Investors corner the market on Harvey-flooded homes
Transforming neighborhoods brings new risks
Investors large and small are snapping up thousands of properties flooded by Hurricane Harvey. From billion-dollar Wall Street funds to momand-pop flippers, they’ve already purchased at least 5,500 flooded homes, often for dimes on the dollar.
In the process, they are transforming some Houston neighborhoods into block after block of rentals. They’re interrupting county plans to buy out floodprone properties. And they’re leaning on the taxpayer-funded National Flood Insurance Program to protect them from future floods.
“All we’re doing is perpetuating a cycle of flooding,” said Harris County Flood Control operations chief Matt Zeve.
Small and midsize private companies have dominated the post-Harvey market so far, some sending executives in from California, Colorado and Las Vegas. But now institutional funds, which woo wealthy investors with promises of double-digit returns, are dipping their toes in the water, too.
The $4.6 billion Tricon Capital Group, of Toronto, wants to spend $600 million in Texas before the end of next year, according to area brokers trying to persuade the company to buy flooded homes in Houston. The $30 billion New York City privateequity firm, Cerberus Capital Management, has picked up at least a dozen flooded homes among 980 it purchased post-Harvey. A California firm, B&P Investment Group, is looking to spend $400 million, targeting homes flooded by the release of water from
northwest Houston’s Addicks and Barker reservoirs.
“Four hundred million is a lot of money,” said Ryan Pina, president of the Orange County-based B&P. “We’re looking to go in and essentially rehab the city of Houston, bit by bit.”
The investment firms aren’t all focused on flood zones. Records show they’ve purchased as few as 150 Harvey-flooded homes so far. But wholesalers and brokers, eyeing a market full of homes stripped to the studs, are encouraging their purchase.
“There’s so much money sitting on the sidelines, looking for a good return, looking for a good yield,” said area wholesaler and investor Eddie Gant.
But flood plain experts, local officials and real estate agents warn that the practice of buying flooded houses has consequences:
It prevents or delays government agencies from buying out homeowners whose houses have repeatedly flooded. Harris County said it has already lost to private parties 88 Harvey-flooded houses it wanted to buy.
It puts renters in harm’s way, since Texas law doesn’t require landlords to tell tenants their homes have flooded or sit in a flood plain.
Since flood insurance is available at deep discounts through the federal government, investors are often insuring their properties on the back of the American taxpayer.
It’s also unclear what individual investors in the real estate funds know — there’s little indication that the big funds disclose when they buy flooded homes.
All of this, said urban planner and Texas A&M professor Shannon Van Zandt, is a manipulation of the market. Markets work best when companies are transparent and consumers can access good information, she said.
“And renters are repeatedly denied that kind of information,” Van Zandt said. “Which puts them at greater risk of losing everything they have — including a place to stay, a shelter, their most basic human need.”
Up to 12,000 sales
Hurricane Harvey damaged about 204,000 homes in Harris County last August, according to county and city data. The Chronicle compared the location of about half of those homes — Houston did not release data on individual homes — with home sales provided by the property data warehouse ATTOM Data Solutions.
Of the 45,000 homes sold in the six months following the flood, at least 5,500, or 1 in 8, flooded during Harvey, according to the data. And that count likely underestimates the number of damaged homes that have been sold: Texas A&M University professor Wes Highfield compared home sales to flood levels and found more than 12,000 properties in Harris County that sold since Harvey and had also been swamped by at least 1 foot of water.
In some neighborhoods, entire streets turned over. More than 165 of 1,100 residents fled the gated communities of two-story brick houses and tall palm trees in the Wimbledon Champions area, just north of Cypress Creek near Klein, including 13 of 23 on one cul-de-sac. At least 200 of 2,800 residents sold in the modest neighborhoods south of the Sam Houston Tollway and west of Interstate 45.
And more than 310 of 2,500 have left Bear Creek Village, which hugs the northwest corner of the Addicks Reservoir in Harris County. For some there, it was the third flood in a decade.
Steve White’s job relocated him to Houston almost 13 years ago. He moved his family onto Pagehurst Drive in Bear Creek, with its tall pines, wide oaks and neat front lawns. “It was really pretty,” White said.
