It's a "Twilight Zone" kind of plot twist that even Rod Sterling could not have imagined. Wall Street's biggest names are rushing to jump into the single family rental market in a big way. They believe that there are "fat profits" to be made in the rental property business, and many of the same firms that played a part in the housing boom and bust are now planning to become landlords.
The Federal Reserve and the Obama administration have been pushing for months for some kind of program to move these properties and help the GSE's get rid of them faster. Analysts have cited studies that indicate a big problem with the supply-demand ratio. Too much supply and not enough demand. They believe that selling large blocks of these properties to investors would help solve this problem.
Further, it is assumed that requiring these homes be held as rentals for at least 3 years, will help stabilize the housing market and bolster falling home prices. Another supposed benefit would be to force rental rates down by adding more inventory to the rental market. In addition, government agencies believe that this plan will also help maintain more value in these properties since they won't be sitting vacant. And analysts have stated that big investors would be willing to pay more for these properties since the return on investment would be higher than other housing related investments such as mortgage securities.
It is also believed that if this initial pilot sale goes well, that perhaps the FHFA can move thousands or even tens of thousands of these properties back into the "private sector". Uncle Sam will need to move quite a few homes to make a significant dent in the current inventory of foreclosures. But Warren Buffet has publicly stated that he'd like to buy up "a couple hundred-thousand houses...", and Berkshire Hathaway is one of the large firms planning to bid on these bulk packages, according to a recent article in Reuters.
Between Fannie, Freddie and HUD, there are hundreds of thousands of foreclosures currently available. And by the Fed's own reckoning, we could see about 3.6 million more foreclosures over the 2012-2013 period. Some respected analysts estimate that we could see an additional 8 million foreclosures over the next 6 years.
So there is no question that the government is concerned about finding a way to sell off as many of these properties as possible, since they are costing the taxpayers big bucks in FHA insurance claims, not to mention the fact that vacant, foreclosed homes tend to lose a lot of value sitting on the market.
But, will this approach really help the housing market? Well.....Maybe...maybe not.
The FHFA has set the financial bar very high for this bulk sale program. Given the overall costs involved in buying, repairing, renting, managing and maintaining a big block of single family rental properties, I can certainly understand the belief that any buyer must have financial staying power to be considered for this program. Generally, landlords do invest a significant amount of money up front because they assume that they will realize a good return on their investment over time.
But I have some concerns about the assumptions that are being made. As a rental property owner, with lots of friends who are also investors, I've recently had a number of conversations with people who are in the rental property business. They have the practical experience that gives them an up close and personal understanding of the challenges of rental property ownership and management. It's definitely a challenge and an unpredictable one at that.
No single investment company has ever attempted to own and manage hundreds or thousands of single family homes as rental property. I'll be watching with great interest to see what happens when an investment company buys and attempts to fix, rent and manage 1000 homes. I'll be especially interested if Berkshire does manage to purchase 200,000 single family rentals. It's just not the same as owning apartments. If you've never owned and managed single family homes it's difficult to imagine all of the issues that can arise, and all of the details that must be taken care of on every single property. And, performance averages for bulk single family REO's are not as good in reality as one might assume.
In addition, no neighborhood or community has ever witnessed a large scale conversion of foreclosed homes into rental properties owned by absentee landlords who are only concerned about their return on investment. The impact will be "interesting" to say the least.
I'm certain that the assumptions look good on paper, but virtually all real estate investments look good when viewed as "what if" scenarios in a spreadsheet. I once heard someone say that it is best not to "ass-u-me" anything, because it tends to make an "Ass" out of "U" and "Me". And when it comes to making assumptions about housing profits, and investing strategies, this has proven to be very practical advice in recent years.
A gigantic rush into a rental property market would alter the fundamentals of the rental market drastically in a relatively short period of time. Where real estate is concerned, this can have lots of unexpected consequences for the entire local market. Many seem to assume that putting hundreds of millions of dollars of rental inventory out on the streets of cities with already high concentrations of vacant properties would go well. But the market fundamentals have a funny way of making asses out of those who make assumptions about things with which they have no practical experience.
Indeed if this initial sale were to go well, we could see big players with hundreds of millions of dollars, buying up thousands of foreclosed properties to use for rental. This could be so big in fact, that many in the media are calling it a "rental property boom". And we all remember what happened the last time everyone starting referring to a "boom" in the housing market.***
Donna S. Robinson is a 16 year veteran of the real estate industry. She has extensive experience as a residential investment property analyst and consultant. For more information on real estate investing fundamentals and strategies, visit Donna's website at www.RealtyBizConsulting.com