ENGAGEMENT
ADAPTATION
Builders Finding Buyers HOME BUILDERS LIKELY TO TURN TO INSTITUTIONAL INVESTORS AS MARKET SLOWS DOWN
by Bruce McNeilage
H
ome builders are starting to see a slowdown in new home sales, and it’s likely to get
houses sell. Unfortunately, that’s bad for everyone in the neighborhood. When other nearby homeowners go to sell or attempt to refinance, they’ll find their own home values have taken a dip. Selling spec houses to institutional investors keeps prices up for everyone. For builders, they can help entice institutional investors by providing important items to the buyer: refrigerators, blinds, garage door openers, and closing-cost assistance and title insurance. This helps reduce the investor’s capital outlay and is more likely to lead to a faster sale. How the real estate market reacts to a post-COVID-19 world remains to be seen, but it’s likely to take a step backwards. Builders who look for creative ways to find buyers will weather the storm. Collaborative partnerships being formed by single-family rental operators and homebuilders is a likely scenario over the coming months. How long will this last and will it be profitable for both sides? Only time will tell. But, for now, it’s a win for builders, investors, and neighborhoods looking to keep property values up. • Bruce McNeilage is the managing member and a co-founder of Kinloch Partners and a partner in Harpeth Development.. He is a passionate advocate for housing affordability and homeownership, and invests heavily in Nashville, Tennessee, as well as throughout the southeast. Learn more about his projects, including single-family built-to-rent communities and the Solo East and North condominium projects at www.Kinlochpartners.net.
worse before it gets better. The economic impact of COVID-19 is leading to business closures and spikes in unemployment insurance claims. This will most likely lead to a rise in credit delinquencies for car payments, credit cards, and/or rent and mortgage payments. It also means customers who might have bought a spec house pre-virus could be on the sidelines for now. This has homebuilders scrambling to sell spec houses that are already finished or currently being built. Builders are looking for options to move these houses. Forming alliances with investors who can purchase multiple houses at a time provides an excellent option. These are often institutional buyers with deep pockets who are stable enough to withstand an economic downturn and willing to buy homes already finished or currently under construction. They frequently turn the new homes into rental opportunities. These investment firms can give builders the opportunity for predictable cashflow in a market that is dependent on interest rates and credit scores. Entry level home buyers can be the most challenging with regard to financing. A guaranteed purchase by an institutional buyer is seen as a positive without having to worry about failed financing, providing closing- cost assistance or even paying sales commissions. The alternative to selling to an institutional investor is to cut prices by perhaps 5 to 10 percent until these
20 | think realty magazine :: may 2020
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