure, filed an actionrnto quiet the title and enjoin the sale. Notrnto get too deeply in the weeds and issues of judicial and non-judicial foreclosures,rnthus far the HOA’s sale and SFR’s deed have been validated although appealsrncontinue.</p
Taking what Philips thinks was anrneducated risk, his firm began to purchase properties from HOA’s which had foreclosedrnon their liens or were in the process of doing so. They have spent a few million dollarsrnpurchasing these properties with the objective of fixing them up, renting them,rnand selling them at a profitable juncture. rn</p
Phillips tells one story thatrnshows the potential of his firm’s hidden market approach. One of the homes they acquired had sold tornits owner in 2006 for $300,000. The investorsrnbought it from the HOA in May 2013 for $11,000 and think the property today isrnworth about $184,000.</p
While the final opinion in thernSFR case could still upend this and other deals, Philips says, “Withrnupsides such as this, we anticipate that our investors could triple their moneyrnafter accounting for investment fees and expenses.”
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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