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Excerpt: "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."

Alan Hladik, inspecting a home in California, uses an iPad to calculate the cost to renovate homes for rentals. (photo: Monica Almeida/NYT)
Alan Hladik, inspecting a home in California, uses an iPad to calculate the cost to renovate homes for rentals. (photo: Monica Almeida/NYT)



Investors Buying Up Foreclosures by the Thousands

By Motoko Rich, The New York Times

03 April 12

 

t 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."

 

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+18 # Andrew Hansen 2012-04-03 07:10
Carpetbaggers pure and simple.
 
 
+13 # tbcrawford 2012-04-03 07:46
I only wonder why it's taken so long to take advantage of banking's misdeeds and other's misery.
 
 
+5 # AndreM5 2012-04-03 08:58
Sorry but this is absolutely no solution to the foreclosure problem. I live next to one of these deals. It was a fine home but subdivided into a flophouse dormitory with 5 different renters, each month-to-month, all with zero regard for the quiet neighborhood. Band practice every day, 8 cars parked everywhere, drunks sleeping in my garden, etc.
 
 
+3 # billybookworm 2012-04-03 14:59
Isn't it convenient that one of the guys responsible for the housing bubble is now profiting from its disasterous effect on innocent home purchasers?
 
 
+13 # Valleyboy 2012-04-03 08:31
Wow, how blatant, a massive transfer of housing from people to the banks - America's middle class transformed from home owners to home renters in one fell swoop.

This constant, structure transfer of wealth comes from running an economy along the lines Milton Friedman drew up.
I swear, if I ever visit America, I will make it rain on that man's grave!

An interesting quote this: "We are going to treat it like a factory & create a production line"

McHomes - coming to a town near you!
 
 
+8 # NanFan 2012-04-03 10:33
Quoting Valleyboy:
An interesting quote this: "We are going to treat it like a factory & create a production line"

McHomes - coming to a town near you!


No kidding. THAT is America! And, oh by the way, let's NEVER throw the criminal banksters that caused this debacle in jail...let's just let them reap MORE profits from these "investors" who buy up all the homes.

America no longer has a heart; it is a three-headed beast, eating its own in whatever "manufactured" way it can.

N.
 
 
+7 # CarolynScarr 2012-04-03 08:49
Since HUD has already been selling foreclosed homes to speculators and absentee landlord, for many years, this is not exactly news. We need to get our DAs to refuse to authorize auctions and require banks to refinance with the owners to the level of the price they would get paid at auction.

These big firms will turn management of housing over to the lousiest of management companies, like our onetime landlord whose company stopped paying for garbage pickup until we called public health -- and that was in Berkeley and our landlord was a SF State professor.
 
 
+6 # cordleycoit 2012-04-03 09:01
You are watching how slash and burn capitalism works. The Chinese did a similar thing with homes built on Super Fund sites. In Colorado. They then stash the money in the M1.The money was passed into holding companies and too big to fail real estate like Highlands Ranch and other interesting properties. Its a variant of sausage machine housing. Future Slums Homes.
 
 
+14 # HealthySkeptic 2012-04-03 09:10
There is something so wrong and so sinister about this. Had the banks simply forgiven even a minimal percentage of the principle on many of these homes, owners could have stayed and avoided foreclosure. The banks would have lost far less money and the results would have been preferable: families owning their homes and having a sense of community. While the banks claim that foreclosures cost them large sums of money, they end up winning because they will simply rent the homes out. This is sick.

There is something at work destroying this country. It is greed. Now that the brokers and lying banks have made their money, betting on losses, they are happy to spend it purchasing the homes that they overvalued and create life-long renters who pay for these homes over and over but never build equity.

Wow.
 
 
+1 # dick 2012-04-03 09:27
So much of the damage is already done, water over the damn criminal mortgage scam. Taking homes out of foreclosure limbo, spending $25,000.00 on labor & materials, getting them occupied rather than vacant, creating hundreds of thousands of rental properties that will eventually be resident owned doesn't sound so bad. Putting people to work doing environmentally sound (tax break) renovating sounds OK. Now if Obama would just criminally indict the crooks who masterminded the war on our economy, we'd be getting somewhere.
 
