Arizona Property Management & Investments
(888) 777 6664
info@azezrentals.com
Investors Are Looking to Buy Homes by the Thousands
By MOTOKO RICH | New York Times –
RIVERSIDE, Calif. — At least 20 times a day, Alan Hladik walks into a
fixer-upper and tries to figure out if it is worth buying.
As
an inspector for the Waypoint Real Estate Group, Mr. Hladik takes about
20 minutes to walk through each home, noting worn kitchen cabinets or
missing roof tiles. The blistering pace is necessary to keep up with
Waypoint’s appetite: the company, which has bought about 1,200 homes
since 2008 — and is now buying five to seven a day — is an early entrant
in a business that some deep-pocketed investors are betting is poised
to explode.
With home prices
down more than a third
from their peak and the market swamped with foreclosures, large
investors are salivating at the opportunity to buy perhaps thousands of
homes at deep discounts and fill them with tenants. Nobody has ever
tried this on such a large scale, and critics worry these new investors
could face big challenges managing large portfolios of dispersed rental
houses. Typically, landlords tend to be individuals or small firms that
own just a handful of homes.
But the new investors believe the
rental income can deliver returns well above those offered by Treasury
securities or stock dividends. At the same time, economists say, they
could help areas hardest hit by the housing crash reach a bottom of the
market.
This year, Waypoint signed a $400 million deal with GI
Partners, a private equity firm in Silicon Valley. Gary Beasley,
Waypoint’s managing director, says the company plans to buy 10,000 to
15,000 more homes by the end of next year. Other large private equity
investors — including Colony Capital, GTIS Partners and Oaktree Capital
Management, in partnership with the Carrington Holding Company — have
committed millions to this new market, and Lewis Ranieri, often called
the inventor of the mortgage bond, is considering it, too.
In
February, the Federal Housing Finance Agency, which oversees the
government-backed mortgage companies Fannie Mae and Freddie Mac, announced that it would sell about 2,500 homes in a pilot program in eight
metropolitan areas, including Atlanta, Chicago and Los Angeles.
And Bank of America
said in late March
that it would begin testing a plan to allow homeowners facing
foreclosure the chance to rent back their homes and wipe out their
mortgage debt. Eventually, the bank said, it could sell the houses to
investors.
Waypoint executives say they can handle large volumes
because they have developed computer systems that help them make quick
buying decisions and manage renovations and rentals.
“We realized
that there is a tremendous amount of brain damage around acquiring
single-family homes, renovating them and renting them out,” said Colin
Wiel, a Waypoint co-founder. “We think this is a huge opportunity and we
are going to treat it like a factory and create a production line to do
this.”
Mr. Hladik, who is one of seven inspectors working full
time for Waypoint’s Southern California office, is one cog in that
production line.
On a recent morning, he walked through a vacant
three-bedroom home with a red tiled roof here about 60 miles east of Los
Angeles, one of the areas flooded with foreclosures after the housing
market bust. Scribbling on a clipboard, he noted the dated bathroom
vanities, the tatty family room carpet and a hole in a bedroom wall.
Twenty minutes later, he plugged these details into a program on his
iPad, choosing from drop-down menus to indicate the house had dual pane
windows and that the kitchen appliances needed replacing.
The
software calculated that it would take $25,413.53 to get the home in
rental shape. Mr. Hladik adjusted that estimate down to $18,400 because
he deemed the landscaping in good shape. He uploaded his report to
Waypoint’s database, where appraisers and executives would use the
calculations to determine whether and how much to bid for the house.
With
just three years of experience, Waypoint is one of the industry’s
grizzled veterans. But critics say newcomers could stumble. “It’s a very
inefficient way to run a rental business,” said Steven Ricchiuto, chief
economist at Mizuho Securities USA. “You could wind up with an
inexperienced group owning properties that just deteriorate.”
The big investors are wooed by what they see as a vast opportunity. There are close to 650,000 foreclosed properties
sitting on the books of lenders,
according to RealtyTrac, a data provider. An additional 710,000 are in
the foreclosure process, and according to the Mortgage Bankers
Association, about 3.25 million borrowers are delinquent on their loans
and in danger of losing their homes.
With so many families
displaced from their homes by foreclosure, rental demand is rising.
Others who might previously have bought are now unable to qualify for
loans. The homeownership rate has dropped from a peak of 69.2 percent in
2004 to 66 percent at the end of 2011, according to census data.
Economists
say that these investors could help stabilize home prices. “If you have
a lot of foreclosures in one community you will improve everybody’s
home values if you take them off the market,” said Diane Swonk, the
chief economist at Mesirow Financial. “If those homes are renovated and
even rented, it is a lot better than having them stand empty.”
Until
now, Waypoint, which focuses on the Bay Area and Southern California,
has been buying foreclosed properties one by one in courthouse auctions
or through traditional real estate agents.
The company, founded
by Mr. Wiel, a former Boeing engineer and software entrepreneur, and
Doug Brien, a one-time N.F.L. place-kicker who had invested in apartment
buildings, evaluates each purchase using data from multiple listing
services, Google maps and reports from its own inspectors and
appraisers.
An algorithm calculates a maximum bid for each home,
taking into account the cost of renovations, the potential rent and
target investment returns — right now the company averages about 8
percent per property on rental income alone. By 5:30 on a recent
morning, Joe Maehler, a regional director in Waypoint’s Southern
California office, had logged onto his computer and pulled up a list of
about 70 foreclosed properties that were being auctioned later that day
in Riverside and San Bernardino Counties.
Looking at a
three-bedroom bungalow in San Bernardino, he saw that Waypoint’s system
had calculated a bid of $103,000. Mr. Maehler, who previously advised
investors on commercial mortgage-backed securities deals, clicked on a
map and saw that rents on comparable homes the company already owned
could justify a higher offer. The house also had a pool, which warranted
another price bump.
By the time the auctioneer opened the
bidding on the lawn in front of the San Bernardino County Courthouse at
$114,750, Mr. Maehler had authorized a maximum bid of just over
$130,000.
As the auction proceeded, Waypoint’s bidder at the
courthouse remained on the phone with Mr. Maehler in the company’s
Irvine office about 50 miles away.
“Stay on it,” Mr. Maehler urged as the bidding went up in $100 increments. The bidder clinched it for $129,400.
The
sting of the housing collapse, driven in part by investors who bought
large bundles of securities backed by bad mortgages, makes some critics
wary of the emerging market.
“I don’t have a lot of confidence
that private market actors who now see another use for these houses as
rentals, as opposed to owner-occupied, are necessarily going to be any
more responsible financially or responsive to community needs,” said
Michael Johnson, professor of public policy at the University of
Massachusetts, Boston. Waypoint executives say they plan to be long-term
landlords, and usually sign two-year leases. Once the company buys a
property, it typically paints the house and installs new carpets,
kitchen appliances and bathroom fixtures, spending an average of $20,000
to $25,000. It tries to keep existing occupants in the house — although
only 10 percent have stayed so far — and offer tenants the chance to
build toward a future down payment.
Waypoint’s inspectors are
evaluating hundreds of properties that Fannie Mae and Freddie Mac are
offering for sale. Because the inspectors are not allowed inside these
homes, they are driving by 40 of them a day, estimating renovation costs
by looking at eaves, windows and the conditions of lawns.
Rick
Magnuson, executive managing director of GI Partners, Waypoint’s largest
investment partner, said “the jury is still out” on whether Waypoint —
or any other investor — can manage such a large portfolio. But, he said,
“with the technology at Waypoint, we think they can get there.”
