We’ve seen a few of these stories about a surge of investors picking up foreclosed homes cheap and converting them into rental properties, and the New York Times follows suit today. In a way this is an old story. Foreclosed or abandoned homes are always fixer-upper candidates, and investors have been scooping them up for decades. The difference here is that the investor groups are bigger and more institutional:
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.
I can think of half a dozen problems right off the bat. First of all, you have the property management hurdles. Large investment groups simply don’t have the expertise to manage multiple properties. The tendency would be to drift into an absentee landlord relationship, which could have negative public relations consequences, as scandal after scandal bubbles up in the media. You could pay local property management companies to handle this, but that eats into profits.
Another major issue is that, looking past the hype, in order for this to work, it has to work in the areas with a large stock of vacant housing. These also happen to be the lowest-demand areas in the entire country.
A growing body of research suggests that the recent recession may have brought an enduring shift in the geography of American growth. Places like Gwinnett County near Atlanta, Lake County, north of Orlando, and San Joaquin County in California’s central valley, where housing booms were fueled by borrowed money, may now become long-term laggards under the weight of those debts.
Various kinds of economic activity, including auto sales, fell more sharply and are rebounding more slowly in areas that had the highest debt burdens at the peak of the boom in 2006, according to a series of recent studies.
Jobs that depend on local spending, in restaurants and retail stores, were eliminated in larger numbers in high-debt areas. And the latest available data suggests that those jobs are returning more slowly, too.
These are the areas with all the vacant homes. And they’re ghost towns. Why does anyone think there would be a stream of renters willing to live there?
Another issue is that these homes are going to need a tremendous amount of TLC. Foreclosed homes are deteriorating while being held back in reserve as “shadow inventory.” Banks haven’t done well with upkeep on the homes they’ve held out of the market. So investors will either have to put a lot of money into these homes, or paper over the problems, leading to more scandals down the road and the aforementioned PR nightmare.
Yet another issue is that, in the foreclosure settlement, banks can secure credit for their penalty by bulldozing these types of homes. They get dollar-for-dollar credit for that, a far better deal than trying to dump a vacant home on investors. So the anti-blight initiatives of the settlement will reduce the available stock for investors to purchase.
And then there’s the little issue that a good deal of these homes just don’t have good title. So investors will wind up buying homes that they’ll never be able to unload (provided they can buy them in the first place, given the chain of title issues). The title insurance companies won’t touch them, no individuals will buy them, and they’ll be lucky to get through a couple years without being sued.
That’s just off the top of my head. It shows what monumental roadblocks there are to a scheme like this actually working at a high level. You’ll still see individual foreclosures bought up and flipped, that’s been happening forever. But to scale it up would require either a very confident or very stupid set of investors.