 
+3 # Activista 2012-04-03 13:53
"indict the crooks who masterminded the war?"
problem is military- industrial complex costing USA over $1.3 trillion/year
Indict the crooks (president, politicians) who are profiting from these wars.
 
 
+3 # Activista 2012-04-03 09:34
With inflation up to 20% (this is how prices basic necessities are rising) and weak dollar - stock will fall like 50% - unemployment 50% - bankrupt USA aka Greece - this is future - NOT Fed propaganda.
Individuals should get Fed loans (it there is over $trillion/year for useless wars ..).
But our political/econo mic system does not have a chance.
We need regime change NOW.
 
 
+3 # reiverpacific 2012-04-03 10:00
This is a repeat of a recent article on the same subject on RSN, so my response is the same (Although I hate repeating myself).
A new age of SLUM LORDS will surely be the resultant of this rash of low capitalism left unregulated. Perhaps it was even originally a deliberate attempt to create such a "desirable" conclusion for the owner-class in the long-run.
These volume-buyers should be scrutinized for their connections to the big bankers who caused the bomb in the first place and barred from bidding on or purchasing their own detritus and neighborhood destruction.
The government could REALLY seize this opportunity to show real solid goodwill and "buy up" foreclosed and inevitably deteriorated properties, put millions of unemployed or underemployed Tradesmen, Architects, Engineers , Landscapers and Planners back to work by giving incentives to renovate whole areas and sell them to foreclosure-evi cted families, returning vets and housing associations with the good of the community at it's base, a certain percentage being retained in blocs for low-income housing. Local banks and Credit Unions could also benefit by helping administer the financial process.
Am I dreaming or does this seem like a common-sense, common-good opportunity for boosting both the economy and giving so many others hope for a decent life and incentive to work for their own and community benefit in their localities and nationally.
That's working socialism, not corporate same!
 
 
+4 # billybookworm 2012-04-03 14:57
They drive the prices up with phony appraisals and fraudulent lending. They collapse the market. Suddenly the house with a $200,000 mortgage is only worth $150,000. Will they let you do a "short refinance" to $150,000? Hell no they want to sell it to their vampire cronies for $100,000 and rent it back to you with an option to buy it for $150,000.
 
 
0 # CandH 2012-04-03 17:28
Crapitalism 101. See how that works?
 
 
+3 # angelfish 2012-04-03 15:56
These "Investors" are nothing more than Ghouls feeding off the misery and misfortune of people whose only crime was to want a little sliver of the American Dream. Having no hearts the the shame they SHOULD feel as they stuff their faces with the life's blood of strangers, I hope some day might give them pause to REALLY reflect on what they've done.
 
 
+2 # namastesf 2012-04-03 17:33
RE: a comment above, about how the banks say they lose money on foreclosures: NOT TRUE. They have INSURANCE. They are covered for every dime, and THEN they take your house (they took ours) and sell it. There is money set aside to do principal reductions and they DON'T DO it. YEs, and now when so many of us who lost our homes are thrust into the rental market, guess what? Rentals are sky-high. It's really hard to get ahead when you're paying half your income on rent.
 
 
+4 # BLBreck 2012-04-03 18:00
The criminal banksters are in pig heaven! First create a bubble, then foreclose so you can take a loss off your taxes while you wait for the vultures to swoop in and make the land grab. And BONUS, the government makes the tax payers bail you out!

Write your senators, state AG's, whomever you can think of and demand that these criminals are investigated and prosecuted.
 
 
+2 # leedeegirl 2012-04-04 10:43
for a country that is "hurting financially," there sure seems to be a HELLUVA LOT of money floating around!!
 
 
+1 # Rick Levy 2012-04-04 18:20
Welcome to the new American dream.
 

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