Their first flood hit in 2008; their second in 2016. Then Harvey filled the house with 5 feet of water, and the family had to be rescued by fishing boat.
At first, the Whites thought they’d rebuild. But at some point, White’s wife, Karen, asked if they could get out.
“I don’t know how,” he told her. “I really don’t know anyone that would be interested in buying it.” Then a neighbor told them an investor was making offers.
The Whites sold a home once worth $160,000 for $100,000 cash. It was enough to pay off their mortgage, and, with insurance, put money down on a house in Spring.
“I’m glad I’m not there anymore,” said White, 62. “And I’m sorry for the people that are still there. As far as what the future holds for Bear Creek, I can’t imagine.”
By mid-March of this year, 15 of 27 on the block had sold.
Steve Mahaffey, 61, saw a lawn sign, “Swifty Buys Houses,” called, sold for $75,000 and moved to Rolling Green. “It was better than some,” he said of the offer.
Troy Scott, 56, collected his insurance payout, sold for $85,000, and, after 40 years in Bear Creek, moved 10 miles north. “I only have two friends still there,” he said.
Yard signs — “Mary paid cash for this home. Want to sell me yours?” — still stick in so many front lawns they look like pickets in a steeplechase.
Harvey draws investors
An army of speculators mobilized after Harvey. Street corners filled with the tell-tale lawn signs, often handwritten: “I buy houses. Any condition. Fast Cash,” said one. Online search engines listed offers on page after page.
“Where we would typically have 150 calls a month, we had closer to 300,” said Brian Spitz, owner of Houston wholesaler Big State Home Buyers.
Big State bought or arranged for the purchase of more than 150 flooded houses by the end of January, Spitz said. He sold mostly to local investors, he said, but he also fielded heavy interest from investment funds.
“We get calls all day long,” Spitz said in February. “‘We need to spend all this money. We need to spend all this money.’”
Chris Shelton, CEO of Las Vegas-based Velocity Acquisition Capital, flew to Houston.
Shelton has spent hundreds of millions on bargain properties in Arizona, California, Nevada and, after Hurricane Katrina, New Orleans. “Anytime there’s any type of natural disaster,” Shelton said, “it creates a little bit of opportunity for us.”
Shelton now has at least 70 Harvey-flooded homes, he said, and hopes to buy about 350 over the next 18 months. He plans to fix and rent about one-third of them, and rehab and sell the rest. He’ll make a killing, he said.
In January, broker Charlie Kriegel sent an email to wholesalers saying he was representing three funds looking to spend more than $1 billion here. “I desperately need daily options to keep this fund closing as many buy/hold properties as possible this year,” Kriegel wrote.
“They wanted to go after nonflooded homes,” said Kriegel, cofounder of Houston’s Winhill Advisors. “But we told them that’s just not a possibility.”
Kriegel said his team sold 250 properties for a little over $75 million last year. This year, WinHill is on pace to sell 400. Half of them, he estimated, will be Harvey houses.
“It’s like blood in the water with sharks,” Kriegel said.
Bundling and selling
In the aftermath of the Great Recession, banks were left with millions of foreclosed homes. In 2012, large investors, including private equity giant Blackstone Group, which now manages $450 billion in assets, began investing in the purchase of such homes, helping kick off the nascent industry.
And in 2013, Blackstone designed a bond backed by singlefamily home rent.
Companies then started to bundle rental homes based on risk, as done with mortgages before the 2008 financial crisis, and sell the securities on Wall Street as a way to borrow money, fueling the purchase of even more homes. Credit ratings agency Morningstar says 13 single-family rental companies have now issued $24.5 billion in such securities.
Between 2005 and 2015, the number of U.S. single-family rental homes ballooned by 7 million, or more than two-thirds, from 10.5 million to 17.5 million.
Institutional investors own a tiny portion of that total — less than 300,000 or 2 percent of the market. But executives see the vast volume as targets for future expansion.
Meanwhile, university researchers say the rent-backed loans are already exhibiting characteristics of mortgagebacked securities, which contributed to the 2008 financial crisis: Companies are taking out multiple loans on the same property. They’re trading risky properties as well as more secure ones. They’ve persuaded the federal government to guarantee some of the loans. And they’ve transferred the risk of default to taxpayers, stockholders and investors.
