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Easier Off-Market Deals Fueling SFR Asset Class

Just because a property isn’t listed for sale doesn’t mean the owner isn’t willing to sell—for the right price. Off-market deals may be harder to find with supply at an all-time low but the potential upside has investors searching harder than ever, turning to technology to fill knowledge gaps. With the right tools and enough cash, finding potential sellers is as easy as the click of a button. If it’s on a map, it’s on the market. 

“We’re absolutely seeing an uptick in off-market sales, there’s no doubt,” Kevin Mattice, Chief Product Officer at the real estate data company Cherre, said.  “I think the biggest place we are seeing it come up is mainly on the single-family residential side of the world, there’s a huge emergence of funds and REITS that are focused on buying and selling SFR in bulk.”

Single-family rental (or SFR) is seeing huge investor growth. Long considered a labor-intensive business with lower than expected returns, new management processes, and investment methods are turning SFR into a hot commodity. The boutique asset class is hitting an unprecedented scale as major funds crowd into the market. Already worth $3.4 trillion, the SFR will soon eclipse the multifamily market in sheer size. The sector’s rapid growth is directly related to the prominence of big money investors courting off-market deals. Using technology to find and approach potential buyers is proving to be hugely profitable. Single-family rental REITs are some of the best performing investments, up 40 percent this year alone and reporting double-digit rent growth as occupancy rates approach record highs. 

Economies of scale

Getting an owner to sell who isn’t listing their property takes some convincing. Stacks of cash help. The funds and REITs bulking up the SFR market are using technology to find where they want to be, approaching owners with cash-in-hand with the promise of cutting through the sales and marketing process and going straight to instant gratification. Platforms like Cherre are short-circuiting off-market deals by synthesizing down property history, ownership, and valuation for practically every property in the United States. Investment strategies that used to take months to search and analyze can now be done with just a few clicks. That’s great for investors, but housing advocates worry that giving large investors too much leverage in the single-family residential market will worsen the country’s incessant housing issues. 

Lack of affordable housing is an issue plaguing practically every major American city. In recent months, the construction of new single-family homes has slowed. Housing prices are up across the country, surging more than 20 percent in some areas. The median price of a single-family home is approaching a half-million dollars. With many cut off from ownership, more and more are turning to rentals. That views investors with cash to burn an edge in housing markets. Critics say investors willing to pay platforms for exclusive property data can approach potential sellers and offer immediate cash in a way that your typical family looking for a home can’t. As funds and investors build strategies at scale, they’re vacuuming up viable owner-occupied homes and turning them into moneymakers. 

Renting a single-family home is an affordable option for people worried about a down payment. Other advantages of renting include not having to worry about maintenance and plenty of flexibility. The only downside is losing the value of a home’s appreciation. Equity in a home is a key factor in families building wealth. 

Because serious investor interest in the asset class is still relatively new and rapidly growing, it’s still too early to tell just how residential markets will be impacted. The size of America’s single-family market cannot be overstated. There are nearly 85 million single-family homes in the United States holding tens of trillions of value. No matter how hot investments are it’s like trying to boil the ocean. Investors and large asset holders control roughly 55 percent of all apartments in the United States but just 2.5 percent of single-family homes. 

The value trap

We’re already seeing home neighborhoods be changed by the growing prevalence of SFR but piecing these pockets together into a coherent understanding is a challenge for even the best economists and analysts. That makes property data platforms even more important. Tracking the impact of SFR on property markets relies on the same tools and technology investors are using to make plays. 

“It will be interesting to see how these investments impact home values, how it impacts the supply side,” Mattice said. “Do home values in those areas go up because decisions are being made programmatically? Will that drive the supply side? Will more homes be built? A lot of opportunities to watch what happens. We have to watch the data.” 

While many critics fear American housing wealth and equity being transferred to corporations and investors, single-family rentals likely have a role to play in alleviating housing shortages. Advocates say more supply is the only way to balance the scales. Single-family rental investors are rushing to provide that supply. Build-to-rent single-family home construction starts are up 30 percent from 2019. Already representing 6 percent of all homes being constructed, experts expect that number to double over the next decade, making it the fastest-growing housing sector in the United States. More housing supply is great, the problem is affordability. For-sale single-family home prices rose an average of 3.6 percent over the past 20 years while median household income increased an average of 0.5 percent over the same time frame, pricing many out of homeownership or forcing them into single-family rentals, according to the Federal Housing Finance Agency (FHFA) home price index

It’s not clear how off-market deals are impacting home prices. Typically off-market deals offer potential sellers less than their home is worth but the full price is paid in cash. Investors paid about 30 percent less than consumers for single-family homes in 2021, according to ATTOM home sales data. Housing advocates have a misconceived notion that investors are overpaying when most deals are doing the opposite. Individually, deals may be heavily discounted but housing prices overall are rapidly rising. 

“Historically, investors have always accounted for somewhere between ten and fifteen percent of residential home purchases, and our data shows that this is still the case today, albeit at the high end of that range,” RealtyTrac Executive Vice President Rick Sharga said. “But the data doesn’t support the ‘Wall Street is buying up Main Street’ theme that’s been a popular theory for the past year or so.”

What’s clear is that technology enabling easier off-market deals is directly fueling the rapid growth of SFR as an investment class. What used to take years now takes days, allowing buyers to reach potential sellers with just a few clicks. How SFR impacts housing markets will be closely watched but it’s safe to say the asset class is here to stay. 

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