As of late 2012, five years after the real estate crash bottomed out, there were still more than 300,000 foreclosed homes in Florida and another 250,000 or so bank-owned properties, called REOs.
In recent months, however, those homes have been coming off the market more quickly. In October, overall sales of single-family homes were up 25%, while inventory was down 30%.
The sales surge doesn’t reflect a rebound in the traditional market for single-family homes — the people purchasing the homes aren’t individual Smiths and Wilsons and Garcias.
Instead, sales records across Florida reflect at least 4,000 purchases by a cadre of private equity funds, hedge funds and REITs with names like American Homes 4 Rent, Blackstone Group, Two Harbors Investment and Pacifica.
Since last summer, for example, American Homes 4 Rent, based in Malibu, Calif., has purchased more than 640 homes in eight Florida counties. The firm has spent $20 million on approximately 200 homes in the Jacksonville area, $9 million on 60 homes in the Tampa region and approximately $20 million on more than 200 homes in the Orlando region.
The sales represent the first major incursion into the rental market for single-family homes by big investment firms in Florida’s history.
“There’s between $8 billion to $10 billion worth, and what was once considered a mom-and-pop asset class is becoming an institutionalized asset class,” says Danny Kattan, managing director of Property Investment Advisors, a real estate investment company that specializes in buying, remodeling and renting single-family homes in south Florida.
The investment groups all share the same strategy: Pay cash for clusters of foreclosed, bank-owned or otherwise discounted homes, generate healthy cash flow by renting them, then exit in a few years when demand from traditional buyers increases and the homes can be sold at a healthy profit.
The dynamics of the market are simple: Prices of single-family homes are low. Rental rates for single-family homes are high. Cap rates on rentals — the net rental income from the home divided by its sales price — are far outperforming most other asset classes.
Real estate experts say investors can expect, on average, 6% to 8% returns on single-family rentals in Florida. Some markets provide better opportunities than others, however. According to Core Logic, a real estate industry analysis firm, Florida boasts some of the highest cap rates in the nation, with rentals in Fort Lauderdale providing a 12% return and West Palm Beach averaging around 12.4%.
Vulcan Investment Partners, a Miami investment group founded by a group of Mexican businessmen, predicts it will hit a 14% cap rate on the homes it’s acquiring in Miami-Dade and Broward counties.
That’s a game-changer for investors, says Lewis Goodkin, a Miami-based real estate analyst who has been advising investor groups on Florida’s single-family market. The “condo vulture” investors who snapped up hundreds of condo units at distressed prices a few years ago didn’t expect to make money by renting them out, he explains. Their strategy was simply to sell the units at a profit “down the road” when prices rebounded.
By contrast, Goodkin says, the investors buying single-family houses can expect “a lot of cash” from rent right from the beginning. “And when the market is appropriate, they will sell at a nice profit.”
Funding for the investment groups is coming from myriad sources, ranging from pensioners to wealthy foreigners to public investment groups. Alaska’s $40-billion state oil fund, for instance, recently made a $600-million investment in American Homes 4 Rent. “There are billions and billions of dollars being raised in this marketplace right now — it’s an on-fire segment,” says Scott Kranz of Title Capital Management in Miami, which is spending $200 million to buy up Florida foreclosures.
Debt financing is also beginning to crop up. Last October, Waypoint Real Estate Group, an Oakland-based investment firm, borrowed $245 million from Citigroup to help build its portfolio of homes for rent. The deal, according to the Wall Street Journal, “may serve as a precursor” to the development of “the first security backed by home-rental payments.”
Several factors have eased the investment groups’ push into the single-family market. One barrier was the fact that single-family homes typically go on sale randomly rather than in clusters; in addition, available homes at any time are often spread across a large geographic area. Trying to buy large numbers of homes at a given time wasn’t practical for big investors, says Jack McCabe, an independent housing analyst in Deerfield Beach.
Now, McCabe says, the banks and the government — via the Federal Housing Finance Agency — are packaging and selling foreclosed homes in bundles, making it much easier to invest at scale. “It also used to be that houses were auctioned off on the courthouse steps,” he adds. “Now it’s done online and a lot of these guys have software and agents who actively monitor these things.”
While each investment group has its own specific set of parameters, the typical home is a three-bedroom, two-bath model that at the peak of the real estate bubble might have sold for $250,000. The same home can be purchased now for between $100,000 and $150,000.
