Real Estate

So what’s wrong with cash?

By From page HS3 | November 22, 2013

At one time in my life, I thought I would add “land developer” to my résumé. After all, for several years I had assisted many developer clients with their land acquisitions and later helped them sell finished lots to builders. From my perspective as their broker, it looked easy enough. Buy some land at a wholesale price, hire an engineering firm to design a residential subdivision, get the approval from the county and sell the finished lots. At the time, I was likely suffering from an affliction called success-itis — a debilitating metal delusion that success in one endeavor is easily achieved in another.

The 40-acre parcel I selected as my first development was ideal with the exception of a main water line that could only be accessed from across an adjacent property owned by a crotchety old geezer who detested developers and real estate agents. Mr. Geezer had been besieged by others before me for a water easement with promises, options, letters of intent and purchase contracts — none of which ever materialized.

“What’s wrong with cash?” was all he would say to my proposal for an easement. He would only sell an easement for cash delivered to his kitchen table.

It was the largest cash withdraw from Glendale Federal Saving and Loan at the time and two armed security guards escorted me out the front entrance with my briefcase stuffed with the cash. My attorney and I drove directly to Mr. Geezer’s old shack where he signed over an easement in exchange for cash. The development went as planned with the exception of a year’s delay with the Planning Commission. By the time building lots were ready to be sold, the 1980 recession hit and builders went on sabbatical. Since my “all cash” experience, I have a better appreciation for how having cash can be a solution to a problem and having too much can also have its challenges.

Beginning in 2010, cash from investors buying single-family homes turned around a pretty bleak housing market. They established a price floor on falling home values by absorbing excess inventory. They created a sense of urgency and excitement in the market and that jump-started appreciation. Their purchases were not dependent upon an appraisal. They didn’t need bank financing and they provided affordable rental opportunities for many families that lost their homes in foreclosure.

Small mom and pop investors accounted for about 60 percent of all single-family homes sold for cash between 2010 and spring of 2013. Small investors purchased between one and 10 investment homes, quickly converting them into rentals or fixing them up and flipping them for a quick profit. Their purchases were usually located in the same town as their primary residence.

Institutional investors consisting of private equity firms, hedge funds and real estate investment trusts have funneled an estimated $20 billion into the housing market over the past two years, acquiring 200,000 houses. The large majority of their purchases have been concentrated in major cities hit hardest by foreclosures but best positioned to recover. During 2012, cash sales accounted for 45 percent of all home sales in Phoenix, 55 percent in Las Vegas, 42 percent in Oakland and 40 percent in Sacramento.

The influx of private cash investors into the housing market lifted all property values, restored dignity to many inner-city neighborhoods and has created or sustained thousands of jobs rehabbing distressed properties. However, no good deed goes unpunished. Now that the housing crisis has become a distant unpleasant memory, a number of housing advocacy groups are petitioning local governments to adopt more regulations as to how these investment properties are leased, managed and eventually sold. Has the “Welcome Mat” for cash investors been replaced with “No Soliciting?”

Community advocates and Realtors have already expressed their reservations about closed deals between financial institutions and institutional investors for the purchase of thousands of foreclosed homes. Bulk sales typically sell for 60 percent of their current market value. These cash sales crowd out potential owner occupants. If fewer families build wealth through homeownership in our country then the wealth created in real estate will be transferred to investors.

Tenant rights groups are concerned about how institutional investors will manage and eventually sell their investments. Unlike small individual investors who purchase, manage and sell one or two homes at a time, institutional investors make decisions that may affect thousands of homes and families all at one time. A corporate decision to dump 1,200 homes in the Sacramento region owned by Blackstone Group will likely have an impact on the displaced families and our region’s collective property values.

Will investors be good landlords? Often individual investors will make short-term financial sacrifices in order to achieve their long-term goals. Californians have typically invested in rental properties for long-term appreciation. Stockholders are not so patient. Their goal is either quarterly dividends or stock appreciation. Institutional investors have little experience in property management. Will they be as responsive to tenants concerns? Will an investment trust in New York show an interest in local neighborhood issues?

“There are serious risks associated with leaving neighborhood recovery in the hands of private investors,” writes Sarah Edelman, policy analyst with the Center for American Progress.

Yes, but if it were not for private investors buying up 3.2 million homes between 2010 and 2012, our housing recovery would be at a much slower pace. Surly the rewards have offset the risk.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached at [email protected].

Ken Calhoon

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