Contact: Peter Kerwin
608-890-2045
Private equity firms, institutional investors, and other big players are getting better prices
than individual buyers, but they also boost area home values
Since 2007, families or individuals looking to buy a single-family home may have found themselves
competing with some heavy hitters in the market, as large private equity firms, institutional investors
and real estate investment trusts have spent billions to purchase as many as 200,000 single-family
homes throughout the United States.
A new study from the Wisconsin School of Business at the University of Wisconsin-Madison finds that
investors are buying properties at a discount compared to individual buyers, and their presence in the
market actually leads to a rise in home values. Overall, investor buyers purchase at a discount of 9.5
percent compared to individuals buying one house during the same time period in the market. The
study also revealed that a 10 percent increase in the number of houses purchased by investors in a
census block is associated with a 0.20 percent increase in house prices in that market.
Abdullah Yavas, professor and department chair of Real Estate & Urban Land Economics at the
University of Wisconsin-Madison’s Wisconsin School of Business, Jessica Rutherford and Ronald
Rutherford of the University of South Florida, and Marcus T. Allen of Florida Gulf Coast University
examined more than 72,000 real estate transactions involving single-family dwellings in Miami-Dade
County, Florida, between January 2009 and September 2013.
“While individual buyers may have a better sense of the local market and a more realistic idea of a
home’s value, they don’t have some of the advantages that large investors bring to the game, such as
the ability to offer sellers cash up front and avoid the mortgage approval process,” says Yavas at the
Wisconsin School of Business. “Large investors are taking distressed properties off the market, possibly
signaling to other buyers that these properties are undervalued, and leading more players to enter the
market and drive up prices.”
“While individual buyers may have a better sense of the local market and a more realistic idea of a
home’s value, they don’t have some of the advantages that large investors bring to the game, such as
the ability to offer sellers cash up front and avoid the mortgage approval process,” says Yavas at the
Wisconsin School of Business. “Large investors are taking distressed properties off the market, possibly
signaling to other buyers that these properties are undervalued, and leading more players to enter the
market and drive up prices.”
– Institutional investors (those averaging approximately 40 purchases during the sample
period) purchased at an average discount of 7.7 percent, compared to single-purchase buyers.
– Large investors (those making six to 28 purchases during the sample period) purchased at an
average discount of 13.6 percent, compared to single-purchase buyers.
– Medium investors (those making three to five purchase during the sample period) purchased
at an average discount of 11.1 percent, compared to single-purchase buyers.
– Small investors (those making two purchases or one purchase as a LLC, LP, or other
corporate entity) purchased at an average discount of eight percent, compared to single-
purchase buyers.
The discount for large investors is attributed to several factors, including the ability of those buyers to
pay with cash. A cash sale may present less risk to the seller of a deal falling apart because of a
mortgage contingency clause, while reducing the time required to complete the transaction because
cash buyers don’t need loan approval. In both circumstances, a seller is more likely to be willing to
accept a lower price. Large investors may also have advantages such as better tools for targeting
potential acquisition properties, superior negotiating skills, and experience with the closing process.
“The entry of large investors into local housing markets appears to have some positive, short-term
outcomes, such as improving property values by reducing the inventory of foreclosed homes,” says
Yavas. “But there needs to be more research to consider how these purchases are affecting housing
affordability and the quality of housing stock in local rental markets.”
