All Cash Investors Beating Buyers of Townhouses in Brooklyn

Investors are buying houses in Brooklyn to rent out — not flip — and doing the deals in cash, further adding to the lack of inventory and raising prices for would-be buyers who are looking for a place to live. “They come to all the open houses, they see every property,” a tipster told us.

They are most active in Bed Stuy but are also purchasing in other emerging neighborhoods such as Crown Heights and Bushwick, as well as Clinton Hill, with occasional forays into more expensive areas such as Fort Greene and Carroll Gardens. They usually put in low-ball offers but not always. Some of their purchases “make no sense,” she said, citing SROs without certificates of non-harassment and properties with stop work orders on them.

They go after everything: foreclosures, houses that would normally sit on the market such as SROs and wrecks, and regular properties that qualify for a mortgage. They are focusing on one- to three-families, the same types of houses would-be homeowners are looking to purchase to occupy — not groups of houses or large apartment buildings, although occasionally they pick up single-family houses that have been subdivided into more than four units. She has encountered five firms, she said, each of which buys five to 10 houses a month with all cash.

“Everyone’s talking about there not being any inventory,” she said. “There’s plenty of inventory, it’s just not being offered any more,” she said, meaning investors are buying houses before they go on the market. “There’s so much money around. A lot is getting bought out quickly. They’re not end users.”

A Brownstoner reader who has been looking for properties in Bed Stuy, Crown Heights and Bushwick said he has been frustrated by losing to investors. “It seems that I’m being outbid left and right by investors who are coming to the table with cash in hand as soon as (or before) the house lists.” He has been “looking aggressively” for the past two months and his price range is $500,000 to $550,000.

We spoke to six real estate agents, four of whom said they had encountered investor groups buying houses to rent out. Some of the firms are European and Israeli, they said. One broker had high praise for one of the private European investment groups he had encountered, a boutique firm with local buyers that focused on buying high end properties with historic detail to rent. He also said that in the first quarter, the bulk of all-cash buyers he dealt with were families, not investors.

One such outfit, operating under the name Newtown Jets, has purchased 24 properties in Brooklyn since March, including 12 in May, according to PropertyShark. The transactions were all over the map geographically and pricewise, from Park Slope ($2,675,000) and Carroll Gardens ($1,699,000) to Bushwick ($662,500 and $599,000).

Interestingly, this group purchased 605 Decatur Street, a wreck with lots of historic detail whose owner was reportedly seeking an all-cash deal at the then-seemingly high price of $649,000. (It was a Brownstoner House of the Day in February.) Newtown Jets bought it in May for $678,000, or $29,000 over the initial ask.

Newtown Jets shares a Jersey City address with NJ Cash for Homes and its owner Dixon Leasing, a subsidiary of Dixon Advisory. Australian firm Dixon Advisory “has over 4,000 clients with funds under management in excess of $4 billion” and manages the US Masters Residential Property Fund, “the first Australian listed property trust with a primary strategy of investing in residential property in Hudson County, N.J.,” according to the fund’s website. Dixon Leasing is a property management company that has recently expanded into Brooklyn, according to its website. The fund is taking advantage of an “historic opportunity to acquire high quality US residential property at attractive valuations” and focuses on “residential properties in Hudson County, New Jersey and more recently, Manhattan and Brooklyn.” As of March, it had a $246.2 million portfolio consisting of 475 freestanding houses and 15 multi-dwelling apartment complexes.

Newtown Jets is a subsidiary of US Masters Residential Property Fund, said Alan Dixon, Managing Director and CEO of Dixon Leasing. The fund has purchased a total of 47 properties in Brooklyn since December 2012 and has 22 under contract. (Each of its buying groups is named after an Australian football team.) The fund has paid an average of $1,200,000 per property. The fund buys to hold and rent for at least five years, as required by the tax agreement between Australia and the U.S. “You buy a property, renovate it, and the bank advances funds against a group of property,” he said.

“We are competing with people trying to buy houses to live in,” he concurred. Because the firm pays all cash, it can buy SROs, and owns nine in Brooklyn. They are going through the expensive and time consuming process of obtaining certificates of non-harassment for each one.

So far, two of the fund’s Brooklyn properties have been on the rental market. As this article went to press, there were no Brooklyn properties available to rent on Dixon Leasing’s website. Permits have not been filed for any of Newtown Jets’ Brooklyn properties, according to PropertyShark. Only one of the fund’s Brooklyn properties, 406 Monroe, has obtained permits so far, said Dixon. “Most properties we have bought are in need of renovation, so we haven’t done a lot of leasing yet in Brooklyn,” he said. “It’s not a fast process. We will always pull all the permits required. Rentals will come up in the next few months,” he added.

In Brooklyn in the first and second quarter, the number of sales transactions and inventory on the market were both down compared to the same periods a year earlier, while prices were up. More specifically, in the second quarter, listing inventory of co-ops, condos, and one- to three-family houses dropped 18.5 percent to 4,704 units, according to a report from Douglas Elliman. The number of sales declined 6.7 percent to 1,855. The average sales price increased 14.7 percent to $671,964. The average price per square foot of one- to three-family houses rose 13 percent in the second quarter vs. the same period a year earlier, to $296. There were 655 sales of one- to three-family houses in Brooklyn in the second quarter, a drop of 31.3 percent compared to the same period a year earlier, when 953 such homes sold. “The spring market marked the lowest inventory in seven years and as a result, sales slipped and prices pushed to 10-year highs,” said the report.

“Bed Stuy has shot up since we started,” said Dixon. But, he said, he believes “there’s continued room for upside in all the Brooklyn neighborhoods. Most of our investors are excited they got to invest in Brooklyn at a good rate.” The firm recently lost a bidding war by $450,000, and regrets not buying 333 MacDonough when it came on the market a year ago. “We heard they wanted $1.4 million and we said that’s crazy, it doesn’t make sense, but now the renovation is all done, there’s no hassle with the Building Department and all the rest, and now it looks pretty cheap. Whenever a market is moving that fast there is stress and risk. We’ve got a diversified portfolio. We think Bed Stuy prices in hindsight will look very cheap — unless something fundamentally goes wrong with the city. There’s no reason why Bed Stuy won’t end up as nice as Park Slope and just as expensive.”

What’s your opinion? Do you think investor groups snapping up property in Brooklyn could be good, on the one hand, because they are fixing up and renting out problem properties, or is it making Brooklyn unaffordable and creating another unsustainable real estate bubble?