THIS Is Destroying Real Estate For The Middle Class

This talks about how hedge funds and ibuyers are buying thousands of homes across the country, and how YOU can profit from it.

Ryan Pineda

October 18, 2021

The hedge funds are buying everything in your neighborhood. And the scary thing is people have no idea and it's only gonna get worse if you don't believe me. Let me tell you the story about this house flip, which we are selling to a hedge fund. 

So a realtor friend of mine brought me this house and another one as part of a package deal as part of the deal, I ended up paying $250,000 for this house. Now, at the time when I bought it in February, I figured it was probably worth $320,000 fixed up. It already had a tenant and everything in the house was dated, but unlike most of the properties we get, I didn't plan to flip this. In fact, I wanted to keep it as a rental. You see, I wanted to keep this as a rental for many reasons. One, it's in a really nice part of Henderson and two it's a newer home. This was built in 2003. 

So for my rental portfolio, I really want to focus on homes in nice areas that are newer in the long run. I feel like those are going to be a better value. I think they're going to appreciate more. You're going to get a better tenant. You're going to get higher rents and you're going to have less maintenance as the landlord, since the home is newer. 

So I was really excited about adding the property to my rental portfolio and we ended up buying it and getting to work. The tenant's lease had expired. So we were able to get them out and get it fixed up. The renovation on this home ended up costing me about $35,000. Now, remember I paid $250,000 for this so I was all in around $285,000, plus all of our closing costs and money costs. I might've made 15,000, potentially 20,000 flipping it. For me, I'd rather keep this as a rental in the long haul, then make that flip profit today. 

It took us a few months to get the tenant out. Then it took us another couple of months to get the project fixed up. And so by the time we went on the market, things had exploded

Homes in this area. We're now selling for $350,000 or $360,000. So if I went to sell it, our profit was going to be really good, potentially over $40,000. But I also knew that this house was a lot nicer than those comps. So we could list it even higher and potentially make a huge profit. So we listed for $390,000, which was way above comps. And my concern was, if I get an end buyer, who's going to live here, the house probably isn't going to appraise. Well, let me tell you I was dead wrong. 

I had misjudged who the end buyer was actually going to be. By the time that we listed this home, we had multiple offers, many of which were cash. We had a cash buyer at $382,000 and eventually we got a cash buyer at $390,000. Now, in my mind, I'm thinking, why would a cash buyer pay so much for this house?

It doesn't make sense. They're paying way over market value. Well, it turns out the hedge funds really like this style of property. They don't want the older, cheaper homes that are in rougher areas. They know that they're going to get a worse tenant and they know they're going to have more maintenance long-term because the home is older. So by picking out these properties and putting them in their portfolio, they know that in the long run, they're going to make a lot of money, even if they're overpaying today.

This isn't surprising because I've been selling to hedge funds for many years. But the thing is most of the time when I do that, it's off market. They're typically not buying my fixed up renovated house after I've listed it for top dollar. Most of the times that we sold the hedge funds, we've sold it, the moment that we bought it, or maybe we've wholesale it to them. Then they end up doing the work and adding some value to it that way. So it's really weird to see that they are going on the market and paying top dollar for properties that are currently listed. 

Now you might be thinking, why would they do that? What's their end game? How are they going to make money? Well, to answer that question, I've got another story for you. Back in 2010, when I was a realtor, going into the foreclosure auctions was a really big thing.

I was one who never really did it because I didn't have cash and I didn't understand how it worked. People were buying a ton of properties back then and making a lot of money. Well, around 2012-13, the hedge funds started going to those auctions and buying all the houses. They were paying market value for these properties. I remember hearing local investors talk about how dumb the hedge funds were and that they were going to go bankrupt and lose all their money because they were overpaying for homes. And guess what happened? The hedge funds were a lot smarter than the local investor. They knew that prices were so low that even paying market value or above was a good deal in the long run.

They were willing to bet on that and buy as much volume as humanly possible in order to buy volume, they had to go to these auctions and pay top dollar to do it. They ended up sitting on these homes for years and watched them double and triple in value. Now, in hindsight, the hedge funds look really smart today. 

The hedge funds aren't the only people buying these homes. You may have heard of big companies like Zillow, Opendoor, and OfferPad who are willing to buy your house right now as if you can go on one of their websites and put your address and they'll make you a preliminary offer right there. Now understand that the offer is going to vary once they finally see your house and like the hedge funds I've been talking about, they're only looking for a very specific style of home.

They don't want complete fixer upper type homes. They want things they could turn really quickly with some paint and carpet. They're also not willing to buy in certain areas or certain ages or certain price points. They don't want to buy million dollar plus homes, but their exit strategies are a little bit different than the hedge funds I'm talking about. Hedge funds want to buy the homes as rentals. These ibuyers are purchasing the homes in order to flip. 

Here's some quick numbers so you get an idea of how big this really is: Opendoor, the biggest ibuyer right now, and in the second quarter of 2021, they purchased 8,500 homes. With those 8,500 homes, they generated $1.2 billion in revenue. But revenue is misleading because that does not equal profit. They actually lost $144 million in the second quarter. But ironically, it was better than the $200 billion they expected to lose.

So I guess congrats for them. Zillow is the second biggest ibuyer. Traditionally they've made the majority of their money from selling agent leads and ads, but they recently added buying homes into their business model, which is generating the most revenue in Q2. They did $777 million in revenue from house flipping. But once again, that's very misleading. They actually lost $59 million doing this. The last company is OfferPad, who just went public on September 1st. They acquired a little over 2000 homes in the second quarter, which led to a revenue of $378 million. And with that, they had a $9 million loss. Now, regardless of how those companies calculated their profit and loss, the reality is they don't really care if they make money on these flips. Right now, they're all in a battle to buy as many houses as possible and gain market share. My opinion is that Opendoor’s goal is to become a household name like CarMax. People know they can go trade in their car at any point to CarMax and get a cash offer.

Opendoor sees the same thing with buying homes. If a lot of people know you can go get an offer from them tomorrow in the long run, they're going to make a lot of money. So where does that leave us today? 

Going forward, these hedge funds are picking markets like Las Vegas and Phoenix that they really like. They're raising a ton of capital and getting cheap financing to be able to go purchase as many homes that fit their buy box. And as I mentioned, they want newer homes in good areas. Now, as a house flipper, I'm okay with this. I'm going to make over $70 to $80,000 on this home because they're willing to overpay. But if you're a middle class or entry level retail buyer who wants to buy a newer home in a nice area, you're going to have some stiff competition that I don't see going away anytime soon. So my advice is to figure out how to get on the investing side and sell to these guys. My students and I have made millions this year selling directly to these guys and it's a great strategy as an investor. That's what's been happening in the real estate market. Most people will have no idea about it, but now you do. So what are you going to do with the information?

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