U.S. investors buying up distressed homes in bulk
Many fire sale deals destined to be rentals
When Vena Jones-cox entered the foyer of the once-grand Colonial-style home in downtown Columbus, Ohio, she stepped onto a wood floor that was so mouldy and mushy that it actually wiggled. As Cox proceeded down the basement stairs, they disappeared from underneath her.
“I found myself lying on the floor,” says Jones-cox, 45. “Staring at a dead rat, by the way.”
The house tour from hell didn’t stop her from making an offer on the place. While she was at it, she bid on some other houses, too. Forty-nine houses, actually.
She’s paying $3,000 for each, a bit more than the cost of an Apple Mac Pro.
“We’re at a bottom,” says JonesCox. “I mean, where else is there to go but up?”
As the greatest real-estate fire sale in the history of the United States rages on, the bulk buy is the dead hot deal of the moment. In some of the most foreclosure-ravaged parts of the United States, it is almost as if the housing market has become the new big box store, with investors wiping out whole shelves at a time.
The idea is to arbitrage other people’s misery. With the ranks of the rental class expected to swell, investors can buy houses at clearance sale prices, pour some money into repairs and then take advantage of the difference between their low cost of capital and the rent they receive. Often, they bank cash from Day 1.
Hedge funds and private equity shops like Mckinley Capital Partners started to quietly become landlords by buying up inventory last year. Now Main Street investors are following suit.
“They aren’t just buying one rental property,” says Oak Park, Ill., realtor Kyra Pych. “This is a frenzy. They are loading up.”
Pych has five clients who are in the process of buying more than one condo in Forest Park, Ill. Units that sold for $180,000 during the boom are now going for as little as $13,500. So instead of putting that money into a retirement account, her customers are putting the cash into homes and renting them out.
In Detroit, the Midwest’s aspiring Donald Trumps are buying bungalows for $500 each. In Atlanta, a group of Florida investors are in the process of buying the remaining 322 units in downtown Atlanta’s swank, Art Deco Atlantic Residences, with room service and maids, near Atlantic Station. The prices start at $180,000.
Up to now, the business of buying foreclosed homes was often an oldfashioned affair. They were usually one-off deals, and often involved an auction on the courthouse steps.
But the recent news of Fannie Mae’s pilot auction of a bulk sale of 2,500 homes was a signal to many housing experts that bulk buying is about to undergo a quantum change. The coming auctions will not only put mammoth amounts of inventory up for bid; they will also streamline and automate current procedures.
Amherst Securities managing director Laurie Goodman, a major housing bear who expects further declines in home prices, believes such bulk sales are the key to cleaning out the foreclosure pipeline before any kind of housing recovery gains traction.
It is not hard to see why U.S. housing is turning into the new value asset class of the moment.
In an analysis of the 325 major metropolitan real estate markets across the globe, the U.S. was home to the top 24 most affordable markets, according to Demographia’s 2012 International Housing Affordability Survey.
In Charlotte, N.C., Cheryl and Bob Littlefield, who have five children, are already making the bulk buy work.
Two years ago, the Littlefields inherited $200,000. They considered all of their investment options. Like a lot of people, they found the stock market to be a scary, bipolar nerve frayer. Bonds and bank accounts offered nothing.
Then there was the lovely little house for $16,000. After putting in a few grand, they cleared $600 a month, after taxes.
It went so well they bought another house. And then another. Now they own eight and are in the midst of exploring financing to do a bulk deal for several more.
“I know houses, I don’t know stocks,” says Cheryl Littlefield, who estimates rental income covers 40 per cent of the family’s expenses, the rest being covered by her husband’s work as a contractor. “I don’t know what to do if something goes wrong with Exxonmobil. I know what to do if something goes wrong with a house.”
There are no official statistics on the growth of the bulk buy. But no less than Warren Buffett recently said in a CNBC interview that he would like to “load up” on a couple of hundred thousand single-family homes because it is a “very attractive asset class now.”
Buffett said what held him back was that the business of being a landlord, of managing the homes, was “enormous.”
As it turns out, one no longer even needs to be handy thanks to a new cottage industry of companies that has grown up to manage virtually everything for a landlord, down to the art of hectoring the renter for the rent.