The real estate market is a complicated and multifaceted entity that undergoes many swings and fluctuations. One new kind of investment system—the institutional fund—is the latest change to shake up how the industry operates.

What Are Institutional Funds?

An institutional fund is a type of mutual fund, and it’s marked by two characteristics: low fees but an incredibly high minimum investment. Because of this second factor, an institutional fund is usually not feasibly available to individual investors, unless that investor has an extremely high net worth. Rather, these funds typically market themselves to entities like pension funds, hedge funds, large nonprofits, or other groups with substantial amounts of capital to invest. Using that capital, these groups are buying up foreclosed or distressed homes, refurbishing them, and reintroducing them on the rental market.

Institutional Funds and the Housing Market Collapse

With the economic collapse of 2008 and the subsequent housing market crash, homes were foreclosing at an unprecedented rate. In the wake of this event, the market saw the emergence of this new kind of real estate investor: institutional firms that possessed the foresight and means to secure tens of thousands of these properties when they were severely undervalued.

Many such institutional firms were in it for the short-term rewards, simply refurbishing the homes and selling them once property values recovered. However, more than 10 years later, some of the biggest players in this landscape are clearly in it for the long term. These firms continue to expand their base of homes for refurbishment and subsequent rental.

RESICAP, which is based in Atlanta, Georgia, United States, is just one example of the kind of company that has emerged in tandem with these institutional funds and institutional investors.

“We are the leading vertically integrated solution for institutional owners of single-family residential assets in the United States,” says Greg Higgins, senior marketing manager of RESICAP. “For these institutional owners, we facilitate and service the entire life cycle, from valuation to renovation to property management to disposition.”

After the 2008 crash specifically, RESICAP capitalized by looking beyond its own borders.

“We were aware of international interest in the U.S. market that resulted from the 2008 real estate crash. Domestic investor interest in the U.S. single-family residence space was nonexistent at the time, so we began to look internationally,” says Higgins. “We sought investors who could take advantage of the deflated value of the U.S. dollar by investing in U.S. real estate while also participating in the rebound of the asset class.”

The Future of Institutional Funds Continues to Look Bright

Because institutional funds tend to surge and to flourish when the market is inundated with renters, market crashes have historically been times of growth for these funds. Just as with the 2008 crash, any prolonged and significant economic downturn hinders those looking to buy homes for the first time, and it jeopardizes the homes of those who are already locked into mortgages—both of which boost the rental market.

Foreclosures and poor economic performance, however, are no longer the most significant predictors of the success of institutional funds. In today’s climate, millennials, many of whom are saddled with student debt, are waiting longer to buy homes, or they are deciding to forego the process altogether. Many young adults view renting in a much more positive light than previous generations and have little interest in building up the necessary (and significant) down payment or taking on the ongoing expense of home ownership. If these trends continue in the demographic that would typically be buying their first homes and entering the real estate market, institutional funds only look to capitalize further on their emerging prominence.

The recent award recognition RESICAP earned is indicative of this trend. RESICAP took home the Gold Stevie® Award for Company of the Year in the Real Estate category, as well as another Gold Stevie Award for Fastest Growing Company of the Year in The 2019 American Business Awards.

“Few people have heard of us, yet we were the fastest-growing company in Georgia [United States] in 2018,” says Higgins. “Currently institutional funds only represent about two percent of the single-family real estate market, so there is tremendous potential and opportunity for them and, therefore, us as their partner. We have a unique business model in a relatively new industry—institutional-level, single-family home servicing—and we look to capitalize on that in order to continue our growth.”

Interested in winning a Stevie Award in 2020?

For a lot of consumers, owning a home is the ultimate symbol of freedom, affording you the opportunity to customize to your heart’s content.

When it’s time to sell, though, real estate ownership can start to feel like the exact opposite of freedom. Suddenly, many find themselves preparing for countless showings while waiting for offers and potentially making last-minute renovations to lure buyers.

Offerpad is among a crop of U.S. companies trying to fundamentally change that process. The firm, which is based in Chandler, Arizona, USA, allows home sellers to upload information about their properties, including optional photos. Home sellers then get their purchase offers within 24 hours. The company bases its pricing on a custom algorithm, which compares the home against similar properties that recently changed hands in the area.

After the customer signs the necessary documents online and Offerpad conducts a home inspection, the seller is ready to set a closing date. According to the company, it can close in as little as 10 days or as many as 90 days. Clients don’t have to worry about showings or open houses, and they don’t have to make any headache-inducing concessions to buyers.

“Traditionally, selling or buying real estate is wrapped up in so much hassle that people often avoid it altogether,” says Offerpad spokesperson David Stephan. “By making it easy, Offerpad hopes to eliminate the stress from people’s milestone moves.”

Support from Venture Capital

Offerpad, which real estate veterans Brian Bair and Jerry Coleman started in 2015, is part of a growing group of companies trying to use technology to reshape the market. So-called “iBuyers,” such as Opendoor and Zillow, are using proprietary pricing algorithms to purchase and to resell homes, and the national brokerage firm Keller Williams is set to launch its own home-buying operative in May.

In the case of Offerpad, Stephan says the company is trying to appeal to people who are disillusioned with the more conventional home-selling approach.

“Real estate doesn’t need to be the frustrating, messy ordeal it’s been for decades,” says Stephan. “With our service, home sellers and buyers now have the better option of closing and moving at their convenience, without the hassle.”

Unlike older companies that paid cut-rate prices for mostly dilapidated housing, iBuyers serve a more mainstream client base. There is a flip side to the convenience they offer their customers, though. With Offerpad, for example, home sellers pay a service fee between 6 and 10 percent, which is higher than what traditional agents charge. However, once the home is sold, the company pays for any concessions to the buyer, as well as maintenance and other associated fees.

To date, iBuyers represent a small part of the residential real estate industry. Opendoor purchased just over 11,000 homes in 2018, and MarketWatch estimates Offerpad bought roughly 3,600 properties last year. The firm hasn’t officially confirmed that number, but whatever the actual amount, it could soar soon, especially with an influx of cash from venture capital and other funding sources. As of March, Offerpad, which garnered five Stevie® Awards this year for customer service and sales, brought in a staggering $975 million in equity and debt financing. The company doubled its home purchases in each of the past two years and is looking to expand on the 12 cities it currently serves.

For Stephan, the sky’s the limit when it comes to algorithm-based home purchasing.

“The world of real estate is rapidly changing,” he says. “Offerpad is at the forefront of its transformation, defining the modern approach to buying and selling a home. In the future, we’ll likely see this approach adapted in markets throughout the world.”