As home prices re­bound, Wall Street land­lords are turn­ing renters into home­own­ers

Fi­nan­cial land­lords look to profit from renters with dreams to buy There is “skep­ti­cism … re­gard­ing Wall Street’s mo­ti­va­tions”

Bloomberg Businessweek (Asia) - - CONTENTS - Heather Perl­berg

Melissa Su­niga had been rent­ing a three­bed­room Phoenix house for less than a year when her land­lord gave her the op­por­tu­nity to buy it. As an in­cen­tive, In­vi­ta­tion Homes, which is owned by pri­vate eq­uity gi­ant Black­stone Group, of­fered the 40-year-old child-care

worker a $5,000 credit, which was put to­ward her clos­ing costs. Fi­nance of Amer­ica Mort­gage, another Black­stone af­fil­i­ate, pro­vided the mort­gage.

“When I started rent­ing, I thought, I wish I could buy this home,” says Su­niga, who ex­pects to com­plete the pur­chase of the $150,000 home, where she lives with her mother. “My mom is 74 years old. I didn’t want to move her again.”

U.S. in­vestors used the hous­ing bust to build their rental busi­nesses by buy­ing cheap homes en masse. Now some are par­ing their in­ven­to­ries. Black­stone, one of the world’s largest as­set man­agers, has amassed about 50,000 rental houses in the past four years, mak­ing it the largest owner of sin­gle-fam­ily homes in the U.S. While In­vi­ta­tion Homes is still buy­ing se­lec­tively, spend­ing about $5 mil­lion a week, it ex­pects to cull about 5 per­cent of its prop­er­ties each year for the fore­see­able fu­ture, says Chief Ex­ec­u­tive Of­fi­cer John Bartling. Sell­ing some of its rentals to ten­ants is a way to help peo­ple stay put, keep their kids in the same schools, and sta­bi­lize neigh­bor­hoods, ac­cord­ing to Bartling. It also saves land­lords the cost and has­sle of spruc­ing up, list­ing, and car­ry­ing the prop­er­ties un­til they sell. “This is an im­por­tant part of the mat­u­ra­tion of the in­dus­try,” Bartling says.

Amer­i­can Homes 4 Rent, the No. 2 sin­gle-fam­ily land­lord, with 48,000 houses, didn’t re­spond to re­quests for com­ment about whether it would be sell­ing homes to ten­ants. Colony Star­wood Homes, the third­largest, with 31,100 homes, de­clined to com­ment. Smaller in­vestors, such as Ax­onic Cap­i­tal, have of­fered renters the chance to buy their homes for years. “We def­i­nitely see it as one of the best ways to sell be­cause there’s no down­time or re­hab cost be­tween ten­ants,” says Jonathan Shecht­man, port­fo­lio man­ager for res­i­den­tial strate­gies at

the $2.7 bil­lion in­vest­ment firm. Renters such as Su­niga may have bet­ter luck buy­ing a home from their land­lords than ven­tur­ing into the open mar­ket. Na­tion­wide, home prices are up 32 per­cent from their 2012 lows— and they’ve risen even more in ar­eas hit hard by the hous­ing crash, such as Phoenix and Mi­ami. But rents also are soaring in many mar­kets, caus­ing some ten­ants to view home­own­er­ship as the more eco­nom­i­cally at­trac­tive op­tion. In­vi­ta­tion Homes started sell­ing houses to ten­ants in Phoenix and Sacramento this year through a pro­gram it plans to in­tro­duce in other cities in the next few months. The com­pany bought Su­niga’s house for $83,000 in 2013, ac­cord­ing to prop­erty records. Home val­ues in Phoenix have since risen about 25 per­cent; rents are up 15 per­cent over the same pe­riod. Su­niga says her monthly mort­gage pay­ment will be $920, about $65 less than her rent.

Su­niga wouldn’t have had enough to close on the house with­out the credit from her land­lord. She says she feels for­tu­nate to have clinched a loan from Fi­nance of Amer­ica, be­cause some of her credit his­tory—in­clud­ing a per­sonal bank­ruptcy fil­ing more than a decade ago—raised red flags for other prospec­tive lenders. In­vi­ta­tion Homes says its renters-turned-home­buy­ers are free to use any lender they want. It’s also work­ing with a small num­ber of other mort­gage providers that are more fa­mil­iar with the new buy­ing pro­gram. Black­stone doesn’t have a fi­nan­cial stake in any of those lenders.

This type of ar­range­ment, how­ever, may draw ques­tions from law­mak­ers and reg­u­la­tors in Wash­ing­ton, ac­cord­ing to Isaac Boltan­sky, an an­a­lyst in Wash­ing­ton with Com­pass Point Re­search & Trad­ing. “There’s in­her­ent skep­ti­cism in D.C. re­gard­ing Wall Street’s mo­ti­va­tions in the mort­gage fi­nance mar­ket,” he says. “Novel forms of credit ac­cess are go­ing to be scru­ti­nized closely even though they pur­port to in­crease home­own­er­ship.”

Some hous­ing ad­vo­cates have pressed rental com­pa­nies to give renters the chance to buy their homes be­fore prop­er­ties are sold to in­vestors. That could help lower-in­come fam­i­lies get on the road to­ward build­ing eq­uity, “as long as the renter can af­ford the home and pur­chases it on fair terms,” says Sarah Edel­man, di­rec­tor of hous­ing pol­icy at the Cen­ter for Amer­i­can Progress in Wash­ing­ton. “It’s im­por­tant, though, that they shop around for a mort­gage,” she says.

Su­niga is plan­ning to re­place some car­pet­ing and up­grade the kitchen cab­i­nets once she of­fi­cially owns the rental home she had thought was unattain­able. “I’m thank­ful for the op­por­tu­nity,” she says. “It’ll be a shock un­til I know it’s mine.”

The bot­tom line Black­stone is par­ing its in­ven­tory of rentals in some mar­kets to take ad­van­tage of ris­ing prop­erty prices.

“When I started rent­ing, I thought, I wish I could buy this home. My mom is 74 years old. I didn’t want to move her again.” —Melissa Su­niga

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