Multiple companies have securitized Houston houses, including a few that have since flooded.
“These investors don’t give a rat’s arse about the long-term stability of the neighborhood,” said University of Leeds researcher Alex Schafran, an urban planner who has written on the subject for the Federal Reserve Bank. “They just care about their asset.”
And while U.S. securities laws require funds to disclose significant risks about their investments, there are no specific requirements regarding flooded homes. Managers of smaller private equity firms say they tell investors about their targets, even showing photos of the Harveyflooded homes.
But few of the public companies, if any, have told shareholders voluntarily, a review of earnings reports, presentations and earnings call transcripts shows.
“It would be very difficult,” said Wojtek Nowak, Tricon’s director of corporate finance and investor relations, “to make them aware of a particular home that we’re buying that may have had flood damage.”
Nowak said Tricon builds for the long term, with quality finishes and professional maintenance crews. The homes — and rental income — are protected by insurance. Securitizing those homes is just another way to borrow money, he said.
“I’m not worried,” he added, “about its systemic risk.” ‘The local slumlord’
There’s also a human toll, experts say. Houston’s leaders have promised to build back better. But investors aren’t preparing for the next flood. They’re just putting nicer finishes back in existing homes — and then insuring their investments on the taxpayer’s dime.
Harris County has targeted about 3,300 homes that have flooded multiple times or are deep in the flood plain. But government-financed buyouts take years. Investors can pay instant cash.
And this tension has played out for decades across the country, said Chad Berginnis, director of the Association of State Floodplain Managers. In 1998, he was a planning director in Perry County, Ohio, building a buyout program after a flood damaged 70 percent of the homes in a 1,000person village there.
“My main competitor was someone I would call the local slumlord,” Berginnis said. And that investor, he said, was quite successful.
The Chronicle asked Harris County Flood Control to match homes it was hoping to buy out to those sold since Harvey; the county estimated 88 buyout targets, and perhaps many more, have already sold to private parties.
Investors are already insuring their new purchases through the National Flood Insurance Program, a part of the Federal Emergency Management Agency; several have said that such investments wouldn’t be possible without the subsidized insurance. But the program has been long criticized for charging policy holders so little it can’t pay its bills, and Congress has had to repeatedly bail it out, including a $16 billion loan forgiven last year.
David Maurstad, chief of the National Flood Insurance Program, said the investors’ use of the program concerns him. If he were to see it spread to other U.S. cities, he said, he’d investigate.
“My main concern isn’t so much the impact on the fund or whether our current structure is an incentive for a large investing firm,” Maurstad said. “What I want is safe homes that will be more resilient to future flooding.”
Changing neighborhoods
Water still beads on the windows inside a few homes in Bear Creek, a sign of the moisture inside. At others, piles of drywall and detritus, torn from homes too late for county pickup, still sit curbside. Work crews are just arriving at many.
Ed Trejos, 67, a retired engineer in the oil and gas sector, bought a Bear Creek house in December for $68,000 and remodeled it. He had planned to rent it, but his wife and daughter fell in love with the tiled bathrooms, wood floors and granite countertops.
The house is in the flood plain, and Trejos knows it has flooded at least twice. But he hasn’t bought flood insurance.
“I’m betting it’s not going to happen again,” he said.
Krystal Nixon, 33, a nurse aide, just moved into a rental with her five kids, ages 15 months to 18 years old. Her landlord told her he bought seven homes in the neighborhood. She pays $1,600 a month in rent and says it’s well worth it. They got burglarized twice in one week at their old apartment, east of Bear Creek. “In this area, you can leave the doors unlocked,” Nixon said.
Nixon’s new landlord didn’t tell her the place had flooded, nor that it sits in the flood plain.
“I should have asked him,” said Nixon. “But I was in a rush to just get out. I was ready to move anywhere.”
Richard Young, 67, a contractor, has lived in Bear Creek for almost 30 years. He raised his children there and doesn’t want to leave. But he looked out at the empty houses around him one recent afternoon. Not a single resident on his cul-de-sac has stayed.
“It’s hard when you see 5 feet of water in your home,” he said.
Now he and his wife are thinking they’ll sell, too. Two floods in two years is too much. He knows it’s going to flood again.
And, he said, they continue to get offers on their house. Every day.