Single Family Homes an Asset Class

By Bruce Davis, Principal,  Lee & Associates Atlanta

A recent phenomenon in the residential market is for institutional investment groups to place large amounts of funds into the acquisition of single family homes.  In pursuit of yield, institutional investors have been steadily invading the province of small investors who for years built their investment portfolio by going to the courthouse steps and buying foreclosed real estate, mostly single family, as rental homes, “fixer uppers” and/or ‘flippers’;  single-family homes that, with a little paint and pine straw, could be purchased and either rented out for cash flow (and once upon a time) appreciation, or with a little bit of refurbishment, be resold to the eventual buyer for a profit. It became a phenomenon a year or so ago, and as predicted, the ‘’big money” came in and in order to gain a foothold, predictably began bidding up to the prices.  To some, of course, they were paying too much for the real estate.

Of course it is difficult to place big money one house or even 10 to 20 houses at a time, much less even one county at a time. And most counties conduct their foreclosure sales just like they did 100 years ago, on the steps of the county courthouse, informally, by public outcry by the attorney representing the bank or lienholder. In this state (Georgia, a judicial foreclosure state), this happens the first Tuesday of each month after 30 days of advertising the sale at least once per week. This is true whether the real estate was foreclosed for $20,000 or $20 million. That takes a lot of market research, valuations, comparable sale studies, renovation estimates (rarely if ever is lawful access able to be arranged) if such acquisitions are to be made in any volume.

The preferred route by these funds is to buy pools of these assets directly from the banks, Life Companies or other lienholders. This is done both as pools of foreclosed real estate, pools of loan (performing and/or nonperforming) or combinations of both, usually at a significant discount to remaining balances or debt. Buying “by the pound” contemplates a lot of mistakes, unforeseen problem assets, physical dilapidation exceeding expectations, etc, coupled with the requirements by the sellers of same, that such sales be conducted with such relative rapidity that little to no true due diligence can be conducted. And some of these portfolio sales have been in the billions of dollars.

There is no history as to how this phenomenon is turning out from the cash flow standpoint to these investors.  As in all things real estate, it will all come down to management. My prediction is that there will be some winners, but more losers, as these types of groups will have underestimated the “hair” with which these portfolios are wrought. Is the popularity of apartments with their high occupancy rates an indication that single family rentals are being snapped up quickly as well, or are apartments in competition with rental single family rentals?

A concern that I have is that this phenomenon may be resulting in a significant undercount by the supply side of the overall market.  From residential salespeople to national builders, how is this large class of assets counted when measuring the strength/solidity of demand? Simply counting numbers of homes for sale in the market by disregarding how many homes are essentially taken offline and available only for rent can be seen to cause another bubble.  That prospect is frightening.  So is the possibility that we may be becoming a nation of renters.