What happens when private equity buys homes in your neighborhood

> I'm not sure if I'd count a person who can buy enough investment properties

Enough means "1 or 2". So yes, many average people can.

They'll often put, say, $50K down and that's it.

Here's how it works.[1] Homeowner has a house that has some significant flaw that's so bad no bank will mortgage it. This means the homeowner cannot sell via traditional methods. It will cost, say, $100K to repair the house and bring it up to market standards, but homeowner doesn't want to spend the money. He may already be ready to move (this may be a second house - or an inherited house, etc).

His only option is to sell for cash. The house is currently worth $250K, but market rates are $450K.

Wealthy non-RE investors won't buy his house - they want a house ready to move in to.

So what does the "average person like you" do? He gets a hard money loan. A private lender gives him $300K. $250K is to buy the house, and $50K is to help with the repairs. The average guy also puts in $50K of his own. At the end of 6 months, the house is all fixed up, and now worth $450K. He sells the house, and pays back the loan, and makes a decent profit.

Alternatively, he gets a mortgage on the house, pays back the private lender, and rents the house out.

What's in it for the lender? A very high interest rate. Back when mortgage rates were 4%, private lenders charged 12%. While this sounds scary high, the average guy plans to be done with everything in 6 months, so it's only 6 months of high interest.

What's in it for the "average guy"? Well, he just got a house, right? Also, what happens if things go south (e.g. runs out of money because he misestimated repair costs)? He loses the interest and his $50K, and that's it. The private lender gets ownership of the house, but cannot go after his assets.

So if you can save up $50K, you can get a house. The real hard work is to identify the right property (i.e. one that can't be sold easily).

Everyone I know who's done this earns less than a SW engineer. Some people are blue collar workers.

Another model: The homeowner is in a bad financial situation and has not have been paying property taxes. Now the county is threatening to take away his house because he owes $20K in taxes. There are only a few weeks left for the deadline.

The investor contacts the owner and says "Hey, let me pay the $20K you owe, and sell me the house for $30K. If you can sell the house for more to someone else, go for it. But if not, here's my number."

If the owner could have sold it for higher, he likely would have already. Both ways he's losing the house, but this way he gets money.

Again, such properties are hard to find.

[1] This is just one model. There are others.

I know people who do that. They pay the same interest rates as if the house was in perfect shape, not higher interest rates, and they are getting loans for most (if not all) the value. Their local banker knows them well (since they get loans for this all the time), and knows they are good for paying back the loan and so they are willing to extend them a loan for a low rate. If the bank forecloses on a house and their inspection decides it is in bad shape the bank will call this person first and it will never go on the market. (they have a list of people who do this work - different people specialize in different problems)

If I was to try to do the same I'd pay a higher rate, and have to put a lot of money down. However once you do it a few times the banks realizes you know how to run this type of business and so is willing to lend you money to do it. (which is to say if you want to get into it you almost have to live in the first 2-3 houses while you fix it up, but after that you can just buy something with their money to fix up)

> I know people who do that. They pay the same interest rates as if the house was in perfect shape, not higher interest rates, and they are getting loans for most (if not all) the value.

Totally different category. The people you know are not getting private loans, but regular bank loans (backed by Freddie Mac, etc). Those houses likely are regular houses banks are willing to mortgage (i.e. free of serious defects).

They are basically just buying regular houses to rent/invest. Requires a lot more money, and is a lot less lucrative.

I'm talking about houses that banks are not willing to touch in their current condition.

> If the bank forecloses on a house and their inspection decides it is in bad shape the bank will call this person first and it will never go on the market. (they have a list of people who do this work - different people specialize in different problems)

Yes - once you make connections with banks, brokers, etc, you'll get on the list of people to call first :-)

Nothing wrong with what you're saying - just a different category of RE investors. My guess is the people you're referring to aren't sending out those mailers.

> If I was to try to do the same I'd pay a higher rate, and have to put a lot of money down. However once you do it a few times the banks realizes you know how to run this type of business and so is willing to lend you money to do it. (which is to say if you want to get into it you almost have to live in the first 2-3 houses while you fix it up, but after that you can just buy something with their money to fix up)

Same idea with the category I'm talking about. It'll be hard to get the first hard money loan, but once you've successfully exited an investment this way, other private lenders are more likely to trust you and give you favorable terms.

> I'm talking about houses that banks are not willing to touch in their current condition.

If they're not willing to touch them in their current condition, it seems strange that they loan me $300k with that house as collateral. If I can't make the renovation work financially, they're stuck with a shitbox, potentially one that I've done more harm than good to.

No, they are buying houses that need significant work before they are rent able. I'm not sure how the loan terms are structured, but they are getting good rates (they likely are doing two loans, one for the house and one for remodeling, perhaps with different rates - but rates you couldn't get overall). Banks will touch any house in current condition (Freddie Mac may not!), they just care that it can be sold - the land has value and the structure has value even when not livable.

Ah yes - my mistake. My guess is they're likely not getting mortgage loans, but rather some other type of bank loan (e.g. business loan).

> Banks will touch any house in current condition (Freddie Mac may not!),

I was speaking of regular mortgage loans. Yes - there are other loan types.

> If they're not willing to touch them in their current condition, it seems strange that they loan me $300k with that house as collateral.

Private lenders != Bank loans. And as another commenter clarified, when I said "bank loan" I meant the usual mortgage loans.

https://lenderkit.com/blog/what-is-private-lending-and-how-i...

"What is private lending?

Private lending is a financial avenue where borrowers get loans from private lenders — individuals or businesses instead of borrowing funds from a bank or a credit union."

> If I can't make the renovation work financially, they're stuck with a shitbox, potentially one that I've done more harm than good to.

Yes, and ...?

Lending is always risky. That's why private lenders have very high interest rates. The private lender will assess how likely you are to succeed. They generally know RE fairly well, so they'll want your analysis on the worth of the house, and how you made the estimates on repairs. If they think you're way off, they'll just tell you why and not fund the deal.

And they'll want to know what you're losing. If you're a blue collar person and are willing to put $50-75K of your own money into the enterprise, they know you have skin in the game.

I appreciate the questions/counterpoints. Just keep in mind you're not arguing with someone who is merely arguing from a theoretical vantage point :-)

Oh, I know! At this point I'm not arguing, I'm genuinely curious about how it works.