Housing investors buy in bulk, aim to profit in hard-hit areas
Alejandro Lazo | Los Angeles Times | March 16, 2013 | link
Invitation Homes bought one of its first fixer-uppers in the San Fernando Valley just last May, a three-bedroom steps from a sought-after school in north Granada Hills.
More than 200 homes later, the company’s Dodger Blue “for rent” signs are a fixture in the Valley — markers for a massive Wall Street wager on the housing recovery.
Created last year by private equity titan Blackstone Group, Invitation Homes has spent about $3.5 billion buying 20,000 houses in nine U.S. markets, including Southern California. It’s a new business model emerging from the misery of the mortgage meltdown.
Blackstone and a handful of other firms believe prices fell too far in the hardest-hit markets. So they’re racing to buy up the bargains, rent them for short-term profit and hold them for long-term price appreciation. These firms say they’ve invented a new investment strategy that also serves the public good by fueling the housing recovery and sprucing up homes.
The company is creating jobs and providing quality homes for families, said Mark Beisswanger, Invitation Homes chief operating officer.
“We feel good about being able to fix up what is generally one of the worst houses on the street,” he said.
But some experts challenge the business model, and critics call it profiteering at the expense of neighborhoods and families who want to buy the same affordable homes. John Husing, an economist who studies the Inland Empire, notes the irony in Wall Street buying up Main Street.
“They create the problem — and now they are taking advantage of the problem,” Husing said.
In all, major investors have raised between $6 billion and $9 billion to buy single-family homes, according to a recent analysis by investment bank Keefe, Bruyette & Woods. The goal is to bring corporate scale and efficiency to what has historically been a mom-and-pop, single-family-home rental business.
These firms are also exploring ways of packaging rental income streams into securities, similar to the way mortgages were bundled during the boom years. Those mortgage bonds — often packed with risky home loans that produced mass defaults — turned into the toxic assets that helped bring down major banks during the financial crisis.
The Blackstone shopping spree has extended into several Southern California areas, including the city of Oxnard, South Los Angeles, the Antelope Valley and the Inland Empire, according to property records tracked by the real estate firm DataQuick. In some cases, the company has swarmed neighborhoods once ravaged by foreclosed homes. In a single ZIP Code in the Inland Empire, Fontana’s 92336, the firm has bought 74 homes in less than a year.
The firm has also invested in Northern California. Statewide, Blackstone has poured close to $740 million into California real estate through January, according to DataQuick figures. Nationally, the firm has invested in seven other regions: Atlanta, Phoenix, Charlotte, Seattle, Las Vegas, Chicago and multiple cities in Florida.
The investors have played a major role in recent home-price surges. Southern California’s median home price has jumped 21% over the last year, with more than a third of buyers last month paying cash. In the process, financial firms — including Oaktree Capital Management, Colony Capital and the Alaska Permanent Fund (which manages that state’s investments) — are rapidly staking claims as the new landlords of the suburbs.
On paper, the buy-and-hold calculus makes sense. The foreclosure crisis destroyed home values — but drove up rents, as repossessions created a new wave of rental demand from would-be owners with ruined credit. Fresh demand from young workers, a short supply of newly built rental units, and stricter mortgage requirements have also made the rental market competitive.
Last year, the Federal Reserve advocated renting out foreclosed homes as a strategy for banks to limit losses. Government-controlled mortgage giant Fannie Mae initiated a pilot program selling foreclosed homes in bulk, raising investors’ hopes of buying at discounts from big institutions.
But the jury is out as to whether the smartest guys in the room can create prominent national brands in a historically labor intensive, low-margin business. An acute inventory shortage — particularly in Western markets, where demand for cheap homes is so high — has made the acquisition of houses increasingly competitive.
“If the prices move ahead too fast — before you have a big enough portfolio — the opportunity could disappear,” said Jade J. Rahmani, the lead Keefe, Bruyette & Woods analyst on the industry report.
That sense of urgency has led some firms to begin buying regular homes alongside bank-owned properties, competing with everyday home buyers and small-time home flippers who renovate properties to sell.
The big investors are creating “auction fever” and driving up prices, said Nick Halaris, co-founder of AH Capital, a company that renovates and resells foreclosed homes in South Los Angeles. He remains skeptical that these firms will be able to manage these rentals effectively. Costs of regular maintenance and serving tenants add up.
“I think it’s crazy, their strategy, especially in L.A. or major markets, because we have managed portfolios of single-family rentals in different places,” Halaris said. “The expense ratios are out of control, so I am not sure these plans are going to pan out.”
Consumer and community advocates are also skeptical that big financial players will make the best neighborhood stewards. Invitation Homes has amassed 80 homes in just two ZIP Codes of South Los Angeles — 90047 and 90044 — buying in both middle-class and low-income areas.
An Invitation Homes for-rent sign recently popped up next to Albert Ramos’ West 69th Street duplex, where he lives with his wife and two children. Ramos has been a homeowner for three years. He would prefer to have another homeowner move into the orange stucco house next door.
“The people that rent it might be here for just a few months, then leave,” Ramos, 31, mused as he puffed on a cigarette on his front steps.
About a mile and a half away south on Normandie Avenue, prospective renter Brenda Browning, 59, stood in the yard of another Invitation Homes property for rent, peering through its windows.
“I love everything about it — the hardwood floors, the landscaping — it’s just beautiful,” Browning said. “And it’s in, what seems to be at least, a quiet neighborhood. I live on 105th and Figueroa right now, and I wouldn’t wish that on anybody. I hate it.”
Vulnerable South Los Angeles neighborhoods do not need more investors looking to buy low and sell high, said Earl Ofari Hutchinson, founder of the Urban Policy Roundtable.
“It’s easy pickings down there — you had a lot of foreclosures over the last years, people are economically challenged and have lost their homes, and you can get properties on the dime at fire-sale prices,” Hutchinson said. “Does that really benefit the area? Essentially, no.”
Executives at Invitation Homes counter that they can boost neighborhood fortunes and make a profit at the same time. Beisswanger, a former home builder, envisions hundreds of neighborhoods across the country dotted with his Dodger Blue signs.
On a recent tour of some of the company’s San Fernando Valley homes, Beisswanger strode through a single-story Canoga Park property, quickly assessing its bones and making note of what might have to go: the popcorn ceiling, dated walls, flooring, kitchen countertops, appliances, doors, light fixtures, bathroom vanities, maybe even the electrical system.
An illegal apartment built out of the home’s garage revealed kitchen walls smeared with grease, an undersized bathroom door and a moldy skylight.
“It is every code violation,” Beisswanger said with disdain. “We will provide a nice house for a family to rent; we are providing jobs; and we are potentially fixing dangerous situations.”
Whether these big investors will achieve the scale they need to make their businesses work remains an open question. Rick Sharga, executive vice president for Carrington Mortgage Holdings — which is partnering with private equity firm Oaktree to purchase homes for rent — said his company has taken a bit of a “breather” and is waiting for prices to “settle down a little bit.”
One of the biggest issues is that the government and big financial institutions have not sold off their foreclosed homes in large portfolios, as had been expected after Fannie Mae concluded its pilot sales. That has meant that investment firms have had to compete at local foreclosure auctions and on the open market — making those properties increasingly expensive.
At a recent rainy auction in front of the San Bernardino courthouse, Roger Zapata, an individual investor, said he had lost out to a bigger player.
“They are going really, really high.… The investors are getting pretty desperate,” he said. “I don’t know how long this is going to last. It’s a big question mark.”