The gold rush in foreclosed homes picks up steam as mad money flows freely

January 10, 2013

By Matthew Goldstein

Institutional money keeps rushing into the market for foreclosed homes, with some big players snapping up homes at breakneck speed. But the question is whether the big buyers are throwing money around indiscriminately and Wall Street’s big housing long will come up a bit short.

The other day Bloomberg reported that Blackstone Group has already spent $2.5 billion to buy 16,000 homes to manage as rentals and eventually sell them when prices appreciate high enough. Blackstone says it’s finding that the going price for homes sold at foreclosure auctions and out of bank inventories are rising quicker than anticipated.

But Blackstone, which some believe could spend up to $5 billion on single family home space, isn’t alone in racing to snap-up foreclosed homes in states like Florida, Georgia, California, Nevada and Arizona. American Homes 4 Rent, a firm that has $600 million from the Alaska Permanent Fund, is buying up hundreds of homes a month, industry sources say. Colony Capital, the other big institutional player is no less aggressive.

Other significant players also are still appearing in the market.

Private equity shop Apollo Global Management is committing hundreds of millions to the market and partnering with several firms that specialize in acquiring and operating single family homes. People familiar with what Apollo is doing say it’s a less aggressive approach than the one taken by Blackstone.  In one partnership, Apollo is providing financing to Calif.-based Haven Realty Capital and has begun buying homes in Las Vegas, for instance.

Don Mullen, a former Goldman Sachs executive who helped design the firm’s subprime mortgage trade, has raised at least $170 million for his foreclosed home fund with the help of Goldman’s wealth management group, which is marketing the fund to its wealthy customers. Mullen’s fund also began buying homes a few months ago in Las Vegas and Florida.

The idea behind the gold rush in foreclosed homes, as we reported last year, is to acquire properties, renovate them, rent them out and ultimately put together a portfolio that can be sold, turned into a REIT or other structure that generates anywhere from a 15 percent to 20 percent return on investment. In the interim, before the homes are unloaded, the plan is to generate income from renting out the properties.  (Check out American Homes 4 Rents rental page here).

Yet there are indications the market for this new asset class is changing in ways these Wall Street investors hadn’t anticipated.

For starters, the big buyers are sometimes  having to move so fast they are being forced to warehouse homes, meaning properties remain empty and don’t generate rental income for some time. Other industry players say the cost and time of renovating so many homes at one time can be a daunting challenge, even for deep-pocketed buyers. There’s also concern about what happens to properties that lay unoccupied in places like Florida and Georgia, where high humidity can quickly led to mold problems and other issues.

The believers in foreclosed home story say in the end it won’t matter because this isn’t a one or two or even three year trade. It’s a five year strategy and in that time, home prices should have risen significantly enough to generate the handsome profit everyone expects.

That may be so. But there’s also worry that good chunk of the recent appreciation in home prices is being driven by these Wall Street buyers and that once they stop buying, or slowdown, the appreciation in price will slow as well. This concern was voiced by at least one manager who attended a recent Reuters investment summit.

And even people associated with the big Wall Street players say the window for buying homes is getting smaller. Most seem to think the market for getting foreclosed homes and distressed properties at prices that makes sense will probably only last for another two years. In other words, it’s getting awfully late for a new entrant into the market.

So this year look for a shakeout with smaller players, selling portfolios to the biggest participants. And keep a close on what the big players say about rental yields and eventual IRRs.


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