In a recent article published in the New York Times, author Matthew Gros wrote about how real estate investment funds are getting more aggressive in targeting new homes, especially in the Bay Area.
The article focused on a fund called the New England Realty Investment Trust (NEERIT), which had been created in 2009 and is led by the real estate firm Cushman & Marsh.
Its goal is to make money by selling properties to wealthy individuals and companies, or even buying them outright.
But, as Gros explained in his piece, there’s been a dramatic increase in recent years in what the fund’s portfolio managers call “value capture” and “value re-invention,” when they turn to selling properties as collateral for loans or refinancing.
Value capture refers to the practice of trying to sell a property that is still undervalued to someone who has a better idea of what it is worth.
It’s the practice in which an investor wants to buy a property based on a valuation that has been set at a lower point in the market, and then resell it to someone else at a higher valuation.
Value re-incorporation, on the other hand, involves turning a property into a value-generating asset that someone else can use to fund an investment.
Value capturing is a risky business, but not just because it’s potentially illegal, and it’s also potentially a lot more expensive.
“It’s really a high-risk, high-reward proposition,” says John Leavitt, managing director of investment banking at LLL Capital, a brokerage firm that specializes in real estate.
Value recapturing is risky, but it’s a risky and costly business.
Gros argues that the NEERIT’s strategy of using value capture to buy up properties has led to some really big deals.
“The fund’s recent acquisition of a $10 million condominium in Palm Beach is a good example of value capture that the fund is doing,” he wrote.
In August 2016, the fund acquired a $1.5 million condo in Palm Springs.
The new condo is a new, 4,600-square-foot unit that was previously owned by a private developer.
The developer is also part of the NEERT family.
“This is the third condo I have sold in two years,” the fund said in a press release announcing the purchase.
In November 2016, a New York-based hedge fund named the David Geffen Group bought a condo in West Palm Beach for $3.4 million.
The fund, which is chaired by Geffen, owns the condominium.
The investment group bought the condo at a price of $8.9 million, which was less than the appraised value of the condo.
The price was based on the fact that the condo was a rental unit, not a condominium, according to the purchase agreement.
The unit, which has three bedrooms, a kitchenette and an attached bathroom, is valued at $2.2 million.
“If you take out all of the other issues with that condo, including the price, the price is less than a third of what the condo would have been sold for,” Leavit says.
The hedge fund’s acquisition of the condumnt resulted in the realtors of Palm Beach, Palm Beach International Airport, Palm Springs International Raceway and other properties in Palm Park, Palm Hills and elsewhere selling them at a loss.
That meant that the condusnt was able to purchase them at an inflated valuation, which made it harder for buyers to take them back and renegotiate the sale.
The condo is now valued at about $8,500, according the listing agent.
“I can’t really think of a better way to use value capture than to put the proceeds of the sale of that condo in the hands of someone who would be able to make a better investment decision in the future,” Leavert says.
Leavits analysis suggests that value capture is a major problem in the Florida real estate markets.
In June, he wrote that the real value of condos sold in the state of Florida was $10.6 billion.
That’s an increase of $1,800 per capita in just four years, and he attributed that increase to the NEET buying properties, which allowed them to “increase their value capture.”
And the value capture problem isn’t limited to Florida.
Other hedge funds have also bought properties in the US and Canada.
In December 2015, the hedge fund The Vanguard Group bought the home of an estate agent in Toronto, Canada, for $8 billion.
The property is valued now at about a third less than its appraised worth.
“They’ve done something really crazy, I don’t know if you know that,” Leavert says of the hedge funds.
“You’ve got to wonder if they’re using a strategy that is going to actually pay off in the long run.”
What can you do about value capture? To protect