While some investors, like American Homes 4 Rent, are focusing on relatively new subdivisions built within the last decade or so, buyers like Blackstone are purchasing older homes as well.
Key to making the numbers work is getting homes in good condition in favorable locations. A typical three- to four-bedroom, 1,500 to 2,500-sq.-ft. foreclosure requires about $10,000 to $15,000 in repairs, according to American Home Real Estate Partnership, a Georgia-based group that has been buying and renting single-family homes since 2009. Kattan says his company is spending nearly twice that sum on rehabs in hopes of boosting sales prices down the road. “Why just put lipstick on a pig when for $10,000 or $15,000 more you can put in new floors? It’s better to do it right now.”
Along with consultants like Goodkin, local businesses in Florida are cashing in on the trend.
Title Capital Management in Miami also offers what Kranz calls a “ready-built foreclosure infrastructure” to institutional funds and other investors. Title Capital Management conducts all the auction bidding, short sales and acquisitions and handles title and lien searches. Kattan also purchases properties for his own $100-million portfolio while providing remodeling/maintenance and management services to other investors. Kattan says he can help institutional investors accomplish what they want far faster than they can scale up an operation on their own. “This is a very hands-on, boots-on-the-ground type of asset class, and these guys are more like Guccis and loafers on the ground — they’re trying to managing these things from corner offices in New York.”
Even investors who handle their own acquisitions typically turn to local management companies like Rent Solutions in Tampa to manage the rentals — collect rent, perform maintenance, etc. “We manage so many homes that we can get discounts” from contractors and other vendors, says Steve Oehlerking, president and broker at Rent Solutions.
Betty Morgan, director of asset portfolio management at Prudential Tropical Realty in a four-county region of Tampa Bay, says property management for institutional investors comprises a “significant portion” of her company’s new business.
The trend is a boon to bankers happy to be able to dispose of foreclosures in bulk rather than singly. “It helps the banks unload problem assets in bulk to these large investors, pleasing regulators wanting these loans off the books and also shareholders wanting a bank with a cleaner portfolio,” says Ken Thomas, a Miami-based banking expert and economist. “The banks, however, must have the capital to withstand the big discount that some of these ‘carpetbagger’ investors are demanding when they buy in bulk.”
Less pleased, however, are real estate agents and brokers, for whom a bulk sale represents the potential loss of dozens of individual commissions.
“We have buyers that are anxious to buy their first home, and they’re getting beat out by these cash buyers and investors. It’s actually hurting the market and closing a lot of people out of the home market,” says Summer Greene, regional manager of Better Homes and Gardens Real Estate Florida First Fort Lauderdale and president of the Florida Realtors.
Greene says her organization and other Realtor groups across the country are “fighting these bulk sales” at both the state and national level to try to get government-sponsored entities like Fannie Mae and Freddie Mac to open their sales to the public on a property-by-property basis. “Right now, the biggest challenge we have is a lack of inventory, so while this might have had some value several years ago, if it continues, this is going to hurt our markets and drive prices up, which will be great for investors but lousy for home buyers.”
Most of those betting on the institutionally managed single-family rental platform are convinced that, at least in the short term, those who need housing will prefer to rent rather than to buy. Even with historically low interest rates, mortgages are more difficult to obtain, and the drop in home prices has soured consumer attitudes on housing as investment. Mounting student loan debt and underemployment, meanwhile, have put homeownership out of reach for many so-called “echo boomers,” those born between 1982 and 2004. All that demand has created a competitive market and driven rents up in recent years.
In three to five years, however, as rents rise and credit profiles heal, the investment groups expect to begin selling off their single-family rental portfolios to a new generation of home buyers. If all goes according to plan, most investors are projecting a 20% to 25% total return on their investment.
Whether the market evolves as the equity firms expect remains to be seen. Last October, hedge fund Ochs-Ziff exited the buy-fix-rent business and liquidated its portfolio of California homes. Others see nothing but upside. Jordan Kavana, founder and CEO of Transcendent Investment Management in Aventura, says he aims to have $1 billion invested in the single-family housing rental market in the next three years.
“It’s one of the most exciting businesses I’ve been involved in. I see an opportunity in this space, and I think that what we’re doing is absolutely pivotal to the stabilization of the U.S. housing market.”