If Texas Takes This Step, Expect Other Cities to Follow

By Strategic Passive Investments

The concept of the real estate investor as a villain or a “vulture” swooping in to snap up assets when times get tough is a common one. Although investors actually fill a vital need during tough economic times, most people who are not real estate investors tend to assume that because investors “buy low and sell high,” they create tough economic times. However, that vilification has historically been, for the most part, an uncomfortable matter of opinion. Now, the third-largest city in Texas is considering codifying this unreasonable prejudice against investors so that the metro-area housing market is not subject to what policymakers are describing as “exploitation” by single-family investors.

Calling investment buyers a “scourge” on Dallas, one councilwoman recently spoke out in support of the proposed legislation, which would affect the municipal area but might set a standard for statewide policy. For now, the policy, if it passes, would limit the number of properties real estate investors can buy.

Policymakers say they are also looking at models such as one implemented in Canada, where the country restricted foreign investors and, at one point, banned sales to foreign investors completely. While Canada defined “foreign” traditionally as individuals who are not citizens of the country, Dallas officials are entertaining the idea of restricting sales to all non-Texans, although this appears to be a relatively fringe notion.

Nevertheless, the idea is gaining steam as median home prices in the area continue to rise, jumping 22 percent year-over-year at the end of Q1 2022. Inventory is brutally tight as well, with listing volumes down 93 percent year-over-year at that same time.

Who is in the Crosshairs?

One of the biggest elements of contention regarding this proposed policy is who would be subject to the restrictions on real estate investors. Some policymakers fault REITs (real estate investment trusts) and institutional investors for most of the housing affordability issues in Dallas, citing bulk-buying practices and the ability to price out retail buyers as reasons these entities should be limited in their activities – at least for the time being. However, there are plenty of parties interested in targeting individual or mom-and-pop investors as well, saying that solicitations to buy homes are out-of-line harassment and, of course, citing the age-old complaint that buying fast and low for cash is exploitative.

One op-ed piece published in the Dallas Observer as far back as December 2020 bemoaned the “repeated inquiries from investors looking to buy properties,” noting that some homeowners are receiving “notes posted on their doors with an offer for their property.” It was unclear why the personal delivery of a legitimate offer specific to that property should be classified as harassment. A self-proclaimed “Dallas activist” quoted in the article reported having to “educate the older residents in South Dallas” because investors were making offers she considered too low, saying that offers to buy below market value if a home needed renovations or repairs that would not be made before the sale were taking advantage of vulnerable older citizens.

At that point in time, Dallas activists were advocating for legislation similar to what had been passed in Atlanta, Georgia, where real estate investors must wait six months after a formal rejection before reaching out with another offer. That legislation passed because the southern city deemed repeated offers to buy a home to be a type of “commercial harassment” that unfairly targeted homeowners in minority and low-income neighborhoods by offering low purchase prices that, one analysis argued, did not factor in the equity homeowners had built up in their properties.

If the Dallas legislation takes a form like this, then private equity firms and REITs will not be the main target of the policy; individual investors will. Fix-and-flip and rental investors will find themselves squarely in the crosshairs of such a policy and, to make matters worse, investors could end up fighting to prove their offers were “legitimate” even when they are permitted to make them. This takes the public vilification of real estate investors to a new level just as the economy appears poised to need the population more than ever.

Artificial Cooling Does Not Necessarily Benefit Homeowners

Most policies like the ones being discussed in Dallas are predicated on the idea that real estate investors “steal” equity from homeowners when they buy below market value – even if they buy quickly, for cash, or without asking for the most basic of repairs or upkeep to the property. Apparently, being willing to take on these costly issues is no longer a bargaining tool or a benefit to working with an investor; it is, in the words of Home Defense Program director at Atlanta Legal Aid Karen Brown, “the dirty, evil underbelly of the real estate market.” Brown described working with motivated sellers as “equity theft” from minority homeowners in gentrifying neighborhoods, explaining, “So, as those homeowners and those neighborhoods have property values these days that are going up, they are targeted because they have equity to steal.”

It may be tempting to ignore this type of propaganda, reassuring yourself and other investors that this is just more of the same type of rhetoric that has been employed against real estate investors for years. It is tempting to simply assume that when investors are once again needed, the market will right itself. However, if prohibitions against investors are codified into law at a time in history when there are more artificial constraints on markets and economies than ever before and when our government has proved itself more willing than ever – regardless of which political party is in power – to interfere in our personal and business finances, the stage will be set to eliminate investor activity. This is a danger that cannot be overlooked, particularly given that the notion of “artificial cooling” in a housing market does not benefit the homeowners who policymakers claim are at the heart of the entire movement.

While homeowners and their “advocates” may want to ensure that they are able to get maximum dollar for their homes by reducing investors’ ability to buy those properties, retail buyers are not going to pay market price for a property that needs work or that needs massive updates in order to be competitive in the local market. Furthermore, most retail buyers will not be able to obtain the funds to purchase such properties at market value (or even below it) and are likely to be unwilling and unable to complete repairs. If local and state governments force prices down, they may, arguably, help home buyers in the short term, but the very individuals they claim to be protecting, the sellers, will suffer since a lack of competition will reduce their equity and make any buyer less likely to take on a project when they could simply acquire a property ready for move-in. Then, at the point when an investor with a cash offer would be welcome, there will be a void that hurts homeowners even while policymakers congratulate themselves — loudly and publicly, of course — on their protective measures.

What Real Estate Investors Should Do

Unfortunately, there is probably not a lot that real estate investors can do to combat this type of proposed legislation other than carefully monitor local ordinances and make sure that marketing materials adhere to local standards. If an investor has been taught to pursue a deal at all costs – as many are and many feel compelled to do in today’s hyper-competitive market – remember that it is simply good business to treat homeowners with respect. Do not allow yourself to get caught up in the “signing push” that might enable a homeowner to say you took advantage of their age or their lack of education about home sales to “make” them sign. Remember, most people are not as informed about their options, limited or otherwise, as you are, and always proceed with a win-win mentality in mind.