Real Estate Investors Profit From Hidden Markets

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RealtyTrac devotes the bulk of its most recent edition of HousingNewsReport, its monthly web
magazine to detailing some real estate investment strategies.  The lead article by Octavio Nuiry, Managing Editor gives advice compiled from interviews
with and articles by several successful investors.  However, even if the advice did come from
Warren Buffet we can hardly get excited about such business models as buying
distressed properties or finding undervalued ones. 

However one useful theme did
emerge from several of the investors featured in Nuiry’s article, “Real Estate
Investment Strategies for 2015.”   The
message was characterized by Tony Youngs, a Georgia investor as finding the “hidden
market,”
one to which no one else is paying attention. 

Youngs’ hidden market is property
just about to enter the foreclosure pipeline which he identifies and follows
through the process until the opportune time come to purchase it.  This gives him the time to research the
property and a head start on competing investors with more human resources or deeper
pockets.  Carrying the hidden markets
theme one step further, Youngs locates clusters of those properties and rather
than buy them himself
markets their availability to those same deep-pocketed
investors, principally Wall Street hedge funds.

For Greg
Markov, a Phoenix real estate broker and investor, the hidden market is unique
but abandoned and/or neglected urban properties.  Markov buys the properties and completely “re-imagines”
them into architecturally interesting housing. 
He then sells them to a second hidden market, millennials who do not
want to live in the suburbs where most builders are building.

The hidden market theme, although he never used those words,
was best and most creatively brought
home in a second piece in the magazine entitled “Calculated Risk:  A Contrarian View of Investing in Real Estate”
written by Alexander Philips, Chief Executive and Investment Officer of
TwinRock Partners. 

Philips’ firm started out with
one of the same strategies as Buffett, locating the undervalued property,
actively pursuing opportunities where it believed rehabilitation or repositioning
would improve the property’s physical characteristics and/or market value.  It looked for distressed properties or those
not being employed in a highest and best use and concentrated in more
affordable markets with a strong upside potential.  The firm followed that plan through
California’s Inland Empire and then through other undervalued communities in
the state until each became saturated with investors so they began looking
outside of California.  That is when they
found their hidden market.

During the savings and loan
crisis and subsequent New England bank failures many condominium complexes were
devastated by the failure of first the owners and then the lenders who
repossessed units to pay home owner association (HOA) dues.  Many states passed what are called priority
lien laws
which allow HOA to place encumber a property for delinquent HOE dues.  These HOA liens are senior even to an earlier
first mortgage on the home.  Philips’
firm picked Las Vegas as its next investment target just as a lawsuit
challenging the states priority lien law (SFR Investment Pool v U.S. Bank)
was wending its way through the court. 

Briefly, SFR, another real estate
investor, had purchased a condo at a foreclosure auction brought by an HOA even
as U.S. Bank was in process of its own foreclosure.  SFR received and recorded a trustee’s deed
from the HOA and, days before the bank’s scheduled foreclosure, filed an action
to quiet the title and enjoin the sale.  Not
to get too deeply in the weeds and issues of judicial and non-judicial foreclosures,
thus far the HOA’s sale and SFR’s deed have been validated although appeals
continue.

Taking what Philips thinks was an
educated risk, his firm began to purchase properties from HOA’s which had foreclosed
on their liens or were in the process of doing so.   They have spent a few million dollars
purchasing these properties with the objective of fixing them up, renting them,
and selling them at a profitable juncture. 

Phillips tells one story that
shows the potential of his firm’s hidden market approach.  One of the homes they acquired had sold to
its owner in 2006 for $300,000.  The investors
bought it from the HOA in May 2013 for $11,000 and think the property today is
worth about $184,000.

While the final opinion in the
SFR case could still upend this and other deals, Philips says, “With
upsides such as this, we anticipate that our investors could triple their money
after accounting for investment fees and expenses.”

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