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VOL. 7 | NO. 15 | Saturday, April 5, 2014

Market Mystery

Long-term impact of investor activity on housing still unknown

By Amos Maki

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Over the last several years, investors ranging from mom-and-pop shops to large hedge funds have been acquiring single-family homes in Memphis at a historic pace.

Ryan Creekmore of DR’s Construction cuts a new section of bank seating for a home being renovated by Reedy & Co., which has benefited from the rise of investment properties.

(Memphis News/Andrew J. Breig)

But determining the long-term impact that investor purchases have made on neighborhoods remains elusive.

While local real estate experts, including those tied to investment activity, say that investors acquiring vacant single-family and transitioning them to rental properties has helped the local housing market recovery by decreasing inventory and firming up values, local and national studies on the impact on investor activity say the lasting effect remains mostly “unstudied and unknown.”

The investor interest has been a boon to companies like Reedy & Co., which helps investors buy and manage single-family homes.

Since 2012, the company’s business has exploded. Reedy & Co. has gone from managing 1,200 homes to more than 2,600. Between 2012 and 2013, Reedy & Co. purchased 1,641 homes for investors, with a total value of more than $106 million.

“It’s amazing what’s happening,” said Jay Reedy. “All this institutional money from out of state and out of the country is coming into Memphis. I think before the crash it was more of a mom-and-pop investor base but since the institutional investors have come in it’s become more of an asset class and it’s an asset class that is here to stay now.”

Attracted by a glut of cheap foreclosures that appeared following the housing crash and recession, large institutional investors such as hedge funds and private equity groups have been targeting the Memphis market.

The Connecticut-based hedge fund Building and Land Technology, the Real Estate Investment Trust American Homes 4 Rent, Fundamental REO LLC and BLTREVJ3, a hedge fund, have all been very active in Memphis.

Randy Merritt of DR’s Construction works on a house renovation for Reedy & Co., which buys, sells and manages homes for investors. 

(Memphis News/Andrew J. Breig)

Building and Land Technology, one of Reedy & Co.’s clients, purchased 1,036 properties from August 2012 to October 2013. Memphis Invest LLC, a single-family rental real estate investment services firm, has been in the top three of residential property sellers in Memphis since 2011, selling 1,330 homes from January 2001 to December 2013. Of the top 25 residential property sellers in 2013, half were investors or investment firms, according to real estate information company Chandler Reports, www.chandlerreports.com.

According to a 2012 lending study by the University of Memphis’ Center for Community Building and Neighborhood Action, 25 percent of single-family homes in Memphis in 2010 were owned by investors. And as the city entered 2012 54 percent of residential property sales were accounted for by investor purchases from the Real Estate Owned inventory of foreclosing lenders.

“Memphis is a 50 percent rental town now and I expect that to go to 60 percent, possibly 65 percent,” said Jim Reedy of Reedy & Co.

Jim Reedy and other real estate professionals said the interest from investors has helped improve the Memphis real estate market by chipping away at inventory, reducing the “shadow inventory” of vacant or foreclosed properties that built up after the recession.

“If it wasn’t for investors buying these properties over the last few years our comeback would have been much slower,” said Jim Reedy. “It’s brought values back much more quickly. Overall, it’s been a good thing because it has solidified the market and brought supply and demand even where sellers can sell and buyers can buy.”

Thomas Murphree, owner of Birch Tree Realty Resources Inc. and president-elect of the Memphis Area Association of Realtors, said investors have played a largely positive role in stopping the housing market’s precipitous slide.

“When we were in the middle of all the foreclosures those purchases helped put a floor in the market,” Murphree said. “We were in a free-fall situation and so it started to steady the free-fall when things looked really bad. That has had a stabilizing effect on the market. If we can get people living in homes and bring communities alive again, that is a great stabilizing force.”

But attorney Webb Brewer, who has worked on a wide variety of housing-related issues, questions the effects the transition of single-family homes into rental properties can have on the long-term health of neighborhoods. Brewer said that banks often sought to sell properties to investors who wanted to turn them into rentals instead of marketing them to potential new homebuyers, particularly in identifiably minority neighborhoods.

“There is a lot of data on the negative effect that such a shift has on quality of life and property values in those communities,” Brewer said.

But determining the future impact of large-scale investor purchases is difficult, according to researchers.

According to a December 2013 Federal Reserve research note from Raven Molloy and Rebecca Zarutskie, “no studies exist on the effect of single-family-real-estate business investor activity on housing markets or other outcomes.”

“On the positive side, these investors are deploying capital to purchase and renovate houses that otherwise might have remained vacant for a long time,” reads the Molloy and Zarutskie note. “Tight financing conditions in the primary mortgage market have likely limited the ability of some potential owner-occupiers to purchase and renovate these properties themselves.”

But because the large-scale rental of single-family homes is a relatively new phenomenon, Molloy and Zarutskie said it does carry some risks.

“Neighborhoods may suffer if a particular investor has difficulties managing large numbers of rental properties or ceases operating and cannot find a new investor to buy out their positions,” the researches noted. “In this case, a large number of homes that are left vacant or put up for sale on the owner-occupied market could cause a drop in home prices in the area and thus negatively impact other homeowners.”

The U of M’s Center for Community Building and Neighborhood Action sounded a similar note in its study.

“The role of investors is growing and the impact on different kinds of neighborhoods is largely unstudied and unknown,” the report states.

Chandler Reports is a division of The Daily News Publishing Co. Inc.

PROPERTY SALES 105 193 8,028
MORTGAGES 120 239 9,024
BUILDING PERMITS 192 445 17,512
BANKRUPTCIES 27 69 5,228