Home Builders Offer to Sell Homes in Bulk at Discount to Investors

October 3, 2022

Full story can be found on the Wall Street Journal, here.

As mortgage rates hit a 15-year high and individual buyers back away, builders look to unload both planned and completed homes

With mortgage interest rates pushing 7%, traditional buyers are retreating from purchases.Photo: Justin Sullivan/Getty Images

By Will Parker

Oct. 3, 2022 5:30 am ET

American home builders are stuck with more houses and land than they can sell. That presents an opportunity for investors such as Bruce McNeilage.

The co-founder of a rental-home investment company, Kinloch Partners, is looking for a deal on homes so he can rent them out while the single-family rental market is hot.

Mr. McNeilage says he has received as many as 10 calls a week from builders eager to sell their homes in bulk and reduce inventory, now that traditional family buyers are backing away with mortgage rates at a 15-year high. Builders have offered to sell him thousands of completed or planned homes at discounts of up to 20% of what they would likely charge prospective home buyers.

“We are being cold called by builders we don’t even know,” Mr. McNeilage said. “They’re saying, ‘Nobody is going to qualify for financing. We’re going to suck wind on this. Let’s contact investors and see if they want an entire subdivision.’”

Big builders had a booming business during the pandemic selling to traditional buyers. But with mortgage interest rates pushing 7%, these buyers are disappearing from model home showrooms across the country. Last month was the worst September for new construction buyer traffic since 2012, according to the NAHB/Wells Fargo Housing Market Index.

Signs that builders will have too much home and land inventory on their hands are growing. There were 14% more homes under construction this August than there were a year ago when the sales market was more robust, according to U.S. Census Bureau figures. Major home builders, including Lennar Corp. and KB Home, have reported walking away from contracts to buy thousands of lots for future building projects.

“We are anticipating that you will see more of that from the builders,” said Carl Reichardt, managing director and home-building analyst at BTIG, a financial services firm.

In some cases, landlords who can pick up large bundles of homes are the most eligible customers remaining. Consequently, landlords get better prices for homes than owner-occupiers do. The discounts to estimated retail value are generally in the range of 10% to 15%, investors and brokers said.

Financing these home purchases has become more expensive for investors as interest rates rise. In July, new homes accounted for just 2% of total investor home purchases, according to Rick Palacios, researcher at John Burns Real Estate Consulting LLC. That figure was around 6% in the second quarter of 2020. Overall home purchases by investors also have declined slightly, according to real-estate company Redfin.

Yet investors are still taking those home builder calls. Some figure as the builders continue to struggle to sell homes, they will eventually have to offer even sweeter terms to bulk buyers.

“The scarier things get, the more attractive this becomes,” said Adam Stern, founder of single-family rental brokerage Strata SFR.

One builder making those calls is Stanley Martin Homes, a Reston, Va.-based firm that recently contacted investors with an offer to sell about 300 homes in the Southeast, according to people familiar with the matter.

Dean Myerow, co-founder of Fort Lauderdale, Fla., rental owner and developer Southern Waters Capital, said he is in contract to buy 20 new homes a month from a builder in Florida. The builder’s retail business has dried up in recent months amid higher interest rates, Mr. Myerow said. He estimated the discount to retail he will receive on the homes is between 15% and 20%.

“We think rental rates will remain very strong,” he said.

Rental investors still focus primarily on existing homes. But in recent years they also have proven to be eager buyers of new construction. Buying homes in bulk next to each other instead of scattered is easier to manage, investors said. Their purchases of handfuls of completed houses, empty lottage or even whole communities can help builders make their margins in both up and down markets.

Even in strong markets, a discounted sale to a landlord can be an attractive deal for a builder. By selling homes in bulk, builders save on the cost of operating a sales office and other marketing expenses. Homes planned for rent are also cheaper to complete because they involve fewer customizations.

If home builders sell more to investors it will mean fewer options for people looking to buy new homes. The sales could protect current homeowners, however, by keeping home prices from falling more than they might otherwise.

Write to Will Parker at will.parker@wsj.com

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Four- and Five-Bedroom Single Family Rental Homes – THE NEW NORMAL

By Bruce McNeilage • November 6, 2024

Meeting the Needs of Consumers, Developers and Investors By Bruce McNeilage In early 2022 I made a prediction. The three-bedroom house would die a slow death. What was once a staple of American construction and homeownership has become as outdated as ‘70s floral couches and wood-paneled living rooms. Consumer demand is pushing builders to create more four- and five-bedroom homes. In addition, existing business conditions make four- and five-bedroom homes the best option for developers and investors. As 2022 played out, my prediction came to fruition. Of the more than 1 million homes constructed in 2022, more than half were four bedrooms or more. That is up from just 25% in 1973. Given current demographics, mortgage rates and work-from-home trends, we expect this trend to continue in the foreseeable future. Older Renters, Work from Home, Drives Need for More Spacious SFR Homes From the consumer standpoint, more bedrooms in a Single-Family Rental (SFR) home makes sense. Most families are clamoring for more space. Millennials, the largest demographic cohort, are entering peak child-rearing years and more space is a necessity. Of course, the global pandemic has played a role in shaping housing trends, as well. More people are working from home and need extra space for one, even two, home offices. More than one-third (35%) of workers with jobs that can be done remotely are working from home all the time, according to a new Pew Research Center survey. This is down from 43% in January 2022 and 55% in October 2020 — but up from only 7% before the pandemic. That’s a five-fold increase in people who need – or likely want – more home office space. While many companies are still hoping to bring workers back to the office, the trend seems to have leveled out. Work from home, in one form or another, is now an entrenched part of the working world and it will continue to impact housing decisions for consumers, builders and investors, alike. Even for a family with only two children, a three-bedroom home no longer has the utility needed for the typical family. Many families are caregivers for an aging parent. In fact, according to Pew Research, 23% of US adults are now part of the sandwich generation — people taking care of an aging parent and a child under the age of 18. These people simply want – and need — more bedrooms, whether they are owners or renters. More families are opting to rent today, as well. The typical age to buy a first home has jumped from 33 years old in 2021 to 36 years old today. It is the oldest ever on record for first time buyers, according to the National Association of Realtors. The rising age is a sign that high housing costs and mortgage rates are pushing homeownership out of reach for younger Americans. Mortgage rates have shot up so rapidly that the average monthly payment on a 30-year fixed-rate loan rose by more than $600 in one year, according to the Consumer Financial Protection Bureau. The CFPB says the average payment for a home purchase loan surged more than 46% — from $1,400 per month to $2,045 — over the 12 months ending December 2022. Likewise, the median total of costs and fees for such mortgages spiked almost 22% to nearly $6,000 in the same period. And with mortgage rates rising to decades-old highs this week, the average monthly payment has almost certainly grown in 2023. This is pushing more people to rentals . Additional Bedrooms Drive up Rental Income, Profits for Builders, Institutional Investors From a business perspective, there is almost no reason for a builder or investor to construct or invest in new three-bedroom homes. If a builder has invested in a lot for $100,000, that is a fixed cost. It is not going to change no matter what they build. A 2,200-square-foot house can be configured with three-, four- or five-bedroom options, so why not go for the configuration that brings a higher profit margin? Won’t an extra bedroom cost more, you ask? Not really. In a 2,200-square-foot house, adding an extra bedroom is a minimal investment up front (approximately $1,000) and will continue to pay for itself over time. Each bedroom can bring an additional $150 per month in rent. That means opting for a four- or five-bedroom house adds $150 to $300 in rent per house per month directly to the bottom line. For builders putting together a Build-to-Rent subdivision, those numbers multiply quickly. A 30-home rental development with five-bedroom homes will yield an additional $100,000 in rent per year. It is as simple as creating a layout that includes five bedrooms. Four- and Five-Bedroom SFR Homes Yield High Occupancy, Positive Cash Flow I have seen this strategy work first-hand. In two of our most recent Build-to-Rent subdivisions, we have opted exclusively for four- and five-bedroom 2,200-square-foot homes in up-and-coming communities. The confluence of demographics (older renters with young families) along with higher home and mortgage costs are pushing more people into high-end rental homes. One key to success is finding cities with growing populations and desirable amenities. Like any real estate transaction, good schools, youth programs, restaurants and entertainment options are important factors. Once you check those boxes, occupancy falls into place. Our occupancy rates are close to 100%, creating positive cash flow, from a demographic of affluent renters with high credit scores. Finally, we anticipate our five-bedroom rentals will add value significantly faster than three-bedroom homes. Whether we hold these assets for one, five or 10 years, the return on our initial investment will be significantly higher with a five-bedroom SFR rental strategy. While no real estate investment strategy is fool-proof, four- and five-bedroom homes show great promise over the next several years. As for the three-bedroom home: You are more likely to see one in the Smithsonian someday. Bruce McNeilage Bruce McNeilage is co-founder and CEO of Kinloch Partners. He has been in the real estate investment business for 33 years, is a national speaker and guest lecturer on the topic of single-family “Built to Rent” (BTR) housing and started his own BTR business in 2005. Kinloch currently owns assets in the MSAs of: Nashville, Tennessee; Atlanta and Augusta, Georgia; and Aiken, Greenville-Spartanburg, and Columbia, South Carolina. Learn more at KinlochPartners.net.