“Smart Money” Woke Up – Now What?
I don’t know about your market, but I can point to the day the “Smart Money Woke Up” and started changing the real estate fundamentals for the buy-and-hold investor. It was like a starters gun went off and competition tripled, prices went up 20% in the distressed market and bidding wars became not only commonplace but also became the norm.I believe the trigger was pulled by Warren Buffett and his now famous quote that went something like this:“I would immediately buy thousands of rental homes if I could do it efficiently.”Now remember, to most mom-and-pop investors, Warren Buffett is seen as the best investor on the planet. So if he would buy thousands of rental homes, the average person should go out and buy 1 or 2 properties immediately to insure they do not lose out on this once in a lifetime opportunity
.However, to the “Smart Money,” Warren Buffett was simply pointing at an opportunity in the market that someone should take advantage of. In the end, “The Smart Money” believes they can capitalize on the opportunity even if Buffett can‘t or doesn’t want to.They believe this because unlike Warren Buffett, who is almost anti-technology, these “Smart Money” investors with deep pockets can utilize technology better than anyone else. They use cloud based applications right on their tablets or smart phones, run instant comps and know more about a house inside of a few minutes than you or I can in 4 hours.Thus, with deep pockets and the technology advantage, the “Smart Money” can go out and single handedly change a market overnight. Some articles I have read indicate (example) they are buying 6 to 10 houses a day, every day and they have no plans to stop. ****In addition, if you follow the common belief that “Smart Money” likes to run in packs, a market can quickly get very crowded. I suspect we will see some significant average price increases shortly in many previously distressed markets, because the “Smart Money” has become the big buyer of REO and Short Sale properties.So what am I doing with my business given this sudden and meaningful change?
First, I want to see if I can decipher the expected or modeled return the “Smart Money” is chasing. My early calculation indicates they are happy with an 8% return on a house they own free and clear (remember they have deep pockets). I think this is a horrible return but then again I don’t have millions of dollars to put to work.I need this data so I know where to take my maximum offering price on a property if I really want it; or if I think the “Smart Money” is missing something about the asset (such as an existing opportunity to create value not found in spreadsheets and online databases).
Second, I want to understand where they are focusing their attention in my market. I want to understand where they are doing most of their buying and what segment of the market they are after.In my market, they seem to dominate the court house steps and they like properties built in the last 10 years. I want to know this information, so I can figure out if these investors are my competition. Plus, it tells me where to focus my energy to find good deals that they will miss, because they rely on technology and deep pockets (not relationships).
Finally, I am going to be very happy if they are in my market because they will goose my returns in short order, and potentially allow me the opportunity to 1031 Exchange out of houses into small apartment buildings 3 or 4 years earlier than I expected. I bought 20+ single family homes over the last 2 years and if they want to double the value for me all the better. I will just move the equity into a segment of the market they are not